Johnnie-jackass - oh how are you going to spin this news...
Big economic news this morning.
The Federal Reserve reports that Industrial Production surged by 1.1% (month over month) in May. This is the largest increase since August 1998 and puts manufacturing output within 0.3% of its all-time peak in June 2000. This is a bona fide sign that the economic rebound is real and deep, as it is widely thought that Industrial Production is a lagging macroeconomic indicator - business don't order capital goods speculatively, they do so when they are confident that demand has returned.
Also, capacity utilization rose to 77.8%. Cap utilization is an aggregate measure of how much capacity (capital, not labor) the economy is currently employing. At 77.8%, the current rate is 330 bps below the running average since 1973 and well below full capacity, which is generally thought to be somewhere between 83 and 84%.
The cap ute number presents an extremely interesting dynamic. First-quarter GDP growth has been initially estimated at 4.4%, which is moderately above the 3.5% growth that is considered "natural" in a full-steam booming economy. What is interesting is that an assumption accompanying "natural, full growth" is a capacity utilization rate of 83%. So, superb GDP growth, along with relatively low utilization equates to one thing in macroeconomics - low inflation. See, in so far as there is spare capacity in the economy, there is little pricing pressure to engage the incremental unit of capacity, it is going to be employed without an increase in cost. So, along with surges in productivity, which we continue to experience, this spare capacity will certainly not add to inflationary pressures, and may serve to dampen them.
Things, from this vantage point, look good. There are, however, a host of other topics, that create concern. I'll get more into that later.
