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: The traumatic Y/Y decline of -2% in real consumer-spending in late 2008 and early 2009 resulted in a precipitous Y/Y decline of 15% in 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
Based on the exceptional consistency of the consumer-spending/industrial-production relationship over the past 50 years, it is almost certain that, if Y/Y real consumer spending growth advances to +2 or more in 2010, industrial production is likely to reach Y/Y gains of 5% for several quarters or more as inventory pipelines are refilled.
