What does the Industrial Production Index (IPI) stand for?

The industrial production index (IPI) is an economic indicator released every month and compares the actual output of the mining, manufacturing, electric, and gas sectors to a base year.

It’s put out by the Federal Reserve Board (FRB) in the middle of every month, and the Conference Board, an economic think tank run by its members, writes about it. At the end of March every year, the FRB also changes its earlier estimates.

What is the Industrial Production Index (IPI), and how does it work?

The industrial output index (IPI) tracks how much is made in mining, including oil and gas field drilling services, manufacturing, and electric and gas utilities industries. It also checks capacity, which estimates the amount of production that can be kept up indefinitely, and utilization, which is the ratio of actual output to capacity.

Figuring out the IPI

Industrial production and capacity levels are given as an index level compared to a base year, which is 2012 in this case. That is, they don’t show exact amounts or values of production; instead, they show the percentage change in production compared to 2012.

The source data is varied and includes physical inputs and outputs like tons of steel, sales numbers that take inflation into account, and sometimes the hours that factory workers log. The FRB gets this information from business groups and government bodies and uses the Fisher-ideal formula to put it together in an index.

You can get the indices in both seasonal and unadjusted versions.

Several sub-indices give a very detailed picture of the output of particular businesses. Gas sales for homes, ice cream and frozen desserts, carpet and rug mills, spring and wire products, pig iron, audio-video equipment, and paper are just a few industries that provide monthly production statistics.

Why the Industrial Production Index (IPI) is useful

Industry-level numbers are helpful for business managers and investors in specific industries. Conversely, the composite index is a critical macroeconomic indicator for economists and investors since changes in the industrial sector cause most of the changes in overall economic growth.

Gross domestic product (GDP), on the other hand, is the most common way to measure economic output. GDP looks at the price paid by the end user. So, it includes value-added in the retail sector, but IPI doesn’t. Another thing to remember is that the manufacturing sector is a small and shrinking part of the U.S. economy. In 2016, it made up less than 20% of GDP.

Capacity usage is an excellent way to figure out how strong demand is. Overcapacity, or low capacity usage, means that demand is not strong. This could signal to policymakers that they need to use fiscal or monetary support. Investors could see it as a sign of a coming recession. Or, based on what Washington says, as a sign of a coming stimulus.

On the other hand, high capacity utilization can mean the economy is getting too hot. That leads to price increases and asset bubbles. In response to these threats, policymakers might raise interest rates or cut back on spending. They could also let the business cycle run, which would probably lead to a decline in the long run.

Data from the Past

Here is the IPI for the 50 years up to October 2017, with seasons considered. You can get data dating back to January 1919.

Conclusion

• Compared to a base year, the industrial production index (IPI) shows how much is being made. And how much capacity is used in the mining, manufacturing, electric, and gas businesses?
• There are changes to earlier estimates by the Federal Reserve Board (FRB). Typically, it