Auto Production Has Bottomed

Industrial production is on the rebound. It increased a solid 0.4% in December (a typical monthly gain is 0.1%, historically), following a decrease of 0.1% in November, and seems likely to continue to advance in the months ahead, particularly because automobile production is no longer declining.

The increase looks even better when the impact of the utility sector is taken into account. Utility output fell 2.6% because of unseasonably warm weather, hence shaving about 0.3% from overall production. The production of technology equipment advanced strongly.

Automobile production bottomed in October, the last month in which it declined. In December, automobile production increased 2.6%, after a 3.4% gain in November. Increases of this magnitude are not expected in the months ahead, but the drag from automobiles is ending. With automobile production accounting for 10% of U.S. industrial output, stabilization in the sector will have important implications for U.S. growth.

The production of select high-tech equipment increased a sharp 2.2%, putting the year-over-year gain at 27.3%. The increase in December was once again led by a sharp gain in the production of semiconductors and related electronic components, which increased 3.3% for the month and is now up 38% vs. a year ago.

The production of communications equipment fell 1.7%, the second decrease in three months. The production of computers and peripheral equipment increased 3.1% for the month, following gains of 2.9% and 2.8% the previous two months. The gain for this category is now 19.2% vs. a year ago. These large increases suggest continued strength in capital spending, although one has to question whether the production gains might be outstripping demand and boosting inventories.

Strength in industrial production is needed in order to boost incomes, spending and hence further increases in production, thus producing a virtuous cycle of increases in production, income and spending. This element of the business cycle had been interrupted for three months until December, and this could mark a return to growth in industrial output and an ending of drags from the automobile sector. This is yet another reason to believe the Fed won't be cutting interest rates anytime soon.

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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 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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