Implications: After rising for four months in a row, it looks like the recovery in industrial production hit a temporary snag in September, falling 0.6%. That said, if you include upward revisions to prior months, industrial production actually eked out a gain of 0.1%. Industrial production has now made up roughly 57% of the decline in activity seen during the height of COVID-19 lockdowns back in March and April, but still has a still has a way to go. We expect a reacceleration in the factory-sector recovery in the months ahead, and here is why. This morning's report on retail sales showed consumer spending up 4.2% from its February pre-pandemic level, and personal consumption spending on goods is up 5.6% from February to August. The pandemic has clearly shifted consumer preferences from services towards goods, and that represents a strong source of demand for US factory output going forward. Overall, even with September's weakness the rebound in Q3 was strong, with industrial production surging at a 39.9% annualized rate versus the Q2 average. Looking at the details, the biggest source of weakness in September came from the volatile auto production sector, which fell 4.0% in September. However, some slowdown in this series was expected as it has already posted a full recovery from its April low. Meanwhile, non-auto manufacturing remained unchanged in September and is has still only gained back roughly 57% of the decline in March and April. Another big headwind in September was utilities output, which fell 5.6% as cooler than expected weather reduced air conditioner use. The one bright spot in today's report was mining, which rose 1.7% and is now up 23.9% from its low in May, signaling the worst is probably over for the beleaguered energy sector. In other recent factory-related news, the Philly Fed Index, a measure of East Coast factory sentiment, surged to +32.3 in October from +15.0 in September. Meanwhile, its counterpart from New York, the Empire State Index, fell to a still solid +10.5 in October from +17.0 in September. Both these readings signal ongoing recoveries and stand in stark contrast to the deeply negative readings early on in the pandemic.
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