Industrial Production & Capacity Utilization Web address: www.federalreserve.gov/releases/g17/current Industrial Production (IP) Index: IP covers nearly everything produced in the U.S. (20% of the economy) for manufacturing (82%), mining (8%), electric utilities (10%) and gas industries. Does not include output from agriculture, construction, transportation, communications, and service industries. Measures changes in the volume of goods produced (does not take price into account) IP corresponds to real GDP (close relationship between IP and GDP) Manufacturing is most cyclically sensitive part of economy, follows the ups and downs of the business cycle. Manufacturing activity is highly sensitive to changes in interest rates and aggregate demand. Good forecaster of manufacturing employment, average hourly earnings and personal income IP data has 2 formats: Supply Side: Output by industry (manufacturing, mining, utility) Demand Side: Type of product, (consumer/business/intermediate goods and materials) Real GDP growth estimator = 3-month IP/IP Nominal GDP/Factory Sales/Manufacturing Revenues Growth estimator = (3-month IP/IP) x (3-month CPI/CPI) Capacity Utilization (CU): Present production divided by maximum potential production capacity 81% long-run average Measure of spare capacity/slack at factories, mines, utilities. Leading indicator of business investment spending and inflation pressures. High CU => rising investment spending and hiring, shortage of vendor parts, higher prices Low CU => low investment spending and hiring, surplus of vendor parts, lower prices. Follows the ups and downs of the business cycle. CU = 82-85% => production bottlenecks => rising producer prices ------------------------------------------------------------------------------------------------------------------ -------- High IP/CU => fast growing economy => rising profits => rising stock prices => production bottlenecks => rising inflation => rising interest rates => falling bond demand => fast growing economy => rising demand for dollar => rising exchange rate
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Industrial Production & Capacity Utilization Web address: Industrial Production (IP) Index: IP covers nearly.
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Industrial Production & Capacity Utilization
Web address: www.federalreserve.gov/releases/g17/current
Industrial Production (IP) Index:IP covers nearly everything produced in the U.S. (20% of the economy) for manufacturing (82%), mining (8%), electric utilities (10%) and gas
industries.
Does not include output from agriculture, construction, transportation, communications, and service industries.
Measures changes in the volume of goods produced (does not take price into account)
IP corresponds to real GDP (close relationship between IP and GDP)
Manufacturing is most cyclically sensitive part of economy, follows the ups and downs of the business cycle.
Manufacturing activity is highly sensitive to changes in interest rates and aggregate demand.
Good forecaster of manufacturing employment, average hourly earnings and personal income
IP data has 2 formats:
Supply Side: Output by industry (manufacturing, mining, utility)
Demand Side: Type of product, (consumer/business/intermediate goods and materials)
Happy consumers are good for business so index is useful for predicting consumer spending. Unfortunately, the relationship between confidence index and spending is not a close one.
Difficult to predict how humans will behave. Sales are the best method of measuring consumer confidence.
A six month moving average of confidence is a better indicator of future household outlays.
Index is important during economic turning points. Better at forecasting recessions than recoveries.
Consumer confidence Index polls 5,000 new households, the survey has 5 questions with emphasis on labor market conditions - which can lag the economy
Consumer Sentiment Index polls 500 new and continuing households (the rotating interview strategy is 60% new and 40% second time interviews => less erratic index), 50 questions with emphasis on financial and personal income expectations which is a driving force behind consumer spending => better leading indicator.