Industrial Production Growth Stronger than Headlines in February 2012

Written by Steven Hansen

The headlines say Industrial Production (IP) was unchanged in February 2012 and up 4.0% year-over-year. Econintersect analysis is up 0.9% month-over-month and up 4.0% year-over-year.

The market was expecting a month-over-month increase of 0.2% to 0.5% (vs the headline 0.0%).

IP headline data has three parts – manufacturing, mining and utilities. In the February 2012 report, manufacturing was up 5.1%, mining up 6.1% and utilities were down 5.6% (all percentages year-over-year). Note that utilities are 10.9% of the industrial production index.

In this case the headlines are dead wrong because of inclusion of utilities – and IP is significantly stronger than what is being conveyed.

The manufacturing component of IP is growing 5.1% year-over-year, and represents one of the strongest segments of the economy.  It has a positive growth trend line.

The Fed explanation of the headline data:

Industrial production was unchanged in February after having risen 0.4 percent in January. Previously, industrial production was reported to have been unchanged in January. Manufacturing output moved up 0.3 percent in February. Within manufacturing, the index for motor vehicles and parts fell 1.1 percent after jumping 8.6 percent in January, but the index for manufacturing excluding motor vehicles and parts  0.4 percent in February. Production at mines fell 1.2 percent, while the output of utilities was unchanged. At 96.2 percent of its 2007 average, total industrial production for February was 4.0 percent above its year-earlier level. Capacity utilization for total industry edged down to 78.7 percent, a rate 1.2 percentage points above its level from a year earlier but 1.6 percentage points below its long-run (1972–2011) 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.

Even with the terrible performance of the utility sector of IP, the growth trend line is flat (meaning IP is growing at a constant rate) since mid 2011.

Regardless of interpretation, 4.0% year-over-year growth is NOT recessionary, and 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.  Note that in general 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. However, 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.

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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