Figure 7-3: Real consumer spending (PCE) and industrial production: The volatile effects of the inventory cycle
Modest cyclical swings in consumer spending result–due to the buildup and ebbing of inventories in distribution and factory pipelines–in far greater volatility in industrial production (see shaded ovals). Industrial production typically reacts quickly to changes in consumer demand through retail stores, so its cycle is usually coincident with, to slightly lagging, that of consumer spending.
Note how, despite claims in most cycles that “it’s different this time,” there is considerable similarity in the timing and dimension of the consumer-spending/industrial-production relationship among most cycles since 1960.
Current Comment: Following the traumatic Y/Y decline of -2% in real consumer-spending in late 2008 and early 2009, industrial production fell to a peak Y/Y decline of 15% industrial production during the first half of 2009. The timing and degree of this decline is very consistent with that of past cycles. Indeed, it very much resembles that of the 1974 downturn, which was the worst preceding (post-World War II) downturn in consumer spending
As anticipated based on this chart’s history, industrial production is already showing signs of actual increases on a Y/Y basis, and is likely to accelerate further in 2010 as inventories increase. Investors should note that, when growth in the manufacturing sectors of the economy begin to exceed that of real consumer spending—representing the “late cycle” stages of the economic upturn—stocks in those sectors also begin to outperform.
