Implications: Industrial production grew 0.1% in May, which was less than the consensus expected. However, this shortfall was due to two temporary factors. First, utility output, which is extremely volatile from month to month, dropped 2.7%. Second, as we have pointed out in our previous reports on industrial production, the auto sector is undergoing huge supply-chain disruptions due to the multiple disasters in Japan. So after dropping 6.5% in April, auto production fell another 1.4% in May. However, outside the auto sector, manufacturing output increased 0.6% and is up 3.7% versus a year ago. We will continue to watch this indicator – manufacturing ex-autos – as a signal of the true underlying trend in the factory sector. Meanwhile, after slipping recently, auto production will surge sharply in Q3 to make up for lost time and low inventories. Investment in equipment by the business sector will continue to push production higher. Inventories are low and both corporate profits and cash on the balance sheets of non-financial companies are at record highs. In other news this morning on the manufacturing sector, the Empire State index, a measure of manufacturing activity in New York, fell to -7.8 in June from +11.9 in May. We believe the decline in the index is temporary and due to supply chain disruptions originating in Japan.
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