America’s Industrial Downturn Won’t Throw the US Into Recession, Probably – Wall Street Journal (blog)

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Bulldozers sit parked in a row at an Indiana coal mine this month. The energy company recently filed for chapter 11 bankruptcy protection.

A deep decline in America’s industrial output may not signal a recession is coming, for once.

U.S. industrial production, the Federal Reserve’s gauge of manufacturing, mining and utility output fell 1.8% in the first quarter, from a year earlier.

That’s an ominous sign.

Industrial production has never plunged so deeply in a year that didn’t include a recession, according to records dating back to 1919.

But this time should be different. While the industrial retrenching over the past year has been a drag on economic growth, it’s yet to derail the expansion. Economists surveyed by The Wall Street Journal project the economy expanded at a 0.7% pace in the first quarter. That’s subpar growth, but not recession territory.

The next reading on gross domestic product is due out Thursday.

What appears to be happening is the industrial sector is contracting, while the broader economy is inching forward.

That could be for several reasons. First, the U.S. economy is now driven by consumer spending mostly on services, including housing, health care and transportation. Second, manufacturing is not the employment engine it was once. Less than 10% of U.S. workers are employed by factories, down from a third just after World War II.

Third, the industrial production decline is largely driven by an unprecedented drop in mining, a category that includes oil and gas extraction and coal production. Mining output fell 12.9% in the first quarter from a year earlier, the largest annual drop on records back to the 1970s.

A steep drop in oil prices and other commodities made some mining and drilling operations unprofitable. And the lower cost of petroleum products encouraged electric utilities to rely more on natural gas, which hurt demand for coal.

Mining, however, employs relatively few workers. And lower prices for gasoline and other forms of energy has the partially offsetting benefit of putting more money in consumers’ pockets, supporting spending elsewhere in the economy.

Manufacturing output, meanwhile, expanded 0.6% from a year earlier in the first quarter. That’s historically weak growth outside a recession, but still a gain. Manufacturing has been hampered by a stronger dollar that causes American-made goods to be more expensive overseas and the downfall of the energy industry, which was an important source of demand earlier in the recovery that began in 2009.

But American consumers have propped up factories through car purchases, which touched a record high last year.

As long as job gains and modest pay increases give consumers the ability to spend, the risk of a near-term recession could be held at bay.


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America’s Industrial Downturn Won’t Throw the US Into Recession, Probably – Wall Street Journal (blog)