The Federal Reserve’s report on August industrial production released earlier today shows that the economic recovery is slowing. Overall industrial production rose just 0.2 percent last month, the second instance of sub-par growth in the past three months. While it is somewhat encouraging that only six of the 19 major manufacturing industries posted declines in production last month, the fact remains that during the three months ending in August, manufacturing output increased at an annual rate of just 2 percent, the slowest rise in 14 months. So after falling 17.5 percent during the 18 months ending in June 2009, manufacturing production still remains 9 percent below the peak attained in December 2007. 

While some of the deceleration in growth that has taken place in recent months is due to the fact that temporary supports for growth, such as fiscal stimulus and inventory restocking, are now largely in the past, increased uncertainty with respect to federal tax and regulatory issues, documented in this year’s NAM Labor Day Report,  is acting as a burden to the recovery.

The Federal Reserve reported today that manufacturing production increased by a strong 0.8 percent in May, driven by a 1.7 percent rise in durable goods production.  The good news is that the gains in durable goods production were widespread, with 9 of the eleven industries increasing last month.  Two of the fastest-growing industries, wood products and furniture, are likely benefiting from the recent end of the homebuyer tax credit in April, which is expected to have positive impacts on housing-related manufacturing sectors for several more months.

The two industries that declined were aerospace and electrical equipment and appliances.  Because of the large nature of single-ticket orders and shipments in aerospace, this sector tends to jump around from month-to –month more than other sectors.  And production has been very strong in recent months for electrical equipment and appliances,  as consumers took advantage of state-administered federal government programs to purchase energy efficient appliances.  Given that 17 of these state programs have ended as funds have been exhausted, the downturn in electrical equipment and appliance production last month was no surprise. 

Separately, after four consecutive increases, nondurable manufacturing production remained unchanged in May, largely due to declines in chemicals and petroleum products that offset gains in other areas.  While the drop in petroleum production was likely a breather from extremely strong growth during the prior three months, the decline in chemicals could be the first sign of spillover effects from slowing growth in Europe.  One of the  chemical sectors that posted a significant fall in output last month was pharmaceuticals , where exports, two-thirds of which go to Europe,  account for about a quarter of domestic production.  Given the fact that pharmaceutical exports also declined in April, today’s report is another signal that weaker demand in Europe may be starting to have an effect on U.S. manufacturers.

The Federal Reserve reported today that manufacturing production rose a solid 1.1 percent in April — the third increase in the past four months. This is an encouraging sign that the manufacturing recovery continued to gain steam entering the second quarter.

The April rise in manufacturing production was broadly based, with 17 of the 19 major manufacturing industries posting gains, up from 16 in March and nine in February. The upturn was likely driven by four factors: housing, business inventories, exports and business investment. Business inventories and housing likely will begin to moderate in the near-term as inventory stocks, which have been depleted, catch up with domestic demand and the recent surge in housing activity wanes following the end of the homebuyer tax credit. Exports and business investment likely will be more solid sources of growth moving forward. The global economy, especially in Latin America and Asia, is on the rebound, and American industry’s demand for equipment should start to improve in the second half of 2010 as we continue to see evidence that a self-sustaining recovery finally is emerging. Therefore, I expect the pace of the manufacturing recovery will moderate somewhat in coming months.

Manufacturers still have a lot of ground to make up. After falling 17 percent from December 2007 to June 2009, the level of manufacturing production remains 10 percent below its prior peak. Even if the pace attained over the past 10 months continues, manufacturing production will not reach is pre-recessionary peak until late 2011 at the earliest.

Ben Bernanke, chairman of the Federal Reserve, testified today before the Joint Economic Committee of Congress. In his prepared statement, he talked about the U.S. manufacturing economy:

On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters. Consumer spending continued to increase in the first two months of this year and has now risen at an annual rate of about 2-1/2 percent in real terms since the middle of 2009. In particular, after slowing in January and February, sales of new light motor vehicles bounced back in March as manufacturers offered a new round of incentives. Going forward, consumer spending should be aided by a gradual pickup in jobs and earnings, the recovery in household wealth from recent lows, and some improvement in credit availability.

