Tale of Two Economies: Industrial Production vs Retail Spending


Retail sales in July rose more than expected albeit from negative revisions. Industrial production is another matter.

Tale of Two Economies - Retail Sales

Earlier today, in Eat, Drink, and Be Merry Shopping at Amazon I noted retail sales unexpectedly surged 0.7% in July fueled by Amazon, food, and drinks.

Tale of Two Economies - Manufacturing

The Fed's Industrial Production and Capacity Utilization for July shows a completely different picture.

  1. Industrial production declined 0.2 percent in July.
  2. Manufacturing output decreased 0.4 percent last month and has fallen more than 1-1/2 percent since December 2018.
  3. In July, mining output fell 1.8 percent, as Hurricane Barry caused a sharp but temporary decline in oil extraction in the Gulf of Mexico.
  4. The index for utilities rose 3.1 percent.
  5. Capacity utilization for the industrial sector decreased 0.3 percentage point in July to 77.5 percent, a rate that is 2.3 percentage points below its long-run (1972–2018) average.


Utilities are a function of the weather, heat in the winter and air conditioning in the summer.

The key item above is point number two.

Consumer Spending as Percent of GDP

Some maintain that consumer spending is 67% of GDP and therefore the economic driver.

It's a reporting illusion.

Please see Debunking the Myth “Consumer Spending is 67% of GDP”.

GDP Illusion

In The GDP Illusion Tenebrarum writes …

Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let’s put the cart before the horse!

In Is the US Economy Close to a Bust, Pater Tenebrarum at the Acting Man Blog points out:

One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. *Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy’s production structure. However, this is precisely the part of the economy where the most activity actually takes place.*The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.

Industrial Production vs Retail Spending

Despite a strong retail sales report, bond yields fell again. The Industrial production report explains why.

It's a far more accurate measure of the real economy than consumers going deeper in debt to buy things. Notably, cars aren't one of those things.

Global Manufacturing PMI

Global Manufacturing Recession

A Global Manufacturing Recession Started and Trump's China tariffs make matters much worse.

So does the Brexit situation in Europe.

Markit reports Germany Manufacturing PMI at seven-year low as downturn gathers pace.

Industrial Production vs Recessions

Don't Expect a Warning

If you think you are going to get a recession warning, you are probably wrong unless you consider this the strong warning.

For discussion, please see Manufacturing Recessions vs Real Recessions: How Much Lead Time Do You Expect?

Those banking on "no recession" are banking on a second consecutive false signal smack in the midst of a trade war, multiple currency wars, and a bond market that is literally screaming recession as the 30-Year Long Bond Yield Crashes Through the 2% Mark to Record Low 1.98%.

Those conditions were not all in place on that last false signal.

Mike "Mish" Shedlock

Comments (19)
No. 1-10

How can we depend upon the measures of manufacturing when they included burger flippers as manufacturing employees, and fast food joins as manufacturers?


I think the bond market signal is bogus as we are not in a scenario that has played out before. We have never seen this much intervention in markets and rates. EU rates are absolutely crazy and the Fed has been in uncharted waters since 2008. I do believe that manufacturing is slowing. Not sure if this is overall economic demand or the inability to hire and employee the people needed to increase production. Supply chains are changing and that causes disruptions, delays and difficulties. It takes time. For now, most people that want a job, have a job. Market is still up nicely, incomes are up and taxes are lower. Be happy! Oh and for Mish, get out of Illinois before it's too late. You'll be glad you left.

Tony Bennett
Tony Bennett

A cursory glance at the chart points - obviously - to "mid cycle" ...

False signal was courtesy of China caving and going on a debt fueled spending orgy. With trade war? Someone better start a war. Somewhere. Anywhere. Quick.


I do think the industrial numbers are probably more of a leading indicator vs consumption more of a current or lagging one. Looks like Trump is succeeding in leading the world into a recession. if countries don't trade with each other there can be no economic growth. If our trading partners are not doing well sooner or later it will hit us. Exports matter, There are also jobs involved in importing goods and services, U.S. jobs.

JJ Johnson
JJ Johnson

Or maybe we should listen to Trump and use media reports on the economy as leading indicators.


