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posted on 14 February 2020

January 2020 Headline Industrial Production Remains In Contraction Year-over-Year

Written by Steven Hansen

The headlines say seasonally adjusted Industrial Production (IP) declined month-over-month - and remains in contraction year-over-year. Our analysis shows the three-month rolling average declined.

Analyst Opinion of Industrial Production

The best way to view this is the 3-month rolling averages which declined. Industrial production remains in a downtrend. From the Federal Reserve:

Industrial production declined 0.3 percent in January, as unseasonably warm weather held down the output of utilities and as a major manufacturer significantly slowed production of civilian aircraft. The index for manufacturing edged down 0.1 percent in January; excluding the production of aircraft and parts, factory output advanced 0.3 percent. The index for mining rose 1.2 percent. At 109.2 percent of its 2012 average, total industrial production was 0.8 percent lower in January than it was a year earlier. Capacity utilization for the industrial sector fell 0.3 percentage point in January to 76.8 percent, a rate that is 3.0 percentage points below its long-run (1972-2019) average.

Note that manufacturing is in contraction year-over-year - and capacity utilization remained in expansion year-over-year.

Consider this report similar to last month.

The rate of year-over-year growth for manufacturing employment and manufacturing production correlates.

  • The headline seasonally adjusted Industrial Production (IP) was down 0.3 % month-over-month and down 0.8 % year-over-year (YoY was published as -1.0 % last month).
  • Econintersect's analysis using the unadjusted data is that IP growth showed a deceleration in the rate of growth of 0.2 % month-over-month, and is down 0.7 % year-over-year.
  • The unadjusted 3-month rolling average year-over-year rate of growth decelerated 0.2 % from last month and is down 0.7% year-over-year.
  • The market was expecting (from Econoday):
Headline Seasonally Adjusted Consensus Range Consensus Actual
IP (month over month change) -1.0 % to -0.1 % -0.3 % -0.3 %
IP Subindex Manufacturing (month over month change) -0.6 % to -0.1 % -0.2 % -0.1 %
Capacity Utilization 76.2 % to 77.0 % 76.8 % 76.8 %

IP headline index has three parts - manufacturing, mining, and utilities - manufacturing was down 0.1 % this month (contracting 0.8 % year-over-year), mining up 1.2 % (up 3.1 % year-over-year), and utilities were down 0.4 % (down 6.2 % year-over-year). Note that utilities are 10.4 % of the industrial production index, whilst mining is 14.6 %.

Comparing Seasonally Adjusted Year-over-Year Change of the Industrial Production Index (blue line) with Components Manufacturing (red line), Utilities (green line), and Mining (orange line)

Unadjusted Industrial Production year-over-year growth has been declining since mid-2018.

Economic downturns have been signaled by only watching the manufacturing portion of Industrial Production. Historically manufacturing year-over-year growth has been negative when a recession is imminent.

Seasonally Adjusted Manufacturing Index of Industrial Production - Year-over-Year Growth

Seasonally Adjusted Capacity Utilization - Year-over-Year Change - Seasonally Adjusted - Total Industry (blue line) and Manufacturing Only (red line)

Econintersect uses unadjusted data and graphs the data YoY in monthly groups.

Summary of all Federal Reserve Districts Manufacturing:

Holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (red bar) to the Dallas Fed survey (light blue bar).

In the above graphic, hard data is the long bars, and surveys are the short bars. The arrows on the left side are the key to growth or contraction.

Caveats in the Use of Industrial Production Index

Industrial Production is a non-monetary index - and therefore inflation or other monetary adjustments are not necessary. The monthly index values are normally revised many months after initial release and are subject to annual revision. The following graphic is an example of the variance between the originally released value - and the current value of the index. If the current values are better than the original values - this is normally a sign of an improving economy.

This index is somewhat distorted by including utility production which is noisy, based primarily on weather variations. There is some variance between the manufacturing component of industrial production which monitors production, and the US Census reported Manufacturing Sales. While it is true that these are slightly different pulse points (inventory not accounted in shipments) - they should not have different trends for long periods of time.

Comparing Year-over-Year Change - Unadjusted Manufacturing Industrial Production (blue line) to Unadjusted Manufacturers Shipments (green line)

Econintersect determines the month-over-month change by subtracting the current month's year-over-year change from the previous month's year-over-year change. This is the best of the bad options available to determine month-over-month trends - as the preferred methodology would be to use multi-year data (but New Normal effects and the Great Recession distort historical data).



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