Brazil industrial production drops below five-year average

Brazil industrial production drops below five-year average

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The pre-release of the Brazilian Industrial Confidence Index (ICI) shows that after three months of staying relatively flat, the index dropped 2.3% vs. February.

Industrial production confidence indices are useful in gauging the perception of current and future conditions in the sector. While industrial activity may not account for a large part of GDP, it responds quite rapidly to changes in consumer spending, commodity prices and interest rates. For this reason, the confidence index, which has a forward looking component, can help predict upcoming economic performance in the economy as a whole.

The latest release places the ICI index at 104.2, which is 2.3% lower than the 106.6 level in February. This level falls below the five year average, which is currently 104.5.

The ICI has two components, the current situation index (ISA) and the expected situation index (IE). The ISA is a coincident indicator that gauges the industrial performance perception of participants in the sector, while the IE is a leading indicator that attempts to quantify the forward-looking expectation for the sector.

Brazil industrial production drops below five-year average

The ISA is now at 104.1 and the IE at 104.3, though versus last month the ISA dropped 1.5% and the IE 3.1%, implying that deterioration in the sector may accelerate. Nonetheless, the IE remains above its five year average of 103.1 and the ISA is below its five year average of 105.9. All values given are seasonally adjusted, so any beginning of year effects are eliminated, or at least minimized.

Possibly the only relatively good news is that utilization, which measures the use of the installed industrial capacity, remained flat at 83.3%, which is pretty much in line with the five year average. The flip side is that this value is almost 1.5 percentage points below the average for the second half of 2012.

Brazil industrial production drops below five-year average

This is yet another economic indicator that is not looking good for Brazil in the short term. Investors in Brazilian equities (EWZ, EWZS, BRF) should follow the coming macroeconomic indicators to see if Brazil’s condition will turn around or if it is time to run for the hills.

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