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Industrial Production Came in Stronger Than Anticipated

Industrial Production Came in Stronger Than Anticipated

May 16, 2023
"The increase was due to motor vehicle production, which will continue even as we expect the economy to weaken noticeably in the second half of the year, says Oxford Economics.

While industrial production was up 0.5% month-over-month in April, Ryan Sweet, chief US economist for Oxford Economics, isn't sold that things will continue this way.  One reason is that while that figure was stronger than the group's consensus forecast of a 0.1% gain, industrial production was revised lower on net, over the past several months. 

He notes that output is now shown to have been unchanged in March (previously +0.4%) and February (previously +0.2%). Manufacturing output increased 1% between March and April but excluding motor vehicles and parts, it rose only 0.4%. 

"The bulk of the increase was attributed to motor vehicle production, which should continue to fair well even as we expect the economy to weaken noticeably in the second half of the year," Sweet says. "Vehicle inventories are still lean and easing supply-chain stress will continue to provide a boost to motor vehicle production and sales. No two recessions are the same and vehicle sales and production will likely hold-up better in the next downturn than in prior ones."

Here is his analysis.

The big surprise was the increase in business equipment output after falling in each of the prior two months. Odds are this won’t be sustained as the recent stress in the banking system has led to tighter lending standards and this will weigh, with a lag, on business investment in equipment and small business formations. Therefore, the economic costs of the recent tightening in lending standards won’t be felt until the second half of this year. 

Business investment is sensitive to changes in lending standards and real interest rates. It’s also often the first to drop ahead of recession followed by consumer spending. The Senior Loan Officer Survey Opinion Survey points to a drop in business fixed investment.The April industrial production data has no bearing on monetary policy, but we may need to change the forecast for Q2 GDP. The new industrial production and retail sales, released earlier today, lend noticeable upside risk to the forecast for Q2 GDP to rise 0.6% at an annualized rate. 

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