Written by Steven Hansen
The headlines say Industrial Production (IP) decreased 0.4% in October 2012 and up 2.8% year-over-year. Econintersect‘s analysis using the unadjusted data is that IP was down 0.9% month-over-month and up 1.7% year-over-year. Per the Federal Reserve:
Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated to have reduced the rate of change in total output by nearly 1 percentage point. The largest estimated storm-related effects included reductions in the output of utilities, of chemicals, of food, of transportation equipment, and of computers and electronic products. In October,
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 0.1% (vs the headline contraction of 0.4%).
Econintersect‘s analysis is that the manufacturing sub-index (which is more representative of economic activity) was down a larger 0.9% month-over-month – and up 1.6% year-over-year. However, there are no recession indications in this data.
IP headline index has three parts – manufacturing, mining and utilities – manufacturing was down 0.9% this month (up 1.6% year-over-year), mining up 1.5% (up 3.4% year-over-year), and utilities were down 0.1% (up 0.5% year-over-year). Note that utilities are 10.3% of the industrial production index.
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)
The growth rate for IP has been hovering around 4% +/- for almost a year. The last two months have been lower than the bottom of this range. The overall trend is considered a declining trend. It is interesting that the unadjusted data is giving a smoother trend line.
Year-over-Year Change Total Industrial Production – Unadjusted
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 Hurricane Sandy effect on the data:
The effect of Hurricane Sandy on industrial output was estimated using the same procedures employed to assess the effects of previous natural disasters. For some industries, timely high-frequency physical product data that reflect the imprint of natural disasters on industrial output exist. For other industries, estimates of natural-disaster effects are constructed using the following methodology. First, information from the Federal Emergency Management Agency (FEMA) is used to determine which counties were affected by the disaster; FEMA issues Major Disaster Declarations and Emergency Declarations based on the needs of the counties. Second, the U.S. Census Bureau’s County Business Patterns data are used to measure each industry’s share of employment located in the affected counties. Third, the duration that facilities in the affected areas were idled is estimated based on the declaration type assigned to each county by FEMA. Fourth, given this information, an estimate of the magnitude of the disruption is constructed for each industry, and the industry-specific effects are aggregated using industrial production weights to obtain an overall estimate of the effect on top-line industrial production and on the major industry aggregates. In subsequent months, as physical product data and other information become available, the disaster effects are further updated and refined.
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. The difficulty in IP is that this index has not settled down to the New Normal effects making evaluation and analysis somewhat 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).