US Industrial Output Trend At 8-Year High
James Picerno | Oct 17, 2018 06:54AM ET
Yesterday’s update on industrial activity in the US for September delivered a new round of bullish news for the economic outlook. The report offers more support for expecting that the Federal Reserve remains on track to raise interest rates again at its December policy meeting.
The year-over-year change for industrial production increased to 5.1% last month, marking the first time output topped the 5.0% mark since December 2010, according to the Federal Reserve. The manufacturing component accelerated, too, rising 3.5% in September vs. the year-earlier level – the strongest annual gain since 2012. Keep in mind that last month’s results were slightly depressed by extreme weather. The Fed notes that “output growth in September was held down slightly by Hurricane Florence, with an estimated effect of less than 0.1 percentage point.”
The main takeaway in yesterday’s release: the rebound that’s been in force in the industrial sector over the past two years is intact and continues to strengthen.
One headwind that may be brewing for the fourth quarter is a tightening labor market. “Companies need more workers than the economy has to give and this is going to lead to a slowdown in economic growth somewhere down the road,” noted Chris Rupkey, chief economist at MUFG.
Yesterday’s update on the number of job openings quantifies Rupkey’s point. The Labor Department on Tuesday reported that number of unfilled positions in the US rose to a record high of 7.14 million (based on a data set that dates to 2000.
Meantime, economists at Bloomberg advised that one reason why production rebounded in September is linked to output in the volatile components slice for the auto sector. “And while some of the strength in the 12-month growth rate is likely to reverse next month due to base effects, the underlying message is that conditions remain strong, and should be a tailwind to growth in the final quarter of the year.”
Indeed, the broad set of data for profiling the US economy continues to support another round policy tightening by the Fed. Yesterday’s update on retail spending for September, for example, reflected a solid year-over-year trend. A lot can happen between today and the December FOMC meeting, when the central bank is expected to lift rates. Based on the numbers in hand, however, the crowd is pricing in higher rates.
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Fed funds futures this morning are estimating a 77% probability that the Fed will raise its target rate by 25 basis points to a 2.25%-to-2.50% range on December 19, based on CME data.
Next week’s preliminary GDP report for the third quarter is expected to suport this estimate, based on recent nowcasts. The average Q3 projection via the Atlanta and New York Fed banks, for instance, calls for economic growth in the low-3% range. That translates into a downshift from the strong 4.2% gain in Q2, but by the standard of recent years a 3%-plus expansion in the economy still ranks as a strong pace.
Any number of risks could derail the upbeat outlook, including an ongoing trade war between the US and China. But the figures published to date continue to paint a bright profile for the US. In relative terms, the numbers certainly compare favorably with the rest of the world.
As CNBC noted on Tuesday, “A record 85% of respondents to the Bank of America Merrill Lynch (NYSE:BAC) Fund Manager Survey see global growth in the ‘late’ stages,” but “the gap between expectations for the rest of the world and the US is at its highest level since October 2007.”
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