Is this Why US Industrial Companies Don’t Invest? by Wolf Richter

The problem with zero or near zero percent interest rates is that eventually the rate of return on investment tends to match the interest rate. Zero or a near zero rate of return does not promote investment. From Wolf Richter at

Production lower than 2 years ago, with ugly capacity utilization.

Total industrial production in the US fell 1.0% in September compared to September 2015, according to the Fed’s Board of Governors today. The index, at 104.2, is now 2.3% off its all-time peak in November 2014, and also 1.3% below where it had been two years ago (105.6). So two years in a row of year-over-year declines.

The first time the industrial production index had reached this level was in March 2007!

Of the major market groups:

• Consumer goods production rose 0.8% year-over-year. Since the index is not adjusted for inflation, this uptick is likely due to inflation.
• Business equipment production fell 1.4%, as businesses are not eager to invest in productive activities. In a moment we’ll see why.
• Construction rose 1.3%. Hallelujah for the apartment and office construction boom in many big cities, such as New York City, Boston, Houston, or those in the Bay Area – even if this boom is now adding to already worrisome oversupply. But hey, that’s a problem for another day.
• Materials fell 2.2%, and that includes the beleaguered mining sector (including oil & gas), which plunged 9.4%.

Of the sub-groups, only a few of the big ones made it into positive territory.

Automotive products jumped 7.3% year-over-year. It’s big enough to move the needle: accounting for 3.2% of total industrial production, it propped up consumer goods production.

And this is interesting going forward: automakers are still cranking out vehicles as if the sales boom were still continuing. But new vehicle sales actually fell in September year-over-year and are nearly flat for the first nine months. Inventories are piling up on dealer lots. So automakers are dousing the market with costly incentives to move the iron. Something is going to give: either a miraculous jump in sales or a cut in production.

The energy component of consumer goods (power, home heating, etc.), which accounts for 3.4% of total industrial production, inched up 0.8% year-over-year.

“Misc. durable goods,” which accounts 2.1% of total IP, rose 1.8%. Information processing, a subcategory of Business equipment and 2.5% of total IP, rose 3.2%. Construction supplies, at 5.1% of total IP, rose 1.3%.

But production in most other categories fell year-over-year, such as home electronics (-5.8%), clothing (-8.2%), food and tobacco (-0.1%), paper products (-4.3%), “transit” (part of business equipment (-4.2%), Industrial and other (-1.8%), defense and space equipment (-0.6%), business supplies (-0.2%), and of course the declines in the materials and energy sectors.

To continue reading: Is this Why US Industrial Companies Don’t Invest?

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