Implications: Industrial production grew modestly in June but is going to surge sharply in July as automakers start to recover from the supply-chain disruptions coming from Japan. In the past three months, auto and light truck assemblies have dropped at a 39% annual rate, resulting in razor-thin inventories and slower sales (as auto companies and dealers curbed incentives). The reversal of that problem is going to generate eye-grabbing and positive headlines in the next few months. Since the multiple disasters that hit Japan, we have been following manufacturing production excluding autos to assess the underlying trend – even though some of these manufacturers were also temporarily hurt by the supply-chain problems. That production increased 0.1% in June, the most since the disasters hit in March, and was up 3.8% versus a year ago. In addition, we expect business investment in equipment to accelerate. Corporate profits and cash on the balance sheets of non-financial companies are at record highs. Meanwhile, companies can fully expense these purchases for tax purposes through year-end. In other news this morning on the manufacturing sector, the Empire State index, a measure of manufacturing activity in New York, increased to -3.8 in July from -7.8 in June. This is a smaller gain than the consensus expected but we expect better regional survey numbers where the auto industry is more prominent.
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