Industrial Production Is Much Better than Headlines in January 2012

The headlines say Industrial Production (IP) was unchanged in January 2012 and up 3.4% year-over-year. Econintersect analysis is down 0.4% month-over-month while up 2.8% year-over-year.

The market was expecting a month-over-month increase of 0.1% to 0.6% (vs the headline 0.0%).

IP headline data has three parts – manufacturing, mining and utilities. In the January 2012 report, manufacturing was up 4.5%, mining up 5.8% and utilities were down 7.5% (all percentages year-over-year). Note that utilities are 10.9% of the industrial production index.

The year-over-year rate of growth for IP has degraded since October 2011 (second derivative)- yet the manufacturing component of IP (which tracks the economy) has a slightly positive rate of growth since May 2010.  The “sick” part of IP is utilities which is causing the overall index to misrepresent the true state of the economy.

The manufacturing component of IP is growing 4.2% year-over-year, and represents one of the strongest segments of the economy.

The Fed explanation of the headline data:

Industrial production was unchanged in January, as a gain of 0.7 percent in manufacturing was offset by declines in mining and utilities. Within manufacturing, the index for motor vehicles and parts jumped 6.8 percent and the index for other manufacturing industries increased 0.3 percent. The output of utilities fell 2.5 percent, as demand for heating was held down by temperatures that moved further above seasonal norms; the output of mines declined 1.8 percent. Total industrial production is now reported to have advanced 1.0 percent in December; the initial estimate had been an increase of 0.4 percent. This large upward revision reflected higher output for many manufacturing and mining industries. At 95.9 percent of its 2007 average, total industrial production in January was 3.4 percent above its level of a year earlier. The capacity utilization rate for total industry decreased to 78.5 percent, a rate 1.8 percentage points below its long-run (1972–2011) average.

The production of consumer goods edged down 0.1 percent in January. The index for consumer durables increased 3.8 percent, but the index for consumer nondurables declined 1.2 percent. Among durables, the production of automotive products climbed 5.8 percent, and gains were also recorded for home electronics; appliances, furniture, and carpeting; and miscellaneous goods. Among consumer nondurables, the output of non-energy goods decreased 0.1 percent, as a decline in foods and tobacco offset gains in clothing, chemical products, and paper products. The output of consumer energy products fell 4.0 percent, with substantial decreases for both residential utilities and fuels.

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 has degraded since October 2011. This negative trend is attributable to the utility portion of IP.  Increasing use of utilities was looked at as a measure of economic growth.  In 2012 with higher efficiencies and tighter budgets – the real economy can grow without using more energy.

Regardless of interpretation, 2.8% 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.  Historically manufacturing year-over-year growth has been negative when 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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