Industrial Production Index
What is Industrial Production Index?
Industrial Production Index values track the real output of factories, mines and utilities, published monthly by the Federal Reserve as an index number.
The index measures physical output in manufacturing, mining, and electric and gas utilities, and the Federal Reserve publishes it monthly as an index relative to a base period rather than in dollars. Industry accounts for a minority of employment in a developed economy but a large share of its cyclical movement, because factories cut production quickly when orders fall while services hold steadier, so the index swings much more than GDP does. It is a coincident indicator and one of the four components of the standard coincident index. Utility output depends heavily on weather, so an unusually hot or cold month can move the headline without saying anything about the business cycle, which makes the manufacturing component the more informative line. Capacity utilization appears in the same release.
Industrial Production Index: a worked example
Suppose the index sits at 102.5 one month and 103.6 the next. The change is 1.1 points, about 1.1 percent (1.1 ÷ 102.5 = 0.0107), and the level itself says output is 3.6 percent above the base period, which is set to 100. Now suppose utility output jumped 6 percent during an unusually cold month while manufacturing rose only 0.3 percent. Most of the headline gain came from heating demand rather than factories, so the cyclical signal is far weaker than it looks. Reading the manufacturing component separately is what separates weather from the business cycle.
The mistake students make with industrial production index
The mistake is reading the index level as a dollar amount or as a growth rate. A value of 103.6 means output is 3.6 percent above the base period, not that production grew 3.6 percent this month. Students also assume industrial production tracks GDP one for one. Industry is a small share of a modern economy but a very cyclical one, so this index falls and recovers far more sharply than total output.
Industrial Production Index questions
Who publishes the Industrial Production Index?
The Federal Reserve Board publishes industrial production monthly, alongside capacity utilization, in its G.17 statistical release. It is one of the few major economic statistics produced by the central bank rather than a statistical agency. Coverage runs from factories and mines to electricity and natural gas suppliers.
Is industrial production a leading indicator?
No, industrial production is a coincident indicator that moves with the economy rather than ahead of it, and it sits inside the standard coincident index alongside payrolls, income and sales. New orders and building permits are the series that lead it. Its value is providing a monthly read on physical output between quarterly GDP releases.
Why does industrial production swing more than GDP?
Manufacturing and mining are far more cyclical than services, and factories can cut output quickly when orders fall, while spending on services such as health care and housing holds up. The index covers only the industrial share of the economy, so it isolates the volatile part. GDP dampens that swing by including steadier sectors.
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