April 2012 Industrial Production Comes in Strong

Written by Steven Hansen

The headlines say Industrial Production (IP) was increased 1.1% in April 2012 and up 5.2% year-over-year. Econintersect analysis is up 1.7% month-over-month (reversing last month’s decline) and up 5.1% year-over-year.

The market was expecting a month-over-month increase of 0.4% to 0.5% (vs the headline 1.1%).

The manufacturing component of this index is NOT indicating a recession is imminent.  

IP headline data has three parts – manufacturing, mining and utilities. In the April 2012 report, manufacturing was up 0.6% this month (up  5.8% year-over-year), mining up 1.6% (up 4.9% year-over-year), and utilities were up 4.5% (up 1.1% year-over-year). Note that utilities are 10.3% of the industrial production index.

The growth rate for IP has been hovering around 4% for almost a year. This month the unadjusted index is at the highest value in the last 12 months (one month is not a trend).  The trend should be at least considered flat which means the rate of growth is constant.

The manufacturing component of IP is growing 5.8% year-over-year (adjusted), and represents one of the strongest segments of the economy. It has a positive growth trend line, and has rebounded from last months decline.

The Fed explanation of the headline data:

Industrial production increased 1.1 percent in April. Output is now reported to have fallen 0.6 percent in March and to have moved up 0.4 percent in February; previously, industrial production was estimated to have been unchanged in both months. Manufacturing output increased 0.6 percent in April after having decreased 0.5 percent in March. Excluding motor vehicles and parts, which increased nearly 4 percent, manufacturing output moved up 0.3 percent, and output for all but a few major industries increased. Production at mines rose 1.6 percent, and the output of utilities gained 4.5 percent after unseasonably warm weather in the first quarter held down demand for heating. At 97.4 percent of its 2007 average, total industrial production for April was 5.2 percent above its year-earlier level. The rate of capacity utilization for total industry moved up to 79.2 percent, a rate 3.1 percentage points above its level from a year earlier but 1.1 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 this index has not settled down to the New Normal effects making evaluation and analysis problematic.

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

Regardless of interpretation, 5.1% 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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