Kevin Spires, CFA, FRM
Industrial Production rose 1.1% in April after a downwardly revised -0.6% in March. Capacity Utilization rose to a post-recession high of 79.2%.
Industrial Production rose 1.1% in April after a downwardly revised -0.6% in March. Capacity Utilization rose to a post-recession high of 79.2%.
The first thing to note is that the ISM New Orders Index is a good proxy for Q/Q changes in Industrial Production. Current ISM New Orders of 58.2 are consistent with Industrial Production Growth of 1.5 - 2.0% Q/Q or 5-7% annualized. Current data is moderately strong and does not show any signs of imminent collapse.
Given the growth rates in Industrial Production, Capacity Utilization has been growing as well. With close to 5% growth rates in Industrial Production over the past 12 months, Capacity Utilization was up 2.67%. Given the Expectations for Industrial Production to remain in the 5-7% growth range going forward, Capacity Utilization will probably grow by at least another 2-3% over the next 12 months.
The Key point to take away from this analysis is that Industrial Production and Capacity Utilization are growing at rates that will put Capacity Utilization in the range that is normally associated with normal to tight Fed Policy. In this context, the current Zero Interest Rate Policy by the Federal Reserve is looking less and less tenable.
The longer the Fed takes to normalize policy, the higher and faster that interest rates will ultimately have to rise to conteract rising inflation. Call me a hawk on this one, but I am just judging the Fed against a policy reaction function, that in the past two interest rate cycles, caused two massive bubbles to arise - first the Internet Bubble and then the Housing Bubble.
I wonder what Bubble will end up bursting this time around - because the Fed has fallen behind the curve once again. I am pretty certain that a Bubble has been formed in the Social Networking sector of the Internet and I expect the current overly accomadative Fed Policy to cause massive dislocations in Credit, Currency, and Commodity markets going forward. As the Fram Oil Filter commercial used to say "You can pay me now, or pay me later."
The longer the Fed takes to normalize policy, the higher and faster that interest rates will ultimately have to rise to conteract rising inflation. Call me a hawk on this one, but I am just judging the Fed against a policy reaction function, that in the past two interest rate cycles, caused two massive bubbles to arise - first the Internet Bubble and then the Housing Bubble.
I wonder what Bubble will end up bursting this time around - because the Fed has fallen behind the curve once again. I am pretty certain that a Bubble has been formed in the Social Networking sector of the Internet and I expect the current overly accomadative Fed Policy to cause massive dislocations in Credit, Currency, and Commodity markets going forward. As the Fram Oil Filter commercial used to say "You can pay me now, or pay me later."
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