Factory stats point to bottoming U.S. recession

Two more mildly favorable data points for the nation's industrial sector: Industrial production fell at its slowest pace in eight months and a key regional manufacturing barometer is at its highest level in a year.

Output at U.S. factories declined 0.4 percent in June, the U.S. Federal Reserve announced Wednesday, adding to signs that the nation's pronounced recession is bottoming.

However, factory utilization fell 1.0 percentage point to 68.0 percent in June -- the lowest level for that metric since the Fed began tracking the statistic in 1967. Factory utilization was at 68.3 percent in May. Economists surveyed by Bloomberg News had expected industrial production to decline 1.1 percent and capacity utilization to total 67.8 in June.

U.S. contraction is moderating

Further, the quarterly decline rate provides additional evidence of a moderating contraction. In Q2 industrial output fell at an annual rate of 11.6 percent, compared to a 19.1 percent decline in Q1.

Meanwhile, the Empire State Manufacturing Index totaled a negative 0.55 in July -- its highest level in a year, the New York Federal Reserve announced Wednesday -- a data point that also suggests a bottom in the sector is approaching. The index totaled negative 9.4 in June. Readings below zero indicate manufacturing activity is contracting. The Bloomberg survey had expected a negative 4.5 July reading.

End of disastrous factory data

Investors should pay attention to the industrial production and capacity utilization data because although manufacturing accounts for only 12 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual decreases in production point to a softening economy; increases indicate the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.

Further, in the Empire State index's supplemental questions section, the median respondent indicated that total sales had fallen 15 percent from the first half of 2008 to the first half of 2009, and that the number of employees had decreased 10 percent. Also, declines for the full year were expected to be of the same respective magnitudes. A year ago, in July 2008, respondents said sales had risen 5 percent, with employment levels little changed. Concerning production plans for the second half of 2009, about 63 percent of respondents said they had scaled back plans, while just 21 percent indicated they had increased them.

Economists monitor the Empire State index because it typically provides an early-read on larger manufacturing surveys released later in the month, such as the Institute for Supply Management's manufacturing survey.

Economic Analysis: Again, the June industrial production and July Empire State manufacturing data are not the stuff of a "Roaring 20s," post-World I industrial boom. But again, it's a matter of industrial healing, relative to previous conditions. The industrial sector is still contracting, but the rate of contraction has slowed to a crawl, and that historically has marked a bottom, and the start of a recovery.

Hence, the market, at least short-term, should view the two above data points favorably. Still, investors should not lose sight of the U.S.'s long-term economic tasks. Given the restructuring occurring in the U.S. economy, the United States must identify and create new, value-added industrial and tech sectors -- in health care services, information technology, infrastructure, education, renewable energy, high-end/tech-based manufacturing, and biotech -- to make up for the industrial output and jobs lost to globalization. Those new sectors must appear for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities, and sustainable GDP growth.

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