Vale operations in Sudbury, Ont.GINO DONATO
Industrial production data due out today in the U.S. are forecast to have increased for three consecutive months. That's the good news. The bad news is it appears to be going in the wrong direction, but don't worry.
U.S. industrial production is forecast to have increased by 0.2 per cent in September, according to a survey of economists by Bloomberg. Unfortunately, that is down from 0.8 per cent in August and 1 per cent in July.
The capacity utilization rate is expected to have climbed marginally to 69.8 per cent in September from 69.6 per cent in August. It set a record low of 68.3 per cent in June.
WHAT ARE THE EXPECTATIONS? Capacity utilization remains well below the long-run average of 81 per cent, which indicates just how sub-par the economy is operating, leaving room for improvement. Auto production is increasing and the mining sector should benefit from rising metal prices, and both are helping boost industrial production, said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.
"You have to see through the auto-related noise," Mr. Guatieri said. "The underlying picture is for a modest recovery." The huge summer recovery in manufacturing levels was an aberration resulting from the increased output by auto suppliers and the beginning of inventory rebuilding, he said.
Although industrial production is rising at a slower pace it continues to recover from historical lows, said Meny Grauman, senior economist at CIBC World Markets Inc. At the same time, industries other than autos are also replenishing inventories as confidence in a recovery slowly builds, he said.
HOW WILL THE MARKET REACT? Rebuilding of auto inventories are likely to result in only a modest increase in production during the third quarter, but it will make a significant rebound in the fourth quarter and during the first half of 2010, according to Capital Economics. And the rebound in spending on machinery and equipment is still very much in its infancy, it said.
Add the fiscal stimulus spending to the inventory rebuild and hopefully that improvement in the economy will encourage the consumer to step up, said Paul Taylor, chief investment officer with BMO Harris Private Banking. "That's the expectation that market is building in. We just hope there's a follow-through."
Mr. Taylor expects there will be decent growth in the U.S. economy in 2010 and it will be sustainable. "You have to buy equities as a result," he said.