- Industrial production rebounded in the third quarter but the overall picture is still weak.
- ISM / Markit surveys and Conference Board leading indicator do not suggest upside for industry in the near term.
- The diffusion index is a silver lining. It suggests the worst may be behind.
- But, renewed weakness in oil sector and strong dollar could continue to weight on industrial activity.
US industrial production is currently at the same level it was in October/14 (red line in the chart below). An important part of the industrial production growth in 2012 to 2014 was driven by the energy sector and, to a lesser extent, by vehicle production. The chart below illustrates this point: core industrial production (blue line -- excluding energy, vehicles and high-tech) remained flat from late 2011 until 2013 while total industrial production drifted upwards.
In 2014 industrial production moved up substantially, but in the last three quarters both total IP and core IP have flattened out.
The chart above shows that industrial production rebounded a bit in the third quarter compared to the previous one (right-side chart).
What about the fourth quarter? Can we expect any improvement?
The manufacturing surveys (ISM, Markit) do not suggest upside for IP in the near term.
A simple linear regression suggests IP likely to remain weak.
Markit PMI has a shorter story, but the message is similar to the ISM
The Conference Board leading indicators are also catching down with weak industrial activity.
The diffusion index of industrial production is the only silver lining. It has improved in the recent months and often leads the overall IP growth by a few months, suggesting an improvement until early next year.
On the negative side...
... renewed weakness in oil sector could again spillover to other manufacturing sectors, similar to what happened earlier in the year.
...and the dollar strengthening continues to weight on industrial activity.