The Economy May Be Moving Into A Vulnerable Window

Today there were several notable data releases including the ever important industrial production report, one of the factors in the four-factor coincident index, as well as the widely followed retail sales report. 

Both data points widely missed consensus expectations on a month over month basis but most importantly, decelerated in year over year growth rate terms. 

Month over month data analysis is nonsensical for the most part. Comparing the monthly change in growth on a year over year basis is more relevant. Financial assets, most specifically Treasury rates, respond to the rate of change in economic growth and inflation. 

Let's have a look at the industrial production report as well as the retail sales data release. 

Industrial Production

The headline reading on industrial production, released by the Federal Reserve, posted a deceleration in growth, falling to 0.9% year over year. 

Industrial Production Year over Year:Source: Federal Reserve

It is surprising to see some still questioning the slowdown in economic growth when one of the big four critical factors of the economy has decelerated from 5.4% to 0.9%. 

One of the sub-components to the industrial production index, the highly cyclical manufacturing index, posted a negative growth rate, falling 0.2% year over year. 

Industrial Production: Manufacturing Year over Year:Source: Federal Reserve

70% of the components to the manufacturing industrial production index have registered negative year over year growth rates.

We can also see a 4.4% delta in durable goods manufacturing production, falling from a year over year growth rate of 4.8% to 0.4%. 

Industrial Production: Durable Goods Manufacturing Year over Year:Source: Federal Reserve

One industry we are watching closely, automobiles, accelerated sequentially but remains down 10% year over year. 

Industrial Production: Auto Manufacturing Year over Year:Source: Federal Reserve

Industrial production growth is continuing a broad-based deceleration. There are those that make the argument that manufacturing is becoming less and less important to the US over time but this is conflating cyclical trends with secular trends. 

Regardless of the size of the US manufacturing industry, manufacturing remains one of the most correlated industries globally and tends to lead service sector growth. 

We can discuss secular manufacturing trends but cyclical trends continue to decelerate in growth rate terms. 

Retail Sales

The widely followed retail sales report was also released this morning and showed a decline of 0.2% month over month relative to the +0.2% consensus estimate. 

Excluding autos, the consensus was looking for a monthly increase of 0.7% but was underwhelmed with an actual reading of 0.1%. 

The control group, the number that feeds into GDP came in four tenths shy of estimates at a flat reading of 0.0%. 

I reiterate, the month over month data has little information as it pertains to studying the cyclical movements in the economy. 

In year over year growth rate terms, core retail sales growth decelerated to 2.85%, just 0.9% after adjusting for inflation. 

Core Retail Sales Growth Year over Year:Source: Census Bureau

Retail sales is another category of the economy that has decelerated sharply, falling from a whopping 6.10% to 2.85%. 

We can claim that the slowdown to trend-level growth was predictable, but why should asset prices only react to the acceleration phase and not the deceleration phase? Specifically, interest rates rose when the economy was accelerating and rightfully continue to decline during the phase of deceleration. 


Industrial production, one of the four factors in the coincident index graphed below has now pushed the index to a growth rate of 1.59% year over year, edging into the historically vulnerable economic window. 

4 Factor Coincident Index Year Over Year (%):Source: EPB Macro Research

The economy moving into this vulnerable stage means a recession is now in the cards, pending an economic shock but I am not yet ready to make this a definitive call as the data is subject to revisions. This is an important development as the economy is now moving into the ease-off phase of the cycle, pending revisions to the economic data and the following several updates to this index.