Industrial production falls in January, consumer sentiment rises

After last quarter’s surprise contraction, a number of voices arose to claim that the -0.1% figure was an anomaly, an artifact of government cutbacks that hid good news on business investment.  Democrats even called it “the best-looking contraction in US GDP you’ll ever see,” and predicted that the business investment in Q4 would pay dividends soon.

And … we’re still waiting:

U.S. industrial production unexpectedly fell in January, weighed down by weak manufacturing and mining, according to a report on Friday that was another sign of slow economic activity at the start of the year.

Industrial production dipped 0.1 percent last month after a revised 0.4 percent gain in December, the Federal Reserve said.

Economists polled by Reuters had expected industrial output to rise 0.2 percent in January. The report comes on the heels of data this week showing retail sales growth slowed in January as households adjusted to higher taxes.

Actually, that’s an interesting point.  Based on January sales figures from higher-end retailers, I argued a week ago that the expiration of the payroll-tax holiday was as depressive as the stimulus had been stimulating — which is to say, not at all — as retail sales rose 0.1% in January overall.  Most analysts reported that this was a poor showing and that consumers had pulled out of what should have been better activity.

However, a separate report released today shows consumer sentiment improving despite the expiration of the payroll tax:

U.S. consumer sentiment improved in February, buoyed by signs of increased hiring, though worries heightened about a decline in future income, a survey released on Friday showed.

The Thomson Reuters/University of Michigan’s preliminary reading on the overall index of consumer sentiment rose to 76.3 from 73.8 in January, topping economists’ forecasts of 74.8.

Like I argued last week, the payroll tax holiday didn’t stimulate personal-consumable expenditures (PCE), and its expiration didn’t have a notable impact on them, either.

Let’s get back to industrial activity, though, which really did show a slowdown.  The Weekly Standard’s Geoffrey Norman catches the AP putting on its rose-colored glasses:

Economists expect healthier output in 2013, partly because U.S. companies are sitting on large amounts of cash and appear poised to invest some of it in equipment and machinery. Economies in Europe are also healing, and growth in Asia is expected to improve.

They’re correct about manufacturing, which improved more than first thought in Q4, probably enough to push its next estimate closer to a positive 1.0% when the interim report comes out at the end of February.  However, as Norman notes, the AP’s report that “Economies in Europe are healing” is contradicted by this report yesterday from, er … the AP:

Renewed worries about Europe overshadowed an encouraging U.S. jobs report on Thursday, leaving major stock indexes roughly where they started.

Germany’s economy shrank more than expected late last year, and the slowdown in Europe’s largest economy deepened the region’s ongoing recession. That’s a troubling sign for the U.S., because sales to Europe have been a boon for American companies. …

After a strong start, the stock market has drifted sideways over the previous week with few major events to sway investors. That calm could disappear soon, said Doug Cote, chief market strategist at ING U.S. Investment Management.

With recessions in Europe and Japan, and weak growth in the U.S., he’s bracing for some turbulence. “Everybody is too complacent,” Cote said.

The “encouraging jobs report” was the weekly initial jobless claims level, which dropped into the 340K range.  That is good news, but it’s a volatile series and not one that correlates particularly well on a week-by-week basis with the state of the economy.

With demand slackening in Europe, don’t expect US industrial activity to pick up significantly in the near future.  The burst of activity in the last two months of 2012 may well have expanded inventories without final sales going up appreciably, which means more discounting and less demand in the next couple of months.

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