Index of industrial production background

18 Mar 2010.

The index of industrial production measures the total output of the industrial sector of the economy. From the Federal Reserve: “The Federal Reserve's monthly index of industrial production … [covers] manufacturing, mining, and electric and gas utilities. The industrial sector, together with construction, accounts for the bulk of the variation in national output over the course of the business cycle. … The production index measures real output and is expressed as a percentage of real output in a base year, currently 2002.”

The OECD standard is to include construction, however the difference is smaller than it might appear since the US index does include most construction materials.

Value added in industrial production was about 23% of GDP in 2006. The US index has been calculated since 1919; the long term CAGR (Jan 1919 to Jan 2009) was 3.3%. Revisions are small – on average 0.26%. The manufacturing sub-index is also of primary interest, however it need not be followed separately since it is very highly correlated with the full index.

Entries below covered through 16 Jun 2009.

• Fed definition (18 Mar 2010) From the Federal Reserve: “The Federal Reserve's monthly index of industrial production … [covers] manufacturing, mining, and electric and gas utilities. The industrial sector, together with construction, accounts for the bulk of the variation in national output over the course of the business cycle. … The production index measures real output and is expressed as a percentage of real output in a base year, currently 2002.”
• Methodology (18 Mar 2010) The volume of commodities can be measured directly, or inferred from deflated sales or inputs such as hours worked or electricity used.
• OECD definition (18 Mar 2010) An index of industrial production (IIP) is defined as “the ratio of the volume of commodities produced within a specified group of industries in a given time period to the volume produced in the same group of industries in a specified base period” (OECD). Industries covered include mining, manufacturing, utilities, and construction (but exclude farming and services).
• Fraction of the economy (21 Feb 2009) In 2006, value added in industrial production was about 23% of the economy.
• Long term context (18 Mar 2010) The current US series goes back to 1919. Over the period Jan 1919 to Jan 2009, CAGR was 3.3%. Revisions are usually small – 0.26% on average.

Only the main index is covered. The manufacturing sub-index is also of primary interest, but is very highly correlated to the main index (see graph on main page). For investors wanting to understand the overall trend it suffices to watch the main index.

• Federal Reserve G17 release background: http://federalreserve.gov/releases/g17/ip_notes.htm and http://federalreserve.gov/releases/g17/About.htm
• An international view from the OECD: http://www.unescap.org/stat/meet/keyindic/oecd_index_industrial_production.pdf.

• US index of industrial production for a higher level view.

22 May 2000. OECD presentation at a conference.

“Index of Industrial Production: Summary of practices in OECD Countries. Eun-Pyo HONG and Michèle CHAVOIX-MANNATO”

http://www.unescap.org/stat/meet/keyindic/oecd_index_industrial_production.pdf

“An index of industrial production (IIP) measures changes over time in the volume of work done in various sectors of industry, limited to the production of commodities, excluding agriculture and services, i.e. mining and quarrying, manufacturing, electricity, gas and water, and construction. More precisely, it is defined as the ratio of the volume of commodities produced within a specified group of industries in a given time period to the volume produced in the same group of industries in a specified base period. … Because of the strong relationship between changes in the level of industrial production and economic fluctuations in the remainder of economies in many countries, IIP is considered to be one of the main indicators for short-term economic analysis. At the same time, IIP is used as core ingredient in the compilation of annual and quarterly national accounts in many countries. … Many countries base their indicator on quantity data, some use deflated sales or turnover data, whilst others base their indicators on inputs such as hours worked or electricity used. Most use a combination of these methodologies. … The quantities compared must be homogenous while the changes for different goods and services must be weighted by their economic importance as measured by their values in one or other, or both, periods. … There are two primary methods in current use for computing an IIP:

• The index is calculated as the ratio obtained by dividing (a) the weighted sum of the quantities of a fixed set of commodities produced in the given period by (b) the same weighted sum but for the base period. The set of commodities should be representative of the production of the specified industries, preferably covering 70 percent or more of total production within each industry. The weights use the prices of the commodities in the base period, thus defining a Laspeyres type volume index. Alternatively, countries use weights based on prices in the current period (Paasche index).
• The index is calculated as the ratio obtained by dividing (a) the sum over the specified industries of the gross output within each industry in current prices by (b) a producer price index (PPI) for that industry (a process known as deflation). The resulting series is then re-referenced such that the value in a base period is equal to 100. If a Laspeyres type PPI is used for deflation the resulting volume index is a Paasche type index. Alternatively, if a Paasche type PPI is used then a Lapeyres type volume index results.”

30 Jan 2009. BEA table 6.1d.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=170&Freq=Qtr&FirstYear=2006&LastYear=2008

“Table 6.1D. National Income Without Capital Consumption Adjustment by Industry”

For 2006 Q4: National income $12.079tn. Income from mining, utilities, construction and manufacturing: .192+.191+.666+1.435 = $2.484tn; ratio 21%.

18 Feb 2009. G.17 background on market structure.

http://federalreserve.gov/releases/g17/SandDesc/sdtab2.pdf (from a link on the About page; see sources)

“Table 2. Market structure of industrial production: classification and weights”

“Value added in 2006 … Millions of dollars … Total index … 3,077,918”

And from the BEA we have (http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&FirstYear=2006&LastYear=2008) GDP in 2006 of $13,178.4bn.

So value added in industrial production was about 23% of the economy.

18 Feb 2009. Fed G17 release.

http://federalreserve.gov/releases/g17/

The index grew from 5.441 in Jan 1919 to 101.337 in Jan 2009, for a CAGR of 3.3%.

27 Mar 2009. Background page for the G17 statistical release.

http://federalreserve.gov/releases/g17/About.htm

“Documentation”

“The Federal Reserve's monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities. The industrial sector, together with construction, accounts for the bulk of the variation in national output over the course of the business cycle. The industrial detail provided by these measures helps illuminate structural developments in the economy.

The production index measures real output and is expressed as a percentage of real output in a base year, currently 2002. The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of actual output in 2002. The production indexes are computed as Fisher indexes since 1972; the weights are based on annual estimates of value added. The rate of capacity utilization equals the seasonally adjusted output index expressed as a percentage of the related capacity index.”

16 Jun 2009. Background page for the G17 statistical release.

http://federalreserve.gov/releases/g17/ip_notes.htm

“Industrial Production Explanatory Notes”

“Reliability. The average revision to the level of the total IP index, without regard to sign, between the first and the fourth estimates was 0.26 percent during the 1987-2008 period. The average revision to the percent change in total IP, without regard to sign, from the first to the fourth estimates was 0.21 percentage point during the 1987-2008 period. In most cases (about 85 percent), the direction of the change in output indicated by the first estimate for a given month is the same as that shown by the fourth estimate.”