Written by Steven Hansen
The headlines say Industrial Production (IP) increased 0.4% in September 2012 and up 2.8% year-over-year. Econintersect‘s analysis using the unadjusted data is that IP was up 0.2% month-over-month and up 3.1% year-over-year.
The year-over-year growth of Industrial Production remains the worst since February 2010. The market was expecting a month-over-month increase of 0.0% to 0.3% (vs the headline +0.4%).
Econintersect’s analysis is that the manufacturing sub-index (which is more representative of economic activity) was up a smaller 0.2% month-over-month – and up 3.2% year-over-year. However, there are no recession indications in this data.
IP headline index has three parts – manufacturing, mining and utilities – manufacturing was up 0.2% this month (up 3.2% year-over-year), mining up 0.9% (up 3.8% year-over-year), and utilities were up 1.5% (down 1.4% year-over-year). Note that utilities are 10.3% of the industrial production index.
Comparing Year-over-Year Change of the Industrial Production Index (blue line) with Components Manufacturing (red line), Utilities (green line), and Mining (orange line)
The growth rate for IP has been hovering around 4% +/- for almost a year. The last two months have been at the very bottom of the range. The overall trend should be at least considered flat which means the rate of growth is constant, but further degradation would be considered a declining trend.
The manufacturing component of IP represents one of the strongest growth segments of the economy. 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.
Seasonally Adjusted Manufacturing Index of Industrial Production
The Fed explanation of the headline data:
Industrial production rose 0.4 percent in September after having fallen 1.4 percent in August. For the third quarter as a whole, industrial production declined at an annual rate of 0.4 percent. Manufacturing output increased 0.2 percent in September but moved down at an annual rate of 0.9 percent in the third quarter.
Production at mines advanced 0.9 percent in September, and the output of utilities moved up 1.5 percent. Roughly 0.3 percentage point of the decline in overall industrial production in August reflected the effect of precautionary idling of production in late August along the Gulf of Mexico in anticipation of Hurricane Isaac, and part of the rise in September is a result of the subsequent resumption of activity at idled facilities. At 97.0 percent of its 2007 average, total industrial production in September was 2.8 percent above its year-earlier level. Capacity utilization for total industry moved up 0.3 percentage point to 78.3 percent, a rate 2.0 percentage points below its long-run (1972–2011) average.
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. The difficulty in IP is that this index has not settled down to the New Normal effects making evaluation and analysis problematic.
Total Industrial Production – Unadjusted
Regardless of interpretation, industrial production growth is NOT recessionary, and that the industrial portion of the USA economy is doing better than many other elements. Keep it real, here is a comparison between the survey predictions and the hard data.
Comparing Surveys to Hard Data
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 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.
Total Industrial Production – Unadjusted – Original Headline Index Value (blue line) and Current Index Value (red line)
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 – Manufacturing Industrial Production (blue line) to Inflation Adjusted 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).