Retail Sales and Industrial Production Reports Released, Doubts Expressed About Using Capacity Utilization to Measure Slack

Reports on industrial production and retail sales were released today and both were lower than anticipated:

Katrina Makes Impact on Industrial Output, by Martin Crutsinger, AP:  Industrial output rose only slightly in August as Hurricane Katrina severely cut back production of petroleum and chemicals along the Gulf Coast.

[One Update]

The Federal Reserve reported Wednesday that industrial output rose a tiny 0.1 percent last month … as Katrina … forced sharp cutbacks in oil and natural gas extraction in the Gulf of Mexico and also depressed output at refineries and chemical plants in the areas hit by the hurricane. Without the adverse effects of the hurricane, industrial output would have been 0.3 percentage points higher, the Fed estimated.

A second report on retail sales showed that the economy was weakening even before Katrina struck. The Commerce Department said that retail sales plunged by 2.1 percent in August, the worst showing in nearly four years … The weakness came from a big 12 percent plunge in auto sales. Excluding autos, retail sales rose by 1 percent, but much of the strength came from a huge rise in gasoline prices. … The 2.1 percent drop in total retail sales last month was the largest decline since a 2.9 percent plunge in November 2001, the period following the 2001 terrorist attacks. The worry is that consumer confidence could be jolted this time around … The biggest increase in spending in August occurred at service stations, a 4.4 percent increase that reflected gasoline prices that have soared past $3 per gallon in many parts of the country. Without the big jump in spending at gasoline stations, retail sales would have fallen an even bigger 2.8 percent last month as demand faltered in many sectors...

I disagree with the last sentence.  It essentially says demand was higher because prices were higher.  If the money had not been spent at service stations, it likely would have been spent somewhere else.  Had gas prices and prices generally been lower, quantity demanded would increase, not decrease.

Capacity utilization figures also came out today and were slightly lower than the average since 1974.  However, given this from Dallas Fed president Richard Fisher, I decided not to report them:

Increased globalization raises questions about traditional policy concepts and tools... We are pondering whether traditional measures of capacity utilization have much meaning in an increasingly interconnected economy. We wonder whether our traditional domestic gauges of slack in the economy are adequate in a world where new technologies made or used overseas make certain U.S. factors of production obsolete. And if we don’t have a good handle on effective capacity, how can we measure how much of that capacity is being utilized?...

In any case, the industrial production and retail sales reports will catch the Fed’s attention.  And somewhere it should be noted that these are monthly data which can deliver very noisy signals about the economy.

Update:  Here's another view from The Financial Times:

...But a separate report from the Commerce Department showed robust consumer activity before the storm struck. Retail sales dropped 2.1 per cent in August - more than had been expected - but excluding the volatile auto sector, sales were actually up 1 per cent, double what economists had expected. Year-on-year, sales are up 9.5 per cent, or an even stronger 11 per cent excluding autos. Most major categories showed rises, but much of the gain came from a 4.4 per cent jump in receipts at petrol stations as energy prices continued to climb. Petrol sales are up 31 per cent year-on-year, according to ActionEconomics. Alan Ruskin, research director at 4Cast economic consultancy, said the fact that rising energy costs - and the feed through to higher pump prices - had not yet damped consumer spending was a positive sign. "The data continue to fit with a view that the Fed will not pause come September 20, and will likely continue tightening in November as well," he added.