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Friday, October 17, 2014

Industrial Production Index

Mark has a pessimistic look at the Log of the Industrial Production index and sees a curved, and flattening, trend channel.  It's a good fit, but I see it a bit differently.  The Data set goes back to 1946, and the measurements follow a perfect linear trend channel through late 1981. 

You can always divide a curve into a series of straight line segments.  But when the first segment is half the data set, you have to give it some credence as the trend candidate.

Note also that when the trend fails, it fails at the mid line of the channel.  This happens commonly in all sorts of data sets.  

After a decline into early '83 pierces the former lower boundary, a new upward trend with significantly lower slope developed.   This channel was also much narrower than the previous one.  The inability to sustain vigorous growth is yet another anemic manifestation of the Great Stagnation.   This trend failed by starting a decline from the top channel boundary in late 2000, then dribbling along the bottom boundary for about 3 years.  No surprise, since the first decade of the century was marked by the closing of 10's of thousands of factories.

The top in 2000 might have been the start of a new trend, and I've indicated it as such.  It's still slanting up, though at a very weak slope.  Since the bottom in 2009, production has made a comeback, rising with a slope slightly greater than that of the '83 to early naughts trend.  It's approaching the upper bound of the presumed current trend channel on both my graph and on Mark's.

Whether you prefer Mark's vision or mine, a test of the upper limit is coming soon.  But with the economy at the effective demand limit, I see very little chance that the upper channel boundary will be breached.

1 comment:

Stagflationary Mark said...

Either way we look at it, industrial production growth has been slowing over the long-term.

I see it as slowing gradually over time. (I'm essentially smoothing out the major dislocations by using one smooth curve.)

You see the slowing happening in chunks. Take your red trend lines for example. Each one slopes less than the one before it. (You are not smoothing the major dislocations, but instead are showing them in all their "grandeur".)

I think we're definitely on the same page here. It's two ways to look at the same data, and I think both ways have merits. Your approach reminds me of how physical systems generally fail. Failures don't generally happen a bit at a time, but in chunks. A single straw can break the camel's back. Mine is intended to show the long-term burden to the camel as new straws are added (smoothing out the breaks and simply showing the pain).

We better hope that neither of our two approaches extrapolate far into the future. In any event, I agree that this post definitely deserves the "disappointment" label. It is extremely disappointing. The phrase "hollowing out" comes to mind. Sigh.