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Capacity Utilization, Productivity Up - Deny At Your Own Peril

We’ve mentioned before that two of the most accurate and helpful economic indicators are capacity utilization and industrial productivity…. both published in tandem by the Federal Reserve. And by ‘helpful’ we specifically mean ‘helpful to investors’, in that there’s a stunning degree of correlation between the market’s long-term trends and the economic data’s long-term trends. [Conversely, it has little bearing on short-term market trend, so it's important to make that distinction.]

With that in mind, you should know that capacity utilization went up last month (to 74.7%), as did industrial productivity (by 1.2%). Ten of the last eleven months have shown improvements on both fronts, and the one odd month was merely flat… February of this year.

You can adopt whatever interpretation you like of the capacity and productivity data. To deny that the trend isn’t a positive one, however, is simply a denial of factual evidence.

As for us, as we’ve said repeatedly of late, the correlation between the direction of these two data sets (we plotted the actual productivity index below) is too strong to dismiss now; we’ll maintain our bigger-picture bullish posture until these two trends change.

In the meantime, keep in mind these are long-term indications that will look errant when short-term market volatility kicks in to the downside. Don’t sweat it - that’s not the trend we’re worried about when considering this data.

Here’s a longer-term chart of the capacity utilization rate and industrial production index, as compared to the S&P 500. It’s here where the correlation really stands out, and fully explains why we’re still leaning bullishly.

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James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.