Industrial Production Is Punk

By David Stockman  |  July 30, 2019

There’s a fake quote making rounds on Twitter today. It’s attributed to Jim Jordan, a Republican representing Ohio’s 4th congressional district.

You’d be amazed at the number of Very Smart People who didn’t, couldn’t, or wouldn’t see the satire here:

GOP rallies around Trump 9/11 role. “While Obama and Biden were cowering in fear on Air Force 1, Mr. Trump was on the ground with first responders searching for survivors and pulling people to safety,” Jim Jordan says. “I remember seeing him on TV, running toward the danger.”

(Editor’s Note: Norm Ornstein has deleted his tweet.)

The tweeter in question is referring to comments made by the Tweeter-in-Chief over the weekend about his role in the terrorist attacks that redefined American political culture. No less an Inside the Beltway light than Norman Ornstein, resident scholar at the American Enterprise Institute, took it at face value.

And, really, who can blame him?

The author of the tweet that’s now offending self-important Acela Corridorians and their elite diaspora for its lack of sensitivity to the times is now begging forgiveness… mockingly, thank goodness.

My stars, how can we joke at times like these?

in this era of Bile, Bombast, Braggadocio, and Bullshit

…when the same sets of folks tsk-tsking all over the place right now stood to cheerlead the Federal Reserve’s report on industrial production for June two weeks ago…

So, bless Dan Lyons. What a great way to launch our 30,000-foot view of the American economy…

Bubblevision was excited by a slight uptick in manufacturing output revealed in the Fed’s recent update on industrial production. The truth is you can’t see it at all on a chart with any meaningful timeframe to it.

When you look at the June number in its cyclical context, it’s downright punk.

In the near term, the 106.3 index reading for June was still below the sugar high of 107.5 reached in December 2018 in response to the Trumpified GOP’s credit-card-based tax cuts for business.

It’s been six months of retreat since. And the hook lower in the far right-hand panel of the chart below looks suspiciously like the those evident before the 2008 and 2001 recessions, respectively.


More importantly, the June print was 1.6% below the level posted at the pre-crisis peak in December 2007. In fact, the 12-year growth rate across this “recovery” is -0.2% per year. That’s about as sharp a break from prior economic experience as you’ll find.

During the 1981-to-1990 Reagan Recovery, manufacturing output grew by 2.8% per year on a peak-to-peak basis. From June 1990 through February 2001, it grew by 4.5% per year. The cycle that ended in 2007 say annual gains of 2.3%.

In short, a healthy economy can’t survive on Pilates studios, nursing homes, and day-care centers alone. It needs to make stuff, even if it specializes in product lines of comparative advantage.

But, when it rolls into recession from a base lower than the prior peak, we’re talking about serious fundamental deterioration in competitiveness.

And the way we’ve gong about things – debt-driven “growth” – we’re killing our capacity for future sustainable expansion.

Let’s take apart the components that make up the Fed’s manufacturing survey… because the story becomes even more striking.

In a world teeming with low-cost labor, the one thing the U.S. economy needs is higher investment in business equipment; that provides more tools per worker.

But production of business equipment has flatlined over the past 11 years. That too marks a sharp departure from prior expansions.

The annualized gain during the 1980s cycle was 3.6%. It surged to 6.9% on a peak-to-peak basis between June 1990 and February 2001. It “settled” to 2.6% during the 2001-to-2007 cycle.

The production index for June posted at 102.1. That’s exactly what it was in December 2007. And it’s lower than what it was in November 2014.

There has indeed been a substantial increase in business equipment imports since the pre-crisis peak. But is the U.S. economy incapable of competing in the capital-intensive production of business equipment in the global economy?

When it comes to consumer goods, of course, it’s been outright retrogression since the December 2007 pre-crisis peak. After rising nearly continuously at a 2.1% annual rate across three business cycles from 1981 through 2007, output of consumer goods production dropped by 14% during the Great Recession. And it’s never recovered.

Output in June 2019 was still 7.2% below the pre-crisis peak, at a level first reached way back in November 1999.

We sure have seen two areas of real “expansion” on Main Street since late 2007. It’s come through increased government support in areas such as health care and education.

And there’s been a bump in energy production owing to a massive shale boom. But the cheap-debt-funded capex spree that made it possible has generated negative economic returns.

This is not organic, sustainable growth.

This is not “The Greatest Economy Ever.”

This Is Good Passion

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR