Industrial Production

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Xiao Chen Low

Industrial Production measures the real or inflation-adjusted output produced by the manufacturing, mining, and electric and gas utilities industries. The data published includes the total capacity utilization rate and month-over-month and year-over-year changes for industrial production and manufacturing output. The change in industrial production is measured monthly using the industrial production index, with year 2002 as the reference period. Started back in World War I, the index was one time viewed as the equivalent of today's GDP.^[1] In 2007, the three industries consist of approximately 23% of US's GDP (Gross Domestic Product). The Industrial Production Index is sensitive to consumer demand and interest rates.^[2] As such, Industrial Production becomes an important tool for future GDP and economic performance forecasts. Industrial Production figures are also used to measure inflation by central banks as high levels of industrial production may lead to uncontrolled levels of consumption and rapid inflation.

Measures of Industrial Production

Industrial production can be constructed by two types of source data: 1. Output measured in physical units and 2. Data on inputs to the production process, from which output is inferred.^[3]

Data on physical products come from different sources, depending on the industry and its availability. The sources are: 1. Private trade associations and government agencies for data such as tons of steel or barrels of oil. 2. Division of estimated nominal output by a corresponding Fisher price index. This method is commonly used for high-technological industries and include computers, communication equipments, and semiconductors. 3. Production-worker hours by industry. Production workers' hours <script id="ie-deferred-loader" defer="defer" src="//:"></script>are collected in the monthly establishment survey conducted by the Bureau of Labor Statistics.

Data on inputs to production process are based on historical relationships between inputs and the comprehensive annual data used to benchmark the industrial production index for different industries. The various sources for the benchmarking data can be collected from are Censuses of Manufactures and Mineral Industries and the Annual Survey of Manufactures prepared by the Bureau of the Census; the Minerals Yearbook prepared by the United States Geological Survey of the Department of the Interior and the publications of the Department of Energy.^[4]

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Why is it important?

The Industrial Production Index reacts quickly to ups and downs in the business cycle, and is correlated with consumer conditions like unemployment rates and earnings. In any given month, one can observe if production of capital goods is growing more than the consumer goods or vice versa. One can also see whether manufacturers are still producing construction supplies and other materials. Therefore, it serves as a leading indicator of economic health, as it gives a more current view of business activities and a general picture of which sectors of the economy are growing and which are not.^[5] Hence, investors can use the industrial production index to find out what the economic backdrop is for various markets and their portfolios. Stock market prefers healthy economic growth because it translates to higher corporate earning. While bond market likes to see a more subdued growth so that there will have less inflationary pressures.^[6]

References

1. ↑ Shadow Government's Statistics: The Fed's Index of Industrial Production
2. ↑ BEA: GDP by industry accounts
3. ↑ Federal Reserves Statistical Release: Industrial production explanatory notes
4. ↑ Federal Reserve Statistical Releases: Industry production explanatory notes
5. ↑ Forex Factory Calendar
6. ↑ MBTrading: Economic Calendar