In the business sector, capital spending on equipment and software appears to have increased at a solid pace again in the first quarter. U.S. manufacturing output, which is benefiting from stronger export demand as well as the inventory adjustment I noted earlier, rose at an annual rate of 8 percent during the eight months ending in February. Also, as I will discuss further in a moment, financial conditions continue to strengthen, thus reducing an important headwind for the economy.

To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments. (continue reading…)

Jim Geraghty of National Review Online posts an e-mail he received from a reader, prompted by Geraghty’s observations about employers who “are terrified of Congress enacting new health care fees, new energy costs from cap and trade, and/or tax hikes.” It’s an insightful e-mail:

I attended a luncheon at the Federal Reserve Branch in Houston where one of the speakers was the economist for the Federal Reserve – El Paso branch.

His presentation mainly concerned Houston and how the city was positioned given the current economic doldrums (thankfully he was optimistic that the city would emerge from recession earlier than the rest of the country); however a main portion of the presentation involved his expectations for a very depressed hiring market for the next 2-3 years, meaning unemployment would remain stubbornly high in the rest of the country.

During the Q&A session, I felt compelled to ask the obvious question: Did he believe that the healthcare reform and related tax proposals, the proposed cap and trade legislation and the consequent increase in energy costs, the expiration of the Bush tax cuts, the agitation for higher taxes on the wealthy, the proposal to increase corporate tax rates, the proposal to increase capital gains taxes, the trial floating of ideas such as a national VAT and removal of the earnings cap on FICA, the more robust regulatory bureaucracy . . . did he believe any of these uncertainties were depressing hiring?

He stated yes, without a doubt and proceeded to relay a conversation he had with a local chemical company regarding their 2010 capital expenditure budget. When asked what the company intended to invest in 2010, the response was ‘nothing,’ not due to a paucity of good opportunities, but because it was impossible for the company to calculate a rate of return given all the uncertainty over cost of labor, energy prices, regulatory mandates and the like. (continue reading…)

More reporting and commentary sparked by the Federal Reserve’s latest monthly report on industrial production, including a good piece in CNNMoney, “Rebound on the factory floor“:

Dave Huether, chief economist for the National Association of Manufacturers, agrees with Zandi that U.S. manufacturers have a relatively bright outlook.

He said the sector is far better positioned today than it was at the end of the previous recession in late 2001, due partly to the lower value of the dollar, which remains relatively weak against other currencies despite a rally this year.

Huether believes that manufacturers could start to hire significant numbers of workers later this year, and that job growth will continue all the way through 2012. He is predicting a million new manufacturing jobs in the next few years. There hasn’t been an annual net gain in jobs since 1997.

“Will we get all the jobs back? Probably not. But we’ll do better than in the last recovery when we really didn’t see any job growth,” Huether said.

AP has a useful box, “Industrial Production at a Glance.” The Fed’s news release is here. Earlier Shopfloor post, “Positive Portents.”

UPDATE (10:28 a.m.): “Jobs claims rise unexpectedly.” Just a week’s report, but still.

Wow. Senator Byron Dorgan (D-ND) announces on Tuesday he will not seek re-election, and Senator Chris Dodd (D-CT) follows up with an announcement today.

This watcher of North Dakota politics is surprised, if only because Congressional incumbency is as close you can get to a sinecure in the state. The last time an incument member of Congress was defeated in North Dakota was 1986, when now Sen. Kent Conrad, a Democrat, knocked off Sen. Mark Andrews, a Republican. And septuagenarianism has never been a disqualification: Sen. Quentin Burdick (D-ND) was 84 when he died in office in 1992 after serving 32 years in the Senate. When Sen. Milt Young (R-ND) retired from the Senate in 1982, he was 84 and had served for 36 years. Dorgan is just 67.

Senator Dorgan’s voting record on Key Votes as identified by the National Association of Manufacturers is available here. In the 110th Congress (2007-2008) he recorded a 15 percent rating on pro-manufacturing votes; he twice reached 35 percent during a Congress.

