14) Economic Indicators: Industrial Production

by · October 16, 2010

What It Is

While most reports are released independently of the others, this one can be accessed concurrently with the Capacity Utilization report. After all, both of them are closely related. Industrial Production report is prepared by the Federal Reserve Board, primarily by the Board of Governors every month, on or before the sixteenth. The data within covers the previous month.

Basic Information

The report covers industrial firms, including electric utilities, mines, and factories. It also covers the publishing industry, viewing the creation of publications and books as part of manufacturing. It also provides the utilization ratio, in aggregates, for high-tech and total manufacturing.

The basis for the figures is the volume of goods produced every month. However, it is in correlation with the ratio for capacity utilization for every kind of business. To make the figures more understandable, a benchmark is year is set. The benchmark year is 2002 and it represents 100 percent.

The importance of the report comes from the fact that early signs of inflation are often seen in the industrial circle. These can be observed in the prices of raw materials and the amount of supply they can obtain in the market. High production production costs will just be passed on to the wholesale traders, then to the retailers, and lastly to the consumers. Moreover, any significant change in the industrial level will help you determine the possible inflection points in the business cycle.

Capacity utilization, which is part of the report, tells you how the economy is going to grow in the coming months. Ideally, the utilization should be at 100 percent, but there will always be wastage. Normally, the level is no more than 85 percent but no less than 80 percent. By this time, the future value of goods will high as supplies will become low. On the other hand, if it falls below 80 percent, then supply increases and demand goes low. It may mean the economy is entering recession, and fewer people are spending money.

The Industrial Production report is also important for those who are investing in the market, as there tends to be a strong reaction to changes in the indicator. They tend to buy more equities during recession in the hopes of gaining a lot once it starts to pick up. If the numbers are low and there is economic overheating, the price of bonds and stocks can rise. Rates of change are better expressed through percentage terms, covering month to month or year to year.

How the Report Is Valuable

It covers numerous and diverse sectors, from electronics to chemicals. The report can also immediately tell you which of these categories are faring well. Thus, it’s easier for investors to conduct a supply chains analysis and see how effective newer methods of industrial production are helping a particular business group. Since the report is released less than a month after information has been gathered, it’s considered to be timely. It also tends to be less volatile.

The figures are coincident indicators and can be utilized to determine the overall gross domestic product or GDP of the country. This is because any change in the figures will also reflect a change in economic activity.

Things to Watch Out For

It excludes services, which interestingly make up most of the economic activity in the country. The report sometimes depends on estimates if there is enough data, dangerously compromising the results. It’s also hard to obtain historical data for comparison because of the fast change in U.S. output demographics.

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