We saw a divergence in economic recovery data last week. Retail sales have been on quite a run and popped again in September, breaking the pre-COVID trendline to the upside (shown in the chart directly below). This is good news for the economy. Overall retail has rebounded even as some sub-sectors have fallen on rough times.
On the other hand, we saw a decline in industrial production for the month of September (shown in the chart directly below). This was somewhat unexpected and points to an economic recovery that is not yet completed. U.S. industrial production peaked in January of 2019, and then moved sideways until it fell off the COVID cliff. With the massive retail sales, inventories are getting thin relative to historic scenarios. This could help prop up the lagging industrial production; it is definitely causing increased traffic at the ports of America as we have seen imports begin to fill the docks again and the trade deficit soar to all-time highs.
Some analysts have compared 2020 with the Great Depression. While that may make for a good talking point, it is important to note that industrial production fell -50% during the Great Depression. Even at the low point of the pandemic, US industrial production only fell -16%. So the two time periods don’t have much in common.
One of the questions that we have been asking ourselves is do economic trendlines re-establish themselves post COVID. We can see that retail sales broke higher after being in an uptrend prior to COVID, while industrial production looks like it is breaking lower. Capacity Utilization, a measure of the proportion of potential economic output that is actually realized, was on a definite downward trajectory prior to COVID, and also saw a downward shift last month in tandem with industrial production (see the chart directly below). So some of the negative trends prior to COVID appear to be re-establishing themselves, which is disconcerting. We will continue to closely monitor this to see if the data signals can break out of their ruts.