Senator Dodd’s record is here. In the 110th, Sen. Dodd achieved an 8 percent rating on manufacturing issues. His high point was 46 percent in the 105th Congress, his first two years in the Senate; in the 107th Congress, he recorded a 0 percent score.

The two announcements have implications for monetary policy. Marketplace Morning Report this a.m. covered the Dodd’s announcement by noting the Senator’s support for legislation to limit the authority of the Federal Reserve. Senator Dorgan, too, has been a relentless critic of the Fed of the populist ilk during his tenure in Congress.

(Disclosure: Your blogger worked for North Dakota Gov. John Hoeven during the 2000 campaign and for six months during his administration. Hoeven, a Republican, was already widely expected to seek the Senate seat even before Dorgan’s announcement.)

Associated Press, “Industrial activity logs smaller-than-expected dip“:

WASHINGTON (AP) — Industrial companies cut back production yet again in June but not nearly as deeply as they have been, another sign the recession is easing its grip.

The Federal Reserve reported Wednesday that production at the nation’s factories, mines and utilities fell 0.4 percent last month as the recession crimped demand for a wide range of manufactured goods, including cars, machinery and household appliances.

The decline, however, was not as bad as May.

National Association of Manufacturers President John Engler told the AP that the figure “are disappointing still.” He added: “Consumers aren’t in a position to lead the economy back.”

The summary from the Fed, notes that manufactured output fell at a rate of 0.6 percent in June, with declines in both durable and nondurable goods producers, but that’s compared to 1.1 percent in May. More details on manufacturing…

Production in manufacturing fell 0.6 percent in June after having dropped 1.1 percent in May. The factory operating rate declined further in June to a historical low of 64.6 percent; prior to this recession, the low for this series, which begins in 1948, was 68.6 percent in December 1982. For the second quarter as a whole, manufacturing output fell at an annual rate of 10.5 percent, a decline that was about one-half the rate of decrease recorded in the first quarter. Production of durable goods fell 0.7 percent in June: The indexes for machinery; computer and electronic products; electrical equipment, appliances, and components; and motor vehicles and parts all posted decreases of more than 1 percent. Output increased for several industries, most notably for wood products, primary metals, and miscellaneous manufacturing. The gain of 1.7 percent for primary metals follows 10 consecutive monthly decreases for the industry. The output of nondurable goods fell 0.4 percent: Declines in the indexes for food, beverage, and tobacco products; apparel and leather; paper; and chemicals were only partly offset by increases in the indexes for printing and support, petroleum and coal products, and plastics and rubber products.

A round-up of 0-based news about the Fed.

Federal Reserve Board of Governors, news release, December 16:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Washington Post, “Dollar’s Slump Erases Months Of Solid Gains”

The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve‘s plan to print vast sums of cash dilute the value of the greenback.

The drops dramatically accelerated the dollar’s reversal of fortune over the past three weeks after months of solid gains. The slide underscores the risks the Federal Reserve is taking to jump-start the U.S. economy through aggressive monetary policy.

On Monday, the Fed cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try to pull the United States from a worsening recession.

• CNNMoney.com, “The growing threat of deflation“
• Motley Fool, “Fed Announces it will Print as Much Money as Necessary“
• AP, “Car, home buyers could benefit from rate cut“
• London Times, “Analysts say Federal Reserve has fired all shots in its armoury“
• National Center for Policy Analysis, citing its fellow Bob McTeer, former head of the Dallas Bank, “The Fed’s Historic Move.”

And the story that prompted this round-up, front page of today’s Washington Post “Style” section, “Here Goes Nothing“:

How do you know things have gotten really, really bad? You know because we have gotten to zero.

Zero is the low beneath which there is no more low. It is nada. Naught. The absence of a thing. Zero: A losing score (blanked! shut out!). A depleted bank account. Less than the bare minimum. Zero: the big fat loser.

Finally, this round of news-numerology allows us the self-indulgence of remembering Tommy Keene, the Washington, D.C., guitar hero who never quite made it to the big-time but still deserves honor for his pop classic, “Back to Zero Now.” There’s no YouTube, so you’ll have to watch him play the Flaming Groovies’ “Shake Some Action” instead.