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, including the 2000–2002 downturn.
Current Comment: Year-over-year growth in real consumer spending has been in a relatively stable band of 3%-4% for the past three years now, a pattern not unlike that of the early 1990s. Growth in industrial production has been relatively stable at 3% or more throughout this period, declining somewhat in late 2006 and early 2007. As long as consumer spending holds up, these two series should stay in equilibrium, but any further slowing in consumer demand would likely—via the inventory cycle—lead to actual year-over-year declines in the manufacturing sector.
