Industrial Production Growth Less Good in December 2011

The headlines say industrial production increased 0.4% in December 2011 and that it was up 3.1% annualized in 4Q2011. Econintersect analysis is down 1.3% month-over-month while up 2.7% year-over-year.

The market was expecting a month-over-month increase of 0.5% (vs the headline 0.4%).   The current flat rate of growth trend line was broken this month to the downside – see commentary later in this post.

IP headline data has three parts – manufacturing, mining and utilities. In the December 2011 report, manufacturing was up 3.7%, mining up 6.5% and utilities were down 6.6% (all percentages year-over-year).  Note that utilities are 11.4% of the industrial production index.

Note that the headline year-over-year data degraded since November – yet the month-over-month headline numbers show that there was an improvement.

The Fed explanation of the headline data:

Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November.  For  the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th  consecutive quarterly gain.  In the manufacturing sector, output advanced 0.9 percent in December with  similarly sized gains for both durables and nondurables.  The output of utilities fell 2.7 percent, as  unseasonably warm weather reduced the demand for heating; the output of mines moved up 0.3 percent.  At  95.3 percent of its 2007 average, total industrial production in December was 2.9 percent above its level  of a year earlier.  The capacity utilization rate for total industry rose to 78.1 percent, a rate 2.3  percentage points below its long-run (1972-2010) average.

The production of consumer goods gained 0.2 percent in December and moved up at an annual rate of 1.1  percent in the fourth quarter.  The output of consumer durable goods rose 0.3 percent in December, with  increases in the indexes for automotive products, home electronics, and miscellaneous consumer durables  partially offset by a decline in the index for appliances, furniture, and carpeting.  The output of  nondurable consumer goods rose 0.2 percent, but the index declined at an annual rate of 0.7 percent for the  fourth quarter.  In December, the production of non-energy nondurables advanced 0.7 percent, with gains in  all of its component indexes other than clothing, while the output of consumer energy products decreased  1.0 percent.

Econintersect uses unadjusted data and graphs the data YoY in monthly groups. From this display it is difficult to tell by visual inspection whether industrial production improved this month.

It is obvious graphing year-over-year change that Industrial production growth rate have degraded in December 2012.  One month of bad data is not a trend, and is partially (but not totally) explained but a significant degradation of the utility portion of IP.

Regardless of interpretation, 2.7% year-over-year growth is NOT recessionary, and that the industrial portion of the USA economy is doing better than many other elements.

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 original released value – and the current value of the index for the period ending with September 2011 release.

This index is somewhat distorted by including utility production which is noisy, based primarily on weather variations. However, economic downturns have been signaled by only watching the manufacturing portion of Industrial Production.   Manufacturing year-over-year growth has been historically negative before a recession is imminent.  This index is not indicating a recession is imminent.

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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