CROSS-SECTORSECTOR COMMENT 4 MAY 2015ANALYST CONTACTSBenjamin S. Garber 212-553-4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.Market CommentProduction Slowdown Could Affect Corporate Credit Quality The US industrial sector has shifted into a worrisome cycle of slowing output growth and falling usage of available capacity. These conditions recall the beginning of the long corporate credit cycle downturn in the late 1990s that was marked by elevated credit spreads and a rising default rate. As in that period, a strong dollar now abets a decline in exports that weighs on corporate profitability. Though temporary factors heighten the current strain on output, a lasting drag on US business results from overseas weakness would require higher premiums on corporate debt.MOODY'S ANALYTICS CROSS-SECTOR2 4 MAY 2015 MARKET COMMENT : PRODUCTION SLOWDOWN COULD AFFECT CORPORATE CREDIT QUALITYProduction growth unfortunately converges with capacity growth Extended periods where growth in industrial capacity exceeded growth in production have preceded past recessions and increasing corporate default rates (Figure 1). Manufacturing output growth of 2.4% yearly to March is a 13-month low that only slightly exceeds the 2.1% growth rate in capacity for this sector. And the current rate of production is still bolstered by the 2.7% output growth of petroleum and coal producers, who have yet to downshift activity despite the deep decline in oil prices. Factoring in the more volatile utility sector drops overall production growth to 2.0%, which is already trailing overall capacity growth of 3.0%. Relief from rough recent weather and West Coast port disruptions can help to halt the deterioration in output, yet persistent weakness for data related to industrial orders do not point to a rapid turnaround.The ...
