Manufacturing sector is drowning
The index of industrial production fell 0.6 percent in December after declining 0.3 percent in each of the two previous months. This kept the index 3.1 percent above year ago levels, but led to the first quarterly drop in industrial production since the first quarter of 1991 when the economy was in recession! But we have seen sluggish periods in the mid-1990s when production managed to stay just above the zero line. Auto and truck production have steadily declined for the past three months, pushing down the total. Manufactured homes have posted sharp and steady declines for the past four months. Among nondurables, textiles, paper and chemicals are down for the quarter. Information processing and related items (computers, etc.) continue to increase month after month -- but the gains have gotten smaller. Clearly, they aren't enough to sustain the entire manufacturing sector.

The production figures weren't any surprise given the drop in the NAPM survey and factory employment as well as the sluggish behavior of factory orders in recent months. The Philadelphia Fed's business outlook survey plunged in January to a level of -36.8 from -4.2 in December. This index does a good job of predicting industrial production and suggests that another hefty drop in production is in store next month with the January figures. It does seem like the first quarter of 2001 is being set up for another drop in production. These data have to weigh on Fed officials. While manufacturing activity does not have the same weight as it did in the past, a quarterly drop can't be sloughed off as irrelevant even in a service-oriented economy.