Over the last fortnight we have been concerned (some may say obsessed) with the mixed signals the financial markets were sending. The equity markets, gold and oil all have been sending signals of robust growth and increasing inflation. At the same time, bond yields remain low suggesting a slow growth low inflation environment.

The picture became a little clearer with the release of industrial production, capacity utilization, and CPI.
As expected industrial production ticked up again in August as the economy began to produce once again. However, we are concerned that this could be the last uptick in industrial production for quite some time.

Long time readers will attest to our penchant for the M1 multiplier. The strong correlation with industrial production makes the M1 multiplier a valuable tool when trying to forecast the direction on the economy.

Our research indicates that 96% of the time the M1 multiplier increases an increase in industrial production occurs six months later. In February 2009, the M1 multiplier not only ticked higher but also crossed above the critical 1 level. And like clockwork, industrial production increased in August. However, since February the M1 multiplier has been stuck below 1 with limited upticks, suggesting that the August IP number may be the last increase we see for a while.

Adding to evidence that we are headed for a slow growth low inflationary environment is the capacity utilization report. Last month capacity utilization increased from the record low of 68 recorded in June. An increase in capacity utilization has marked the end of every recession since 1970.

In August, capacity utilization increased once again which adds to the suggestion that the recession is over.