Bad News Piles Up

Industrial production on downward path

Fed Chairman Ben Bernanke said yesterday there are "tentative signs" that the sharp decline in economic activity may be slowing, but the latest numbers coming from the nation's factories clearly show we are not out of the woods yet. Industrial production tumbled 1.5% in March, mirroring February's sharp decline and bringing the annualized drop in 1Q to a stunning 20%.

Industrial production is down almost 13% versus a year ago, barely eclipsing the slide that took place in the severe recession of 1974. Factories, like many companies across the country, have been quickly shedding jobs in response to poor economic conditions, and the decline in output highlights the speed at which the economy has been contracting.

Capacity utilization, which is tied to the release of industrial production, also underscores how bad conditions are in the manufacturing sector. Capacity utilization fell from 70.3% in February to 69.3% in March, about double the expected decline, leaving the country with the most slack in its industrial base since the series was first calculated back in 1967. And that could lead to even more plant closures and the shuttering of assembly lines in the near term.

Pricing data mixed

A decline in energy prices last month led to a 0.1% drop in the Consumer Price Index, but the core rate of inflation, which excludes the more volatile food and energy groups, marched ahead at a modest rate of 0.2% for the third straight month. A 0.1% rise was forecast. Compared to a year ago, the core rate of inflation is up 1.8% and has been holding in that range since the end of last year.

The worsening recession and the slack in the economy do suggest that we may eventually see inflation decline to near the low end of the Fed's implied target of 1-2%, especially as last year's drop in commodities and flat labor costs work their way through the pipeline. And policymakers have openly fretted inflation could persist for a time below rates that best foster economic growth and price stability. However, unless the already steep recession gets much worse, I still believe concerns that outright deflation is set to spread through the economy are probably overblown - see PPI post below.