The US economy posted a record quarter-over-quarter GDP growth rate of 33.1% in Q3 2020 signaling the end of two consecutive quarters of COVID-induced recession. The unemployment rate has declined steadily from an April high of 14.7% to a modest 7.9% in September. The consumer confidence index improved sharply in September reflecting positive sentiment in the recovery of the US economy.

Industrial Production Index

The post COVID-recession has been positive in many ways but is a combination of mixed success across the industrial sector.  Almost all market and industry groups saw a sharp rebound in the Summer months but Q4 performance and recovery into 2021 is going to be complex. A review of the Industrial Production Index shows a sharp rebound at the end of the second quarter and continued growth into July and August across all industry groups. But performance has dipped slightly as we head into the fourth quarter of 2020. September production was down only 0.7% compared to August 2020 but is still 7.3% below September 2019 levels. The Industrial Production Index is the economic indicator that measures real output for all facilities located in the US including the key categories of manufacturing, mining, and utilities.

Key Drivers of Segment Performance

Month-over-month production rates in September have been relatively flat across most industry groups. However, there are three groups that saw declines in production during the month including seasonal declines in electric power generation as fair weather throughout the country in August and September reduced consumption. While none of the declines constitute a drastic decrease in production, the simple change in direction and overall deviation from previous forecast could indicate additional challenges within the segment.

• Computers & Electronics production was down nearly 3% with large manufacturers such as Cisco, Honeywell, Northrop Grumman having combined production slow downs for the month. Key categories in this group include communication equipment, semi-conductors, and navigational and control instruments. Lagging performance in the aerospace sector has decrease demand for plane orders that are driving their way back through the supply chain.
• Motor Vehicles & Parts production was down 4%. Key categories in this group include automobile manufacturing, motor home and travel trailer manufacturing, and motor vehicle parts manufacturing. Inventory levels in the recreational vehicle market suffered during the peak Summer months due to lagging production schedules. Inventory seems to have finally caught up and manufacturers have shifted to building spare parts inventory to support delayed warranty repairs. However, with inventory finally regaining normal levels, manufacturing still slows whenever new cases of COVID-19 are detected among employees.

Market Outlook and Forecast Consideration

Industrial production forecasts for the past several months have all included strong recoveries with expectations of regaining pre-COVID levels near the end of 2021. However, with the directional change in September the chance for full recovery depends on several factors in order to stay on track. Below are a few key variables impacting the recovery and growth of the industrial sector.

Upside Forecast Variables

• A coronavirus vaccine is released driving rapid commercial growth and inventory build
• Loosened restrictions on capital budgets; maintenance and expansion delayed in 2020 will rebound in 2021
• Improved working environments to protect employees and adoption of automation will prevent plant shutdowns
• US election results fuel consumer confidence and economic growth

Downside Forecast Variables

• Resurgence of COVID-19 cases globally as “pandemic fatigue” sets in; possible shutdowns on the horizon
• US election process delays create negative sentiment for consumers
• Corporate level budget restrictions remain in place delaying capital improvements that drag down pipeline recovery
• Shift in US corporate tax policy negatively impacts expansion of the manufacturing sector

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