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Weekly Economic Commentary


July Factory Production Improvement is Tentative, August Factory Data Awaited

August 16, 2011

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Factory production rose 0.9% in June after a 0.4% increase in the prior month. The gains in industrial production were widespread. Factory production rose 0.6%, while mining (+1.1%) and utilities (+2.8%) also moved up. Factory production excluding autos increased 0.2%, with auto output posting a sharp 5.2% increase. Auto production declined in each of the three months of the second quarter due to a shortage of parts arising from bottlenecks following the natural disaster in Japan. Production at the nation’s utilities was partly driven by extraordinarily high temperatures.

Chart 1 - 08 16 2011

Table 1 - 08 16 2011


As supply chain problems are not valid anymore and weather appears to be less oppressive in August, industrial production data in August would be a better gauge of underlying factory conditions. Factory survey for the nation showed a moderation of factory conditions in July as gleaned from the ISM composite index of manufacturing (50.9 in July vs. 55.3 in June). The disparate messages from actual production numbers and survey data should be sorted out in August. History suggests that one should be cautious about July numbers; the ISM manufacturing composite index advanced two months has a strong positive correlation with the year-to-year change in factory production (see Chart 2). Stay tuned for an analysis of the August report.

Chart 2 - 08 16 2011


Home Construction Continues to Remain in a Slump

Housing starts fell 1.5% to an annual rate of 604,000 units during July, followed by a downwardly revised 10.9% gain in June. Single-family starts fell nearly 5.0% to an annual rate of 425,000 in July, while that of multi-family units rose. Single-family units make up the bulk of total home construction activity. The level of single-family starts is yet to advance meaningfully forward in the past year (see Chart 3). Overall, housing starts are hovering close to levels seen during the recession. Starts of new homes fell in the Midwest (-37.7%) and West (-3.0%) but rose in the Northeast (+34.7%) and South (+5.6%). Permit extensions for multi-family units fell nearly 11.0% in units in July but that of single-family units moved up slightly (+0.5%), which augur poorly for housing starts in August. The main message of the housing starts report is that home construction activity is not on a robust recovery path as yet.

Chart 3 - 08 16 2011


Treasury note Yields and Equity Prices after the S&P Downgrade

Volatility of financial markets during the week of August 8, 2011 was severely pronounced following Standard and Poor’s downgrade of U.S. sovereign debt on August 5, announced after markets closed in the US. At the same time, headwinds from Europe related to the resolution of the debt crisis in Euroland and the recent weak economic data pertaining to the US economy played a significant part in the wide swings of financial markets during the same week. As of August 15, stock prices have recovered in the United States past levels seen at market close on August 5; the S&P 500 closed at 1204.49 on August 15 vs. 1199.38 on August 5. The 10-year Treasury note yield is trading at 2.22% as this writing vs. 2.58% on August 5.

Chart 4 - 08 16 2011

Economic developments in Euroland are a major market mover as equity prices once again lost some ground, as of this writing, after Germany announced that second quarter real GDP barely budged from the first quarter tally (up only 0.1% in the second quarter, see Chart 5). Essentially, Euroland’s economic juggernaut has stalled and raised more questions about the region’s fundamentals. Fitch, one of the big three rating agencies, reiterated the AAA status of the US sovereign debt today and Moody’s has also affirmed the top-notch status of U.S. credit.


Chart 5 - 08 16 2011






The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.