Industrial Production OK but a Little Soft in March 2012

Written by Steven Hansen

The headlines say Industrial Production (IP) was unchanged again in March 2012 and up 4.0% year-over-year. Econintersect analysis is down 1.0% month-over-month (reversing last month’s gain) and up 3.6% year-over-year.  This was a data reset month with slight changes to the entire index back to 1972.

The market was expecting a month-over-month increase of 0.1% to 0.2% (vs the headline 0.0%).

IP headline data has three parts – manufacturing, mining and utilities. In the February 2012 report, manufacturing was up 4.8%, mining up 4.2% and utilities were down 4.6% (all percentages year-over-year). Note that utilities have been revised down to 10.3% of the industrial production index.

The growth rate for IP has been hovering around 4% for almost a year.  This month is on the low side of the range.

The manufacturing component of IP is growing 4.8% year-over-year, and represents one of the strongest segments of the economy. It has a positive growth trend line (although this is a down month).

The Fed explanation of the headline data:

Industrial production was unchanged in March for a second month but rose at an annual rate of 5.4 percent in the first quarter of 2012. Manufacturing output declined 0.2 percent in March but jumped 10.4 percent at an annual rate in the first quarter. The gain in manufacturing output in the first quarter was broadly based: Even excluding motor vehicles and parts, which jumped at an annual rate of nearly 40 percent, manufacturing output moved up at an annual rate of 8.3 percent and output for all but a few major industries increased 5 percent or more. In March, production at mines rose 0.2 percent and the output of utilities gained 1.5 percent. For the quarter, however, the output of utilities dropped at an annual rate of 13.8 percent, largely as a result of unseasonably warm temperatures over the past several months, while the output of mining fell 5.4 percent. At 96.6 percent of its 2007 average, total industrial production for March was 3.8 percent above its year-earlier level. The rate of capacity utilization for total industry edged down to 78.6 percent, a rate 2.1 percentage points above its level from a year earlier but 1.7 percentage points below its long-run (1972–2011) average.

Econintersect uses unadjusted data and graphs the data YoY in monthly groups. The difficulty in IP is that I do not believe this index has settled down to the New Normal effects.

Even with the terrible performance of the utility sector of IP, the growth trend line has a slightly positive trend since mid 2011.

Regardless of interpretation, 3.6% 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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