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:
Consistent with this chart’s history, industrial production—responding to the recovery of consumer spending in 2010—rebounded to a Y/Y increase of over 7% by mid-2010 and has remained relatively strong (most recently at +5%) in mid 2012. We are currently in a classic “mid-to-late cycle” in which stable growth in consumer spending is supporting continued growth in production and services. However, any slowdown in consumer spending would lead to liquidation of inventories in retail and distributor pipelines, in turn causing industrial production growth to fall back toward, or even below, the zero level. This, in turn, would take its toll on corporate profits. This makes forecasting consumer spending (see Figure 10-7) extremely important at this time.