Thursday, September 10, 2009

July Industrial Production: Deceptively High

At first, I was pretty excited when I saw the numbers from today's IPI report (+6.9% m-o-m), especially coupled with US trade data for July which saw a surge in imports. Could my analysis be wrong (per my last post) and we are seeing a rebound in external demand? Sadly, digging deeper into the numbers, I'm forced to conclude there's insufficient evidence so far. The increase in US imports is real enough (seasonally adjusted, USD millions):

...and monthly growth confirms this (seasonally adjusted, log monthly changes):

...and at first blush, there's a corresponding increase in Malaysia's IPI level (2000=100) and growth (log monthly changes, 2000=100):

But adjusting for seasonal variations brings down both the IPI level (seasonally adjusted, 2000=100):

...and the growth rate (log monthly changes):

Looking at the detailed breakdown of US import data, again the numbers look to deceive. Nearly 60% of the increase of USD7 billion from July to June came from consumer goods and auto imports. A further USD1 billion came from crude oil imports and another USD500 million in imports of computer equipment.

The problem is that the US government "cash for clunkers" program is probably the main driving force behind both the increases in auto and oil imports, and H1N1 may be behind the more than USD1 billion increase in pharmaceuticals (which is under the consumer category).

Take away those two factors and US import growth actually falls behind export growth. Since neither are expected to have long term effects, it's difficult to make an argument that there has been a meaningful change in consumer spending patterns - in short, we're not seeing a long term resumption of US import demand.

So I'm back to my inventory bounce/domestic demand story...for now.

Technical notes:
1. July IPI data from the Department of Statistics
2. US trade data from the Bureau of Economic Analysis

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