On Friday, we’re thankful the US is a consumption-driven economy.
Why? Well, because retail sales data showed spending was far more robust in September than expected, but industrial production logged a big downside miss for the month.
Output dropped 0.6% in September, the Fed said, against estimates for a 0.5% gain. Out of 73 economists, not a single one of them predicted a drop on par with the headline print. The most pessimistic guess was for a 0.3% contraction.
I’m not inclined to pretend market participants will care much (if at all) about this, given that manufacturing simply isn’t the driver of US economic dynamism and, more generally, because last month’s IP data isn’t even on the list of market talking points.
Still, it’s worth noting that this comes on the heels of upbeat manufacturing jobs data in September and a less-than-inspiring ISM report, which showed that while labor conditions are improving, the recovery in activity is losing momentum. Surveys for October (i.e., Empire Fed and Philly Fed) painted a mixed picture.
Total capacity utilization missed too, dropping to 71.5%, while factory production dropped 0.3% against estimates for a 0.6% rise. Notably, we’re still nowhere near pre-pandemic utilization levels for manufacturing. At 70.5%, manufacturing plant usage is mired at levels seen during the depths of the financial crisis.
As long as that’s the case, you can probably pencil in subdued capex. After all, you don’t need to buy new equipment when you aren’t using the equipment you already have.
Anyway, I won’t pretend as though there’s a lot of interest in this given everything else that’s muscling for room on investors’ crowded radar screens.
But you know what they say about “idle hands” at “workshops”…
Manufacturers like consistency, you need it to confidently plan and build new capacity that takes years and huge investment. The US under Trump is anything but consistent. The outlook for the EU is anything but consistent with the uncertainty of Brexit. Throw rising nationalism into the mix. If I’m a multinational industrial do I really want to consolidate my operations geographically or spread them around?
Will be interesting to see where all the corporate debt gets spent. Maybe it’ll just sit in corporate treasury accounts, buying US Treasuries. But, that doesn’t make sense if you’re paying 1.5% and getting 0.5%. Not capex so far. Likely not into R&D and product development (meaning less innovation in the future). What are they going to doing with all that money? Maybe operating expenses to keep business afloat. Still, that doesn’t make too much sense. Let’s hope it’s not more “returning value to shareholders.”
But, we do know the devil’s workshop is financial engineering. hmmm?