Industrial production measures the output in the manufacturing, mining, electric and gas industries. Measured monthly as the Industrial Production Index (IPI), it serves as a macroeconomic indicator for economists and investors.
What Is It and How Does it Work?
The Industrial Production Index is published by the Federal Reserve Board in the middle of every month. This index measures the level of production in manufacturing, mining (which includes oil and gas field drilling services), and gas and electric sectors. The index also measures capacity and capacity utilization. Capacity is an estimate of the production levels that can be sustainably maintained. Capacity utilization is the ratio of actual output to capacity.
Industrial production is expressed as an index. Analysts and investors look at the month-on-month change. In April 2020, the index was at 84.2 due to decelerated manufacturing because of lockdown measures in the early days of COVID-19. In April 2022, the index shot up to 105.6 as companies tried to keep up with demand due to the supply-chain disruptions we experienced.
Capacity utilization is expressed as a percentage of total capacity, with 100 representing full capacity. In August 2018, capacity utilization was 79.9 percent. In April 2020, capacity went to 63.4 percent due to COVID-19 restrictions curbing manufacturers’ productions. Capacity returned to pre-pandemic levels in 2022.
Benefits
The composite index is important as a macroeconomic indicator for economists and investors. Fluctuations within the industrial sector account for most of the variation in overall economic growth.
Manufacturing makes up about 20 percent of GDP and the index on industrial production and capacity utilization is used to track that output.
Capacity utilization is a great indicator of the strength of demand. Low-capacity utilization, also known as overcapacity, signals weak demand. High-capacity utilization, however, could be a warning that the economy is overheating.
First State Investment Advisors has over 50 years of experience examining industrial production patterns. For a free consultation, call us today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.