Industrial Production Falls In Europe And The U.S.

On June 12, Eurostat reported European Industrial production fell 21.6% in April (y-o-y comparison). The weakness was broad-based across the EURO region, with all member states reporting a decline: Germany saw April output decline 23.2%, Spain -19.7, Italy -24.2 and Sweden -21.2%.

The chart below (source: ECB statistical data warehouse) shows the industrial production decline for the Euro Area 16 takes it back to levels last seen in 1999.

The domestic picture on industrial production appears no brighter. Just yesterday, the Federal Reserve released figures on Industrial Production and Capacity Utilization. Industrial Production fell 1.1% in May following a 0.7% decline in March. The April number was revised down from the initial reading of a 0.5% decline. On a year over year basis, total industrial output is down 13.4%.

Looking at the chart below (source: St. Louis Fed), investors can see the decline in the Industrial Production index has fallen below the prior recession low levels in late 2001.

Manufacturing output fell 1.0% in May following a 0.6% decline in April (revised from -0.3%), and declined 15.3% compared to the same period a year ago. Output from the nation’s mines declined 2.1% following a 3.2% decline in March, and is 10.5% below year ago levels. After rising in the month of April, utility output fell 1.4% in May and is down 3.4% compared to May of 2008.

As for capacity utilization, overall capacity dropped to yet another all-time record low of 68.3%, from a revised 69.0% in April. A year ago, overall capacity utilization was 78.9%. Thanks to the chart below (source: St. Louis Fed), investors can see that in prior recessions capacity utilization typically drops to around 75%. In prior economic cycle booms, capacity utilization typically increases to about 85%. At today’s current rate of 68.3%, we are clearly in uncharted territory.

Yesterday’s report on U.S. Industrial Production and Capacity Utilization raises some important issues for investors. As Zacks Director of Equity Research Dirk Van Dijk, CFA has pointed out before (and is still pertinent today), if you have a factory with 30 of your 100 lathes sitting and collecting dust, are you really going to go out and buy more of them? Also, he said if mines are not working at capacity, it means that they will have idle equipment, and are not likely to place new orders with Joy Global (JOYG) or Caterpillar (CAT).

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