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What is Industrial Production Index (IP)?
Posted by: admin 2 years, 7 months ago
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What Is the Industrial Production Index (IPI)?
The industrial production index (IPI) is a monthly economic indicator measuring real output in the manufacturing, mining, electric, and gas industries, relative to a base year.
It is published in the middle of every month by the Federal Reserve Board (FRB) and reported on by the Conference Board, a member-driven economic think tank. The FRB also releases revisions to previous estimates at the end of every March.
KEY TAKEAWAYS
- The industrial production index (IPI) measures levels of production and capacity in the manufacturing, mining, electric, and gas industries, relative to a base year.
- The Federal Reserve Board (FRB) publishes the IPI in the middle of every month, and revisions to previous estimates at the end of every March.
- The composite index is an important macroeconomic indicator for economists and investors.
- Industry-level data, meanwhile, is useful for managers and investors within specific lines of business.
How Does the Industrial Production Index (IPI) Work?
The industrial production index (IPI) measures levels of production in the manufacturing, mining—including oil and gas field drilling services—and electrical and gas utilities sectors. It also
It also measures capacity, an estimate of the production levels that could be sustainably maintained; and capacity utilization, the ratio of actual output to capacity.
Calculating the IPI
Industrial production and capacity levels are expressed as an index level relative to a base year—currently 2012. In other words, they do not express absolute production volumes or values, but the percentage change in production relative to 2012.
The source data is varied, including physical inputs and outputs such as tons of steel; inflation-adjusted sales figures; and, in some cases, hours logged by production workers. The FRB obtains this data from industry associations and government agencies and aggregates them into an index using the Fisher-ideal formula.
The indices are available in seasonally adjusted and unadjusted formats.
Within the overall IPI, there are a number of sub-indices providing a detailed look at the output of highly specific industries. Examples of a few of the dozens of industries for which monthly production data is available include: residential gas sales, ice cream and frozen dessert, carpet and rug mills, spring and wire products, pig iron, audio and video equipment, and paper.
Benefits of the Industrial Production Index (IPI)
Industry-level data are useful for managers and investors within specific lines of business, while the composite index is an important macroeconomic indicator for economists and investors—fluctuations within the industrial sector account for most of the variation in overall economic growth.
At the same time, IPI differs from the most popular measure of economic output, gross domestic product (GDP): GDP measures the price paid by the end-user, so it includes value-added in the retail sector, which IPI ignores. It is also important to note that the industrial sector makes up a low and falling share of the U.S. economy—less than 20% of GDP as of 2016.
Capacity utilization is a useful indicator of the strength of demand. Low capacity utilization, or overcapacity, signals weak demand. Policymakers could read this as a signal that fiscal or monetary stimulus is needed. Investors, meanwhile, could interpret it as a sign of a coming downturn, or—depending on the signals from Washington—as a sign of coming stimulus.
High capacity utilization, on the other hand, can act as a warning that the economy is overheating, suggesting the risk of price rises and asset bubbles. Policymakers could react to those threats with interest rate rises or fiscal austerity. Alternatively, they could let the business cycle take its course, likely resulting in an eventual recession.
Historical Data
Below is the seasonally-adjusted IPI for the 50 years to October 2017. Data is available going back to January 1919.
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