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Industrial Production Is Headed for a Record At Last

L: This is a long one (in the blogging world) so here’s a preview. In this blog Jim is doing what he does best. Not only is he telling us that the news on industrial production is pretty darn good, but he’s also offering a little background on the report itself, a great explanation of why economists are always working with data that gets revised regularly, and details from the report. He also provides similar information about the manufacturing index, which is about 75 percent of the industrial production index.

J: On May 16 the Board of Governors of the Federal Reserve System released some great news about industrial production. The first sentence of the report stated, “Industrial production advanced 1.0 percent in April for its third consecutive monthly increase and its largest gain since February 2014.”

A Little History

These data are some of our oldest economic indicators as the Board has been compiling and publishing them since 1919. That’s well before the advent of the National Income and Product Accounts (NIPA), which were not presented in a consistent and complete accounting system until 1947. The GDP and national income data only go back to 1929 on an annual basis and 1947 on a quarterly one.

A Reverie about Revisions

Many people tease economists for dealing with data that are often revised. However, there are so many good reasons for those changes. The most common one is because we frequently get more and more complete data the farther away we get from a particular month or quarter. Most economic data are compiled from surveys, so when we get a complete tabulation (e.g., from final tax filings or from a periodic census), it is necessary both to revise history and to benchmark old data to the new totals.

A less frequent source of revisions is a change in the definition of an industry. The switch from the Standard Industrial Classification (SIC) codes to the North American Industry Classification System (NAICS) in 1997 caused many changes in the way industrial production data are compiled and reported. The Board did this reclassification in December 2002.

A third reason to revise data is changes in seasonal patterns of economic activity. This obviously has no impact on raw data, but it does change seasonally adjusted data. For index data such as industrial production and many price series, it is necessary to periodically rebase the index to a time period closer to the present.

The Board incorporated all of these procedures into its March 31, 2017 revisions to industrial production. The data have been revised back to 1972.

An Overview of the Industrial Production Index

This first chart shows the entire history of the industrial production index. Note the 17 recessions (grey bars) that have occurred since 1919. The current index is set at 2012=100. The chart is plotted on a logarithmic scale to make it easier for you to see the relatively much larger collapses in the index in recessions before 1968, especially in the 1920s and 1930s compared to the last recession.

The second chart shows the actual levels of the index from January 1999 through April 2017. Here you can see that the index peaked in November 2007 at 105.3. It did not exceed that until June 2014, when it hit 105.5. The current record is 106.6 in November 2014.

The industrial production index generally fell from then until it hit 102.5 in March 2016. It has now risen for three months in a row. Even more encouraging is the fact that the 1.0 percentage point increase in April from March was the strongest rise since February 2014.

Manufacturing makes up the largest share of the index at 76.46 percent under the SIC definitions. It is a slightly smaller 74.21 percent of the index under the NAICS definitions. Mining, which includes oil and gas drilling, accounts for 12.91 percent of the index.

Utilities account for the remaining 10.64 percent of the index. This sector is dominated by electricity generation, transmission and distribution (NAICS 2211), which has a 9.42 percent weight in the total index. The utilities index has set several new records since the recession.

The mining sector has also set many new records since the last recession. The real laggard has been the manufacturing sector.

Details on the Manufacturing Index

The next chart shows the complete history of the manufacturing index since 1919. It is again on a logarithmic scale so you can see the relative rates of growth and decline through all 17 recessions.

This next chart is another one showing the manufacturing index, this time since 1999 in level format.

You can see that April at 103.8 (2012=100) is the highest level since the recession began, but is far below the peak of 110.0 in December 2007, the month in which the recession began.

The April manufacturing index will need to grow by 6.0 percent from its April level to set a new record. It should achieve that before the end of 2018. That would still make the recovery from the last recession the slowest one ever. It only took 7-1/2 years to set a new record after the peak before “Great Depression” of August 1929 to March 1933. We're at 9 years and 4 months from the December 2007 peak and still waiting for that new record.

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