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 13% 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 resembled 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 by mid-2010 rebounded to a Y/Y increase of over 7% by mid-2010. However, as Figure 10-4 indicates, Y/Y consumer spending growth may well slow over the coming year. If this occurs, some liquidation of inventories in retail and distributor pipelines could well lead industrial production growth to fall back toward, or even below, the zero level. This, in turn, would take its toll on corporate profits.
