Implications: The most important part of today's report on industrial production wasn't the change in September itself, but upward revisions to prior months. Both overall production and manufacturing shrank slightly in September, as the consensus expected. But upward revisions to prior months mean the level of activity in September was higher than anticipated. Now that we have September figures, as well as those revisions, we can see that output was up at a 1.9% annual rate in the third quarter, consistent with our forecast that real GDP grew at Plow Horse 1.5% rate. Given lower oil energy prices, mining continues to be a headwind for the economy, dropping 2% in September, led by a 3.8% decline in drilling of oil and gas wells. However, we don't think declines in drilling and extraction will last much longer. Productivity gains in energy production from new technologies continue to drive down costs on almost a daily basis. As oil prices bottom out, drilling activity should start to climb again, even if oil prices stay low relative to recent years. Meanwhile, utility output rose 1.3% in September due to warmer-than-usual temperatures, which boosted AC use. Cutting through the month-to-month volatility, overall industrial production and manufacturing ex-autos are up 0.4% and 0.8%, respectively, from a year ago, and the fundamentals favor further growth in the year ahead. Companies are sitting on huge cash reserves and corporate cash flow is at a record high.
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Posted on Friday, October 16, 2015 @ 10:25 AM
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