Written by Steven Hansen
The headlines say seasonally adjusted Industrial Production (IP) declined month-over-month – and now is even deeper in contraction year-over-year. Our analysis shows the three-month rolling average declined.
Analyst Opinion of Industrial Production
The best way to view this is the 3-month rolling averages which declined. The decline was due to the impact of the coronavirus which caused many firms to suspend operations.
Total industrial production fell 11.2 percent in April for its largest monthly drop in the 101-year history of the index, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to slow or suspend operations throughout the month. Manufacturing output dropped 13.7 percent, its largest decline on record, as all major industries posted decreases. The output of motor vehicles and parts fell more than 70 percent; production elsewhere in manufacturing dropped 10.3 percent. The indexes for utilities and mining decreased 0.9 percent and 6.1 percent, respectively. At 92.6 percent of its 2012 average, the level of total industrial production was 15.0 percent lower in April than it was a year earlier. Capacity utilization for the industrial sector decreased 8.3 percentage points to 64.9 percent in April, a rate that is 14.9 percentage points below its long-run (1972-2019) average and 1.8 percentage points below its all-time (since 1967) low set in 2009.
In addition to the regular revisions that reflect incoming data, the industrial production indexes for March were revised to incorporate data on initial claims for unemployment insurance by employees who had worked in the industrial sector. The methods used to construct the estimates are described on the Federal Reserve Board’s website at www.federalreserve.gov/releases/g17/g17_technical_qa.htm#covid2020ui.
Note that manufacturing is in contraction year-over-year – and capacity utilization is also in contraction year-over-year.
Consider this report significantly worse than last month.
The rate of year-over-year growth for manufacturing employment and manufacturing production correlates.
- The headline seasonally adjusted Industrial Production (IP) was down 11.2 % month-over-month and down 15.0 % year-over-year (YoY was published as -5.5 % last month).
- Econintersect‘s analysis using the unadjusted data is that IP growth showed a deceleration in the rate of growth of 10.9 % month-over-month, and is down 15.8 % year-over-year.
- The unadjusted 3-month rolling average year-over-year rate of growth decelerated by 4.9 % from last month and is down 7.0 % year-over-year.
- The market was expecting (from Econoday):
| Headline Seasonally Adjusted | Consensus Range | Consensus | Actual |
| IP (month over month change) | -15.0 % to -6.2 % | -11.5 % | -11.2 % |
| IP Subindex Manufacturing (month over month change) | -20.0 % to -5.0 % | -11.4 % | -13.7 % |
| Capacity Utilization | 60.0 % to 75.7 % | 64.1 % | 64.9 % |
IP headline index has three parts – manufacturing, mining, and utilities – manufacturing was down 13.7 % this month (contracting 18.0 % year-over-year), mining down 6.1 % (up 7.5 % year-over-year), and utilities were down 0.9 % (down 3.8 % year-over-year). Note that utilities are 10.4 % of the industrial production index, whilst mining is 14.6 %.
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)
Unadjusted Industrial Production year-over-year growth has been declining since mid-2018.
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.
Seasonally Adjusted Manufacturing Index of Industrial Production – Year-over-Year Growth
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.
Summary of all Federal Reserve Districts Manufacturing:
Holding this and other survey’s Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (red bar) to the Dallas Fed survey (light blue bar).
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 originally released value – and the current value of the index. If 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. 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 – Unadjusted Manufacturing Industrial Production (blue line) to Unadjusted 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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