Written by Steven Hansen
The headlines say Industrial Production (IP) was decreased 0.1% in May 2012 and up 4.7% year-over-year. Econintersect analysis is IP was unchanged month-over-month and up 5.0% year-over-year.
The market was expecting a month-over-month increase of 0.1% (vs the headline -0.1%).
Even though Econintersect’s analysis shows IP was unchanged, the manufacturing sub-index (which is more representative of economic activity) was slightly “less good” this month.
IP headline index has three parts – manufacturing, mining and utilities. In the May 2012 report, manufacturing was down 0.4% this month (up 5.2% year-over-year), mining up 0.9% (up 4.6% year-over-year), and utilities were up 0.8% (up 1.0% year-over-year). Note that utilities are 10.3% of the industrial production index.
The growth rate for IP has been hovering around 4% +/- for almost a year. This month the unadjusted index remained at the highest value in the last 12 months. The overall trend should be at least considered flat which means the rate of growth is constant.
The manufacturing component of IP is growing 5.2% year-over-year (adjusted), and represents one of the strongest growth segments of the economy. It has a positive growth trend line.
The Fed explanation of the headline data:
Industrial production edged down 0.1 percent in May after having gained 1.0 percent in April. A decrease of 0.4 percent for manufacturing production in May partially reversed a large increase in April. Outside of manufacturing, the output of mines advanced 0.9 percent in May, while the output of utilities rose 0.8 percent. At 97.3 percent of its 2007 average, total industrial production in May was 4.7 percent above its year-earlier level. Capacity utilization for total industry declined 0.2 percentage point to 79.0 percent, a rate 1.3 percentage points below its long-run (1972–2011) average.
Econintersect uses unadjusted data and graphs the data YoY in monthly groups. The difficulty in IP is that this index has not settled down to the New Normal effects making evaluation and analysis problematic.
Even with the poor performance of the utility sector of IP, the growth trend line has a slightly positive trend since mid 2011.
Regardless of interpretation, 5.0% year-over-year growth (unadjusted) 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. Note that in general 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. 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).