The Weekend Economic Wrap up

By February 18, 2007General

Business is UpLast Thursday, the Federal Reserve released its report on industrial production for the month of January. The report showed that overall industrial production fell by 0.5 percent in January. The manufacturing component, which accounts for more than three quarters of industrial output, declined by 0.8 percent…the fourth decline in the past five months. Despite solid gains in aerospace and computer and electronics production, the January downturn was led by a 1.3 percent decline in durable goods production. The cause? A precipitous 20 percent decline in heavy-duty truck production — the largest monthly decline in 16 years –, probably resulting from new regulatory standards for trucks that went into effect January 1, was largely responsible for the January downturn.

In recent years, heavy truck production has been increasing at double-digit rates. Industry has been forward buying trucks in advance of the new 2007 EPA regulation, which makes trucks more expensive. I expect we will see continued downturns in truck production going forward in the year.

On Friday, the Commerce Department reported that both housing permits as well as new housing starts fell in January. Permits fell by 14 percent — the 8th decline in the past 12 months and the largest single monthly drop in more than a year. Housing starts were down 3 percent in January, marking the 11th drop in the past 12 months. Friday’s report shows that the housing downturn will be with us for a while. I expect residential investment will continue to be a drag on the economy throughout the first half of this year.

Continued weakness in housing and a softening for transportation equipment will likely be a drag on manufacturing in the months ahead. While this will be partially offset by continued growth in consumer demand, exports and business investment in structures, manufacturing will likely grow more in-line with the overall economy in 2007, after outpacing GDP for the last three consecutive years.

For the week ahead, next Friday, the Labor Market will release its weekly report on initial claims for unemployment. This should give some indication if the economy is slowing from the solid 3.5 percent growth registered in the 4th quarter…stay tuned!