Q2 GDP and Industrial Production introduce a new round of Fed regional indicators for July
Fed regional indicators for July demonstrate continuing
weakening entering Q3, as they did entering Q2. Putting Fed regional data into
perspective is Q2 GDP and June's Industrial Production results. Regional
indicators proved over Q2 to ultimately become a lead on GDP and other
indicators, suggesting decent correlation.
GDP ended Q4, 2011 at 4.1%, Q1 at 2.0% and initial Q2 data
showing GDP down to an increase of 1.5%, but still higher than an expected
decline to 1.2%. Nearly all areas showed quarter over quarter decline with
personal consumption expenditure down to a 1.5% increase v. Q2's 2.4% increase.
Personal expenditure on durable goods fell into decline, down a -1% against a
Q1 increase of 11.5% and expenditure on nondurable goods was flat.
Telling is motor
vehicls' contribution to GDP where output provided .72% in Q1, the number fell
to .13% in Q2. Motor vehicles have
been a major force of economic growth. Such a result comports with the Retail
Sales report as opposed to month over month car company reports.
Providing support to GDP was a slowing of the rate of decline
in Federal government spending which declined to -4.2% in Q1, then to -0.4% in
Q2. Where exports strengthened in Q2 to 5.3% v. Q1's 4.4%, the strength was
offset by an increase in imports (which reduce GDP) to 6.0% in Q2 from 3.1% in
Q1.
All told it appears that an uptick in government spending
helped to support otherwise slowing production. Also a strong dollar encouraged
import purchases offsetting positive increases in exports. Motor vehicles declined significantly while staying positive and....
June's Industrial Production results released on July 17 show
a significant quarter over quarter decline in production. Total industrial
production grew in Q2 by 2.2% against Q1's rate of 5.8%. Manufacturing grew in Q2 by only 1.4% v. Q1
at 9.8%.
Breaking manufacturing down into durable and nondurable manufacturing,
the durable side saw Q2 growth at 6.2% compared with Q1 at 16.3% with wood
products, nonmetalic mineral products and primary metals falling into negative
territory. Automobiles show continued strength but waning momentum. Q2 saw
motor vehicle production grow at 18.2% against Q1's growth rate of 41.0%.
Nondurable manufacturing went from a Q1 advance of 3.5% to a
Q2 contraction of -3.4%. In fact all items composing nondurable manufacturing
went into significant contraction aside from printing/support and
plastic/rubber products.
It appears that progressing weakness witnessed in Fed regional
indicators month over month through Q2 did show up in GDP and industrial
production. Concern is that where Fed regional indicators demonstrated volatile
results which were inclined to weakness in Q2, such a trend might move into
more consistent results inclined to consistent weakness. Implication could be
deeper declines in GDP.
July's regional indicators are generally either in
contraction, or if they happen to be up, they're not up by much. Empire State
Manufacturing Survey has managed to keep its head above water. General business
conditions improved a little in July going to 7.39 from June's 2.29. But one
can't help notice how new orders fell into decline in May and progressed to
July's -2.69 from June's 2.18.
Empire State does show improvement in shipments up to 10.28
from 4.81 in June, employees have increased, prices paid for raw materials
continues in decline where prices received for finished goods ticked up a
little from 1.03 in June to July's 3.70. Overall, the indicator is bouncing,
but when it is bouncing up, the gains tend to be diminishing.
Kansas City Fed Manufacturing Index is like Empire, only
stronger indications of weakness exist. Kansas City’s composite index showed a
3 in June and improved to 5 in July. Contrary to this 2 point improvement are
continued declines in nearly all items. Production showed a decent 12 in June
and down to 2 in July, for the same period volume of shipments were 12 and in
July -3, new orders are in sequential but relaxing contraction with June at-7
and July -4, average employee workweek is sequentially in contraction, prices
paid for raw materials are up substantially and prices received for finished
goods are contracting or flat.
Advancing items for Kansas City Fed Index are inventories,
perhaps a consequence of production overshooting demand; and employment, perhaps
due to similar reasons as with inventories.
Philadelphia Fed Survey, which started contracting entering
May, remains in relatively steep contraction, despite a modest July improvement
from June’s-16.6 to July’s -12.9. Positives do exist with new order improving
in July to -6.9 from June’s -18.8 and shipments show similar improvement as
with unfilled orders. What is most encouraging is pricing strength returned to
Philly suggesting return of demand. Namely, prices paid were up in July to 3.7
against a -2.8 for June and prices received a positive 1.6 from -6.9 in July.
Adding to significantly contracting Fed regions is Richmond
Fed Manufacturing Survey. Its composite index puts July at a contraction of -17
v. a contraction of -1 in June. Real problem, and unlike Philadelphia is
shipments, new orders, backlog orders and capacity utilization which are contracting
from -16 to -27 versus a mild June of
contraction.
Dallas Fed Manufacturing Survey moved into a dichotomy of
significant contraction against growing weakness. Dichotomy is in business
activity contracting to -13.2 in July from June’s 5.8 and production sustaining
at a positive 12.0 in July from a June strong result of 15.5. Where business
activity is in contraction, production side items in contraction are growth
rate of new orders at -3.1 v. June’s 1.6 and unfilled orders at -1.6 v. June’s
7.6. Also in contraction are inventories with materials’ inventories at -3.0
against a June 1.1 increase and finished goods’ inventories down -8.0 where
June was down -7.7.
Appears to be a dirth of demand driven destocking in Dallas. Low
demand destocking can be seemingly confirmed with prices paid for raw materials up
sequentially, but prices received for finished goods down -5.5 for July and
down -5.8 in June.
Looks like Empire is struggling to stay above water and
Kansas City should be underwater, but bloated inventories are creating a false
positive in Kansas City. Philadelphia remains in significant decline, but
showing pricing strength and perhaps growth in demand. Richmond does not look
healthy at all and looks anemic. Dallas, where is this dichotomy going? Could be
destocking driven by demand declines.
Overall, Fed regional indicators remain volatile, but even
more inclined to weakness.
Other indicators are in contraction. Namely, Chicago Fed
National Activity Index in sequential decline with June down -.45 and July down
-.15 but the 3 month moving average down for all four months sequentially. ISM
Manufacturing Index is down sequentially June to July with June at 49.7 (below
50 tends to show contraction) and July an improved 49.8.
Leading Indicators are
also down for a first time in a long time. Results are down in July at -.3% v.
June up .4%. Essential strength for Leading Indicators is spread in yields (for
banks) between 10 year Treasuries and Fed Funds rate. (I tried to borrow at Fed
Fund rates and buy Treasuries for the carry trade, got denied, they told me I’m
not a bank, I had no choice but to agree)
Currently, it does look like indicators that can sustain
positive territory are in a real minority. Even then, they have their ugly
points. In majority are indicators in decline, with month over month dynamics
continuing into July progressing into pattern weakness.
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