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Manufacturing and the Business Cycle
ROBERT FRY
DuPONT ECONOMIST’S OFFICE
NABE Annual Meeting
Denver, Colorado
October 11, 2010
2
Excuse me.
Can you tell
me where I
am?
You’re in
a balloon.
5/23/2017 DUPONT ECONOMIST’S OFFICE
3
You must
be a economist.
Your answer is
perfectly correct
and totally
useless.
You must be a manager. You
have a great view, but don’t
know where you are.
5/23/2017 DUPONT ECONOMIST’S OFFICE
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US Industrial Production: Manufacturing
Cycle Trough = 100
125
125
June 2009 Trough
April 1975 Trough
December 1982 Trough
120
120
115
115
110
110
105
105
Dates on bottom axis
apply to current recovery
(June 2009 trough).
100
2007
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2008
2009
2010
2011
100
5
US Real GDP and Industrial Production
Percent Change from Year Ago
15
Shaded areas denote recessions
15
10
10
5
5
0
0
-5
-5
-10
gdpipich
-15
70
-10
GDP
Industrial production, manufacturing
75
5/23/2017 DUPONT ECONOMIST’S OFFICE
80
85
90
95
00
05
10
-15
6
US Real GDP and Industrial Production
Billion 2005$
15000
13125
2007 = 100
120
110
100
90
80
70
Industrial production, manufacturing (Right)
GDP (Left)
11250
9375
Cyclical Downturn
or
Structural Shift?
7500
60
50
5625
40
gdpipi
3750
70
75
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80
85
90
95
00
05
10
30
7
US Industrial Production: Manufacturing ex high-tech
Index, 2007 = 100
110
110
(5)
(11)
100
100
90
90
(19)
80
80
(13)
(2)
70
70
(-1)
60
Numbers in parentheses are months
from peak in industrial production to
NBER-designated business-cycle peak.
(3)
50
70
75
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80
85
90
95
00
05
10
60
50
8
US Manufacturing Production
2007 = 100
130
110
90
70
105
50
95
30
90
100
Ex High-Tech
High-tech
jipccs
85
10 97 98 99 00 01 02 03 04 05 06 07 08 09 10 80
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US Manufacturing Production
Percent Change from Year Ago
60
60
50
50
40
40
30
30
20
20
10
10
0
0
-10
-20
-30
-10
High Tech
Ex high-tech
-20
jipccsc
90
92
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94
96
98
00
02
04
06
08
10
-30
10
U.S. Manufacturing Production ex High-Tech
Percent Change from Year Ago
15
20
Industrial Production Index (Right)
Conference Board LEI, 5 months prior (Left)
15
10
10
5
5
0
0
-5
-5
Average of
both series
-10
1979-2009 Correlation = .78
g0m910ipc
-10 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
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-15
11
U.S. Manufacturing Production ex High-Tech
Percent Change from Year Ago
25
Industrial Production Index (Right)
ECRI US Long Leading Index, 8 months prior (Left)
20
1979-2009 Correlation = .68
15
20
15
10
10
5
5
0
0
-5
Average of
both series
-5
jipuslli
-10
-10 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 -15
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12
US Manufacturing Production & Orders
Percent/Percentage Point Change from Year Ago
40
Manufacturing Production ex high tech (Right)
ISM New Orders Index, 7 months prior (Left)
30
Average of
both series
20
10
20
15
10
5
0
0
-10
-5
-20
-10
-30
jiporn
1979 - 2009 Correlation = .57
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
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13
Manufacturing and the business cycle
Manufacturing has significantly underperformed GDP since 2000.
•The 2001 recession was more structural shift than normal cyclical downturn.
•Strong dollar, undervalued yuan shifted production abroad.
Manufacturing (ex high-tech) leads the overall economy at peaks.
•Has led by at least 2 months at last 5 business-cycle peaks
•Has led by 11 months or more at 3 of last 5 business-cycle peaks.
•That makes my job harder a lot harder than forecasting GDP.
•High-tech always lags traditional manufacturing, even in 2001 recession.
Lead implies need for “longer” leading indicators.
•Half of Conference Board indicators lead by 2 months or less.
•By splitting leading indicators into short and long, ECRI achieves longer lead.
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US Real Gross Domestic Product
Annualized Growth Rates
8
Shaded area
7
denotes recession
6
5
4
3
2
1
0
-1
-2
Annual Growth Rates (%)
-3
4.0 2.5 3.7 4.5 4.2 4.4 3.7 0.8 1.6 2.5 3.6 2.9 2.8 2.0 1.7 0.8
-4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
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8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
15
Prediction is very difficult,
especially about the future.
-- Niels Bohr
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What I’ve learned
Trust unit data over dollars and index numbers.
•Employment, housing and auto stats got the story right from the beginning.
•GDP, retail sales didn’t show recession until after large revisions.
•Industrial production looked like mid-cycle slowdown until revisions.
Trust leading indicators.
•Don’t be afraid to forecast a recession.
•If you are, at least offer a downside scenario.
Role of Lehman failure has been exaggerated.
•DuPont US sales volume fell much more before Lehman than after.
•We shouldn’t forget $147 oil. (Our plant workers don’t.)
You can have supply constraints soon after a business-cycle trough.
•When capacity is “lumpy,” you don’t restart lines without big rebound in demand.
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How my job has changed since 2007
I talk to Senior Management a lot more.
•Monthly meeting with 8 top executives on leading indicators.
•Semi-annual meeting with all corporate officers (VP and above).
Everybody wants to talk about leading indicators.
•Individual businesses want help in finding leading indicators for their sales.
•Working with statisticians developing new leading indicator forecasting methodology.
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“Uncertainty rules the tax situation, the labor situation,
the monetary situation, and practically every legal
condition under which industry must operate.”
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“Uncertainty rules the tax situation, the labor situation,
the monetary situation, and practically every legal
condition under which industry must operate.”
--Lammot du Pont II, 1937
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