Moneybeat – Good news for industrial production

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: We have financial analyst and adviser David Bahnsen. And David we have a new set of economic reports I’d like to dive into, but let’s begin on the big one on industrial production because I know you pull a lot more meaning out of those numbers than you do on things like retail sales—although I see sales were down, but — [BAHNSEN: Yeah.]

Yeah, but industrial production, now after all we’ve been through, the November number sitting merely 5 percent below the last reading we had pre-Covid, back in February.

DAVID BAHNSEN, GUEST: Yeah, actually the manufacturing portion has come back. The services number is still a little bit below the pre-COVID levels. And I do want to come back to the retail figure as well, because I think there’s a really important nuance there. 

But on the industrial production side, I think you see much better manufacturing recovery than I would have expected and much better manufacturing than we need to be on the right trajectory for growth. So I think we’re ahead of pace for economic recovery going into 2021. The services side is a bit of a question and it’s lagging a little, but it’s still recovered at least 90 percent of what it has needed to from that huge contraction in the spring.

EICHER: What accounts for that? Is there a COVID reason for that difference—perhaps easier to gear up factory floors and get machines humming than the more social nature of services?

BAHNSEN: I think that plays into it. There also, though, is frankly an economic side of it: a lot of this manufacturing is in the supply chain of autos and because of very low interest rates, you have a resurgence of automobile sales. So, automobile sales are being driven by low cost of funds and auto sales are driving demand that increase manufacturing. 

On the services side, there’s a couple reasons but it’s such a broad and nebulus category, it’s hard to pin it to one thing, particularly in a COVID context. But I will point out that a lot of this is a by-product of global trade. And right now the import-export side with some of the Asian partners that are not in real COVID-constricted moments—China’s economy is mostly normalized, South Korea, Japan is not dealing with a lot of the things that Europe and America is. And so you really get a lot of activity on both the buy side and sell side as a result of global trade, which has skyrocketed back higher.

EICHER: You mentioned the low cost of funds. That’s also got to be driving the housing market, which is another bright spot.

BAHNSEN: Yeah, I’m not sure I’d call it a bright spot because that presupposes that a lot of people overpaying for a house is a good thing and that a lot of people that maybe couldn’t afford to buy a home without low rates that now are able to is necessarily a good thing. I’m actually all in favor, of course, of more people buying homes. 

But you’ve got to remember that the affordability index with lower rates is still going higher. The inaffordability. Meaning even with the lower costs of funds, the higher prices are offsetting that and the reason for that, of course, is an inadequate amount of supply. 

We have not built enough new homes because of environmental regulations and city and state. It is a very, very silly situation that in the United States of America we can’t build enough homes to meet the demand. And yet that’s the situation we’re in and when you have artificially constricted supply, you get artificially boosted prices. 

So, there’s certainly a lot of activity. 

That activity is encouraging in this sense: it does show that there are plenty of people that are economically capable right now. You have a lot of mortgage demand, obviously around low rates. 

But I just—the only reason I push back a little is that there is this tendency in our circles to talk about any activity in housing as automatically a positive thing. And I really believe that we have to remember how much we learned that to be untrue with the great financial crisis.

EICHER: Right, the last thing we need is a crisis like that on top of everything else.

You said a moment ago you had a note you wanted to make on retail sales.

BAHNSEN: Well, it’s very important that people have the context here for the retail number that came out this week because it was a bit lower than had been expected in the sort of month-over-month number. 

But then when you do the comparison to a year ago—apples to apples—it was up 4.1 percent. And so I think that the retail number being lower than expected and being lower month-over-month is interesting in the sense that in the margin some of these tighter restrictions from COVID clearly held down some restaurant and bar sales, which is the only category that was down, by the way. 

But, still, year-over-year, the retail number was up 4 percent. And so I think it had as much positive in it as negative and it really helps to isolate what’s actually going on, which is just simply that the only economic shortcomings are coming from policy decisions.

EICHER: David Bahnsen, financial analyst and advisor. I will say Merry Christmas to you and we’ll talk to you in a week.

BAHNSEN: Merry Christmas, Nick.

(AP Photo/Carlos Osorio, File) In this May 13, 2020, file photo, Ford Motor Co., line workers put together ventilators that the automaker is assembling at the Ford Rawsonville plant in Ypsilanti Township, Mich.

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