Nov. 17, 2009 – 10:00 a.m. CT

Road to Recovery Still Rocky

Preliminary data for industrial production in October, which increased an anemic 0.1%, underscored the weakness of the recovery and the hurdles we face in generating much self-feeding momentum prior to Christmas. Producers in the auto industry, in particular, are complaining about problems with their suppliers, who don't have the cash or credit to get their idle capacity up and running again. (Some suppliers are operating at less than 40% of their peak capacity.) This is, at least in part, what policy makers where trying to avoid when they decided to bail out GM earlier in the year. I could say something flippant – like, so much for that $50 billion – however, the reality (as even GM's competitors will tell you) is that the damage to infrastructure would have been worse without the bailouts. The collateral damage to bank balance sheets in the Midwest would have been particularly hobbling.

That said, problems in the production pipeline are not a problem for inflation (i.e., don't worry about bottlenecks). Producer prices increased 0.3% last month – less than expected – and continued to drop on a year-on-year basis despite some rebound in food and energy prices.

On net, real GDP is still expected to rise in the 3% range in the fourth quarter, but that is truly marginal given the depth of the losses we have endured. Fed Chairman Ben Bernanke and his colleagues at the Fed are correct to be more worried about persistent weakness than runaway growth at this stage of the game.

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