November 2012 Industrial Production Improves but Remains Lower than 2012 High

Written by Steven Hansen

The headlines say Industrial Production (IP) increased 1.1% in November 2012 and up 2.5% year-over-year. Econintersect‘s analysis using the unadjusted data is that IP was up 0.5% month-over-month and up 2.4% year-over-year. Per the Federal Reserve, the gain this month was due to the recovery of the loss of production in last month’s report from Hurricane Sandy.

The year-over-year growth of Industrial Production remains one of the lowest readings in 2012. The market was expecting a month-over-month increase of 0.3% to 0.5% (vs the headline growth gain of 1.1%).

Econintersect‘s analysis is that the manufacturing sub-index (which is more representative of economic activity) was up 1.1% month-over-month – and up 2.7% year-over-year. The recession marker of peak industrial production still remains in July 2012.

IP headline index has three parts – manufacturing, mining and utilities – manufacturing was up 1.1% this month (up 2.7% year-over-year), mining up 0.8% (up 3.0% year-over-year), and utilities were up 1.0% (up 0.7% 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

/images/z ip3.PNG

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 but remains in an overall downtrend.

Seasonally Adjusted Manufacturing Index of Industrial Production

The Fed explanation of the Hurricane Sandy effect on the data:

Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October. In November, manufacturing output increased 1.1 percent after having decreased 1.0 percent in October; in addition to the storm-related rebound, a sizable rise in the production of motor vehicles and parts boosted factory output in November. The output of utilities advanced 1.0 percent, and production at mines rose 0.8 percent. At 97.5 percent of its 2007 average, total industrial production in November was 2.5 percent above its year-earlier level. Capacity utilization for total industry increased 0.7 percentage point to 78.4 percent, a rate 1.9 percentage points below its long-run (1972–2011) average.

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

/images/z ip1.PNG

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

/images/z survey1.png

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)

/images/z ip2.PNG

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).

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