The Industrial Production Index, an economic indicator issued by the US Federal Reserve on or around the 16th of the month at 9.15am EST, is a measure of the monthly raw volume of goods produced by industrial firms in factories, mines, and power plants in the USA. This figure includes the output of the publishing industries including newspapers, magazines, and books.
This data is combined with a number of industry capacity estimates to work out capacity utilization ratios for each line of business, with a benchmark level of 100% set in the base year that is currently being used, which is 2002 at the time of writing. Aggregate utilization ratios are also produced for different categories within this, such as total high-tech production and total manufacturing, and these are released simultaneously with the Industrial Production figures.
What do these numbers represent for the economy?
Both of these figures are considered to be coincident indicators, in that they are neither lagging nor leading, but instead represent the current state of play in terms of economic activity and gross domestic product (GDP). The report shows percentage changes from year-to-year and month-to-month, showing business cycle growth and short-term changes respectively.
This figure is closely watched by the Federal Reserve because inflation tends to show itself at the industrial level when supplies of raw materials get tight. Rising commodities and materials costs get passed down the line, and result in more expensive finished products.
Because the industrial sector exhibits the most volatility in terms of nominal output during a business cycle, big changes here can often indicate inflection points in the business cycle.
What do increases and decreases mean for traders?
As a general rule, capacity utilization levels don’t tend to approach the upper limit of 100%, and anything above the 82-85% range is seen to be tight and tend to precede price increases or supply shortages in the near future. However, levels below 80% mean there is some slack in the economy, and this could precede a recession and possible job losses.
If the number comes out higher than the consensus estimate during a period of economic expansion, this can trigger inflationary fears and send the dollar downwards. If, however, the economy is lagging. an upside surprise in the release could boost the stock market, and if it comes out below the consensus estimate during a period of expansion, stock and bond prices also will tend to rise, and the dollar with it.