There is a continuing story recently: revise downward the previous month and then publish a month-over-month gain for the current month. This game continues in the October 2011 Industrial Production (IP) data where the headlines show an increase of 0.7% month-over-month after revising downward the previous month’s growth to a -0.1%.
The real story is that Industrial Production’s rate of growth has been essentially flat for the last five months. Please read caveats below for an understanding of backward revisions which occur in this index.
IP headline data has three parts – manufacturing, mining and utilities. In the October 2011 report, manufacturing was up 4.1%, mining up 6.0% and utilities were up 0.1% (all percentages year-over-year).
The Fed explanation of the headline data:
Industrial production expanded 0.7 percent in October after having declined 0.1 percent in September. Previously, industrial production was reported to have gained 0.2 percent in September; most of this revision resulted from lower estimated output for mining. Factory output increased 0.5 percent in October after having risen 0.3 percent in September. Production at mines climbed 2.3 percent in October, while the output of utilities edged down 0.1 percent. At 94.7 percent of its 2007 average, total industrial production for October was 3.9 percent above its year-earlier level. Capacity utilization for total industry stepped up to 77.8 percent, a rate 2.1 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972–2010) average.
Econintersect uses unadjusted data and graphs the data YoY in monthly groups. From this display it is difficult to tell by visual inspection whether industrial production improved this month.
It is obvious graphing year-over-year change that Industrial production growth rate has been almost unchanged beginning May 2011 – however the trend line may have an almost imperceptible upward bias.
Regardless of interpretation, 3.4% year-over-year growth is NOT recessionary. Industrial Production has simply been growing at a fixed rate averaging 3.4% for the last 5 months.
It shows 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 for the period ending with September 2011 release.
This index is somewhat distorted by including utility production which is noisy, based primarily on weather variations. However, economic downturns have been signaled watching the manufacturing portion only of Industrial Production. Manufacturing year-over-year growth has been historically negative before a recession is imminent. This index is not indicating a recession is imminent. [note: graph below updated through September 2011]