Soft patches are common during business cycle expansions. The chart above shows the three-month percentage change in the Index of Coincident Economic Indicators from 1960 to now. There were eight business cycle expansions since then, and all of them had soft patches. Especially encouraging is that the Index of Leading Economic Indicators (LEI) rebounded by a larger than expected 0.8% in May. That followed a 0.4% drop in April, which was the first decline in 10 months. Eight of the 10 components contributed positively to the LEI last month, compared with four in April.
May’s data for US industrial production strongly support our view that the current economic soft patch is mostly attributable to a shortage of Japanese parts, especially ones required to assemble a car. Let’s review:
(1) Auto production remained depressed in May. It rose 0.3% during the month to 7.9 million units after plunging 10.8% during April. It should jump to a new cyclical high exceeding 9.0 million units during August and September.
(2) Overall industrial production, which includes the output of manufacturers and utilities, rose 0.1% during May following no change in April. Excluding production of motor vehicles & parts, it rose 0.1% in May following a 0.3% gain in April.
(3) Manufacturing output rose 0.4% during May following a 0.5% drop in April. Excluding production of motor vehicles & parts, it rose by a solid 0.6% in May following a 0.1% decline in April.