There are more signs of a recovery in the works. Both industrial production and the Conference Board’s leading economic indicator reported positive year-over-year growth rates in March, recent data shows.
The leading indicator index from the Federal Reserve strongly implies a return to pre-pandemic levels of industrial production in the United States by the end of the year.
The last time the industrial production yearly growth rate was positive was August 2019. The leading indicator was last positive in February 2020.
While there will continue to be supply-induced challenges in the auto industry, the combination of the restarting of Boeing’s 737 Max production and the general reopening of the economy should be sufficient to stimulate a robust recovery followed by expansion across the ecosystems that comprise industrial production.
But it will not be sufficient. That will require those supply chains to get up and running to meet the expansion that has clearly begun.
It wasn’t until March 2020 that the composite leading indicator would confirm the end of the decade-long recovery from the financial crisis. Industrial production was already sinking because of the trade disruptions and the manufacturing recession.
Whether the turning point for the business cycle occurred during the first quarter is up to the judgment of the National Bureau of Economic Research. For instance, the 7.9% increase in the leading indicator is inflated because of base effects of lower activity beginning in March 2020.
Relative to February 2020, the month before the economic shutdown, the year-over-year percentage change in the leading indicator is slightly negative. The industrial production index is 3.4% lower than its February 2020 value.
From here on, the base effects of extremely low activity in 2020 will inflate the growth rates of most economic data. Nevertheless, increased activity in the production sector and in segments of the labor market suggests that a K-shaped recovery is underway, with the service sector needing more time to catch up.
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