Industrial Production and Capacity Utilization By: Elizabeth Velasco Sandra Martinez

Industrial Production and Capacity Utilization Published by: Board of Governors of the Federal Reserve System Frequency: Monthly Period Covered: prior month Volatility: Low Market Significance: Medium/Moderate New Release on the Internet:

What is it? Records U.S. Industry’s output and its spare capacity. Industrial production index measures changes in production between two different periods of time. It aims to measure the average change in value of production. IP Index must reflect: - Variations in type and quality of the commodities and of the input materials - Changes in stock of finished goods and goods in progress - Related services, such as assembling of production units, mounting installation, repairs, planning, engineering.

What is in the report? The reports include hours worked in factories (from employment data) and the amount of electric power consumed by business (from power supply companies). IP data is presented in two formats: –By type of product, such as consumer goods, business goods, intermediate goods, and materials. –Based on output by industry in broad, supply- side terms.

Why is it important? IP covers nearly everything that is physically produced in the U.S. and includes cars, umbrellas, paper clips, electricity, and medical equipment. It reacts fairly quickly to the ups and down of the business cycle. It has a good track record of forecasting changes in manufacturing employment, average hourly earnings, and personal income. Monthly survey on IP index allows identifying the turning points in economic growth at an early stage; also the timely IP index is one of the most important measures of economic activity.

Keys to Interpreting the Data Industrial production figures are seasonally adjusted in reports. Final numbers can occasionally be distorted because of bizarre weather, natural disasters, or a major strike by labor. To distinguish the true-underlying growth rate of IP in the economy, it is best to look at a three- month moving average. The final revised index, three months later, vary by an average of just 0.3 percentage points.

Latest Release Industrial production decreased 0.2 percent in March after an increase of 0.8 percent in February. Output in the manufacturing sector moved up 0.7 percent in March; the increase was led by advances in the production of durable goods. Overall industrial production for March was 2.3 percent above its year-earlier level. The output of utilities dropped 7.0 percent, largely reversing its February jump of 7.6 percent, as temperatures swung from below seasonal norms in February to above seasonal norms in March. The rate of capacity utilization for total industry fell 0.2 percentage point, to 81.4 percent, a level 0.4 percentage point above its average.

Latest Release IP and Capacity Utilization: Summary Seasonally adjusted 2002=100 Percent Change IndustrialProduction 2006 Dec Jan Feb Mar Dec Jan. 2007Feb Mar. Mar.’06 to Mar.’07 Total Index Previous Estimates Major Market Groups Final Products Consumer Goods Business Equipment Nonindustrial Supplies Construction Materials Major Industry Groups Manufacturing Previous Estimates Mining Utilities

Historical Data

Data Analysis Based on the information from the indicator, we conclude: -Industrial Production increased by 2.3% compared to last year’s level -Industrial Production is very close to 3% of potential GDP (3.5-4%) - The Federal Reserve should not be concerned about economic growth