Industrial Production – Easy Trends (thru April 2013)
Let’s talk about industrial production, its importance and the current trends. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.
NOTE: You may be reading an outdated analysis. Please visit my latest industrial production trend analysis for more info.
Quick ‘n Easy
Industrial Production (IP) measures how much is being produced by factories, mines and utilities. The changes in IP track very closely with changes in the overall economy.
First, a nice summary of what Industrial Production (IP) is from Econoday:
The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.
Easy Translation: The first sentence is probably enough for an understanding – what’s being produced at factories, mines and utilities. The second sentence is a key detail though. Because it relates to manufacturing, and manufacturing is only about 20 percent of our economy, at first glance one might consider this indicator not important. But the changes in the manufacturing sector track the changes in the economy extremely well. In other words, the cycles of the two are well matched, making IP incredibly important to track.
Here’s a ten-year chart of the Industrial Production Index from the Federal Reserve Bank of St. Louis (a level of “100” represents the level in 2007):
Industrial Production Trends and Projections
Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I start my analysis from 3 years ago.
Industrial Production Trend Analysis
Quick ‘n Easy
From September 2012 thru March 2013, the Industrial Production Index rose at an average rate of 0.40 points (0.40 percent of the latest value) per month. But the latest reading (April) was too low to include in that upward trend. This is slightly concerning, as industrial production is considered a leading indicator for the economy. If this is the start of a downward trend (too early to tell) it might be bad news for the overall economy for the next 6 months or so.
Current Trend: September – March 2013 – During that time, there was a confirmed upward trend of about 0.40 in the index per month, which is about 0.40 percent per month of the latest figure. The latest reading for April was too low to include in that upward trend, however.
Last Confirmed Trend: May 2010 – July 2012. During that time, the Industrial Production Index was rising by about 0.27 per month.
Projected Next Data Point
The next report is for May 2013. If the recent trend (excluding any off trend points) were extended perfectly, the next reading of the Industrial Production Index would be about 100.03 for May 2013, an increase of 1.31 percent from the previous month. This seems unreasonably high, especially considering the slowdown we’ve seen in other manufacturing indicators. We’ll have to hope this doesn’t signal the beginning of a downward trend.
The report for the April 2013 Industrial Production Index showed its first monthly decrease in three months and its biggest decrease since August last year. We have a confirmed upward trend that began in September 2012, and it has seen the value of the Industrial Production index increasing an average of 0.40 points per month, which is about 0.40 percent of the latest figure. But the latest reading for April is too low to include in that rising trend, so we’ll have to hope it’s not the start of a new downward trend. Looking at the longer term, it basically looks like industrial production has been on an upswing ever since the Great Recession ended back in 2009.
Industrial production is a leading indicator for the economy, and as long as we’re seeing a rising trend, we can expect that the economy will be growing for several months down the line. We will watch the next couple of reports and hope that we don’t see any steep downward trends develop, as it might signal a slowdown for the economy several months down the line.