This morning the Federal Reserve announced that during September its Index of Industrial Production had declined by 0.2 percent. This followed a rise of 1.1 percent in August. This year's September value of 122.6 was 3.1 percent higher than the value a year ago.

The Index of Industrial Production is a measure of the output of the nation's factories, utilities, mines, and oil and gas wells. It is one of the four coincident indicators selected by the Department of Commerce as components of its Composite Index of Coincident Economic Indicators. A coincident indicator is one that has a strong tendency to hit its highs and lows at the same time as the highs and lows of general economic activity.

The Index trended upward at an annual rate of 4.9% from the end of the 1990-91 recession through February of this year. From February through September the Index increased from 122.1 to 122.6, an annualized rate of increase of only 0.7%. Breaking this recent action down a little further, we find that the Index declined at an annualized rate of 2.3% in the second quarter then rose 2.6% in the third quarter after removing the contribution from the surge in utility output due to unusually hot summer weather.

As part of this morning's report, the Fed also released data on the Capacity Utilization Rate during September. The monthly Capacity Utilization Rate is simply the percentage of the nation's productive capability that was employed during the month of interest. September's rate was 83.8%, a decline of 0.4% from last month. Since 1967, when the government first began to keep records, the maximum and minimum values attained by the rate were 89.5% and 71.5%, respectively.

Examination of the 28-year record of Capacity Utilization data reveals that each of the five recessions occurring during that period was preceded by a peak in Capacity Utilization of at least 82.5%. The lag between the Capacity Utilization peak and the the onset of the recession varied from a few months to 3.5 years. From the end of the last recession until January of this year, Capacity Utilization trended generally upward from a low of approximately 78% to a high of 85.2%. Since January, with the exception of a one-month uptick in August, the rate has trended down. Is this forecasting a recession? Only time will tell. But, one thing this data is telling us is that demand for goods has fallen off as the year has progressed.

All things considered, Industrial Production and Capacity Utilization data since early this year paint a picture of sub-par economic growth---a picture the Fed needs to examine carefully when deciding what to do about short term interest rates at the mid-November Open Market Committee meeting.

Byline: Lafferty (MF Merlin)