Bond market is a great predictor of health of US and Global Economy. Since the last down Turn, liquidity created from QE and other sources of borrowing has flowed primarily to corporate America and emerging market business investment opportunities. Massive liquidity flowing into US treasuries from both US and international investors is a direct indication that global/US investors no longer believe that their past, current or planned investments in corporate America or emerging market opportunities are going to reap the returns expected when initial commitments were made. Because the investors were lent money at such crazy low interest rates, they paid too much to participate in those projects. Now after ten years, with asset and stock prices to surge 200 - 300%, projects in the real economy do not have the market power to raise consumer prices to anywhere close to those levels..... Asia and Europe are feeling that more strongly in their manufacturing, but that is coming to America in the next 6 - 18 months. And given that the excessive leverage over this ten years period, was not in housing, but in corporate....when the market gets whiff of the fact that corporates won't get the end use inflation on their products and services, that they were expecting and can no longer artificially support earnings and stock prices with big tax cut or large interest rate cut, given we are almost at bottom of interest rate curve already, the bubble will be at corporate with massive layoffs, which may be ideal for them if this can be held off for another year maybe two, because by then corporate will have artificial intelligence and machine learning in place to permanently replace workers no longer needed for jobs once thought to be safe from layoffs....accounting, analyst, customer service, legal services..........so yes, I believe bond market is telling us that the mother of all depressions could be on its way if we continue down the course of the status quo and allow the inevitable to happen as it has happened in the past. Remember, we cannot look at the past to find out exactly the shape and nature of how the bubble will burst this time, but if you follow the money and look at where you can see that there are clear lies or inaccuracies about what the fundamentals look like and why, you can piece together a story that makes sense in light of history and where we are today and where we are headed tomorrow. Its hard to stop a train wreck though when everyone is drinking the koolaid, because that is the easiest thing to do and the easiest thing to see, but it almost always guarantees that they will not see the freight train coming precisely for maintaining those koolaid drinking views. Also about consumption and job market.......the crazy low interest rates are supporting many large and small businesses that would not survive in a more normal interest rate environment. I believe that if we do not correct the status quo, the market is going to reprice interest rates up to 6% - 12% level, not because of robust economic growth, but because of low or falling demand that can no longer be subsidized by central banks, trying to push down interest rates to zero or more negative values.....this is only achievable if the market participants believe in the power of the central banks and believe that government is for and by the people. We are in a totally different environment now. We have been through 10 years of Central banks giving money to corporate America, to save them and us from Great Recession, and all they did was take the money to make them selves richer, doing nothing to make economy better for the bottom 90%.....Housing is not more affordable, healthcare is not more affordable, cars are not more affordable, college is not more affordable, all those expense categories, the ones most important to consumers, increased in cost two, three, four times faster than bottom 90% income.....this is why we have populist movement on the left and right,....Also we have politics and political leaders that divide us, tell us our most basic institutions are not trustworthy.....central bank, FBI, CIA, the Press, our Allies, the only thing we seem like we should believe is chaos!!! In this environment, where the people, investors and the financial institutions themselves can no longer trick us into believing that lower and lower interest rates are good for us and everything will be ok in the long run.....The market will start to reprice the interest rate curve for the real risk that are in the economy,,,,6% - 12%, and given that US and global debt level are at the highest that they have ever been in history, both absolutely and on a per gdp basis...........those debt payments will destroy the global economy as we know it.......Again, in fairy tale land, the Fed and all the experts are worried about inflation and the risk that inflation will drive up interest rates and choke of economic growth.......I think interest rates are going to rise and hold at a strong level because the market prices in the true risk in our economy due to massive debt levels that out economy does not have the capacity to increase consumer prices to the levels needed to support these massive debt levels.....what do ya think?????

Christian dk
Christian dk

Sailing without a compass would be nuts, especially at night. That is EXactly what the FED is doing, ever since they scrapped the M3 to save 1 million dollars in administering the number of dollars in cirkulation. The FED has a 110 % failure rate, and yet all the smart/rich serfs still pay attention to the most USEless leaders on this planet. The same goes for the USA gold reserves, that have NOT been audited in 50 + years. A simple scam right in front of your eyes. Is this supposed to be the "Free market" capitalists against the controlled kommunist markets 5 year plan, ? It is actually the other way around, the West is faking/creating money to suppress interest rates for bankrupt countries and suppressing commoditie prices to make sure, that the 3 world countries dont excape the "vortex" and STOP exporting for FAKE money. Us $ are going DOWN...again....from 35$ against gold in 1971 to now OVER 1500 us$.


. . M I S H C E N S O R S D I S S E N T .


sorry I am new to this blog, I got carried away with my rambling....


Hey Mike, I think most are missing one data point, this year on Prime Day Target and Walmart got in front of AMZN with next day delivery on everything in the stores. August, we might see a large negative in retail sales number.

Global Economics