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Industrial output fell a sharp 0.7% in April, four-tenths of a percentage point more than expected. The prior month's figure was revised downward by a tenth of a percentage point to a 0.2% gain. The drop matched February's decline, which was the largest since September 2005 when Hurricane Katrina hurt output. Excepting that decline, the 0.7% declines of February and April are the largest since June 2004, when production fell 0.8%. Output has not fallen by more than 0.8% since November 1990. April's drop overstates the impact of the economy on output, as strikes in the automobile sector shaved three-tenths of a percentage point from total output. For this reason, and because the data are consistent with the large 1.2% decline reported in aggregate hours worked in the manufacturing sector in April (most in 4½ years), these data are not a major surprise. In the months ahead, output is likely to rise in response to a pickup in consumer spending. In fact, if chain-store sales move to a 3% increase or higher on a same-store year-over-year basis, charts on the correlation between chain-store sales and the ISM index indicate that the ISM could move back above 50 by the end of the summer. In other words, consumer spending will lead data such as industrial output and the ISM index, which is why it is important to track chain-store sales on a weekly basis to get the best possible lead on data such as these. One can imagine the mood in the markets if the ISM goes above 50 again. It might be temporary, but that is a scenario to discuss another day. RELATED STORIES More Jobless Claims Point to Shallow Recession CPI Buoys Dollar Rate Odds Lean Toward Hike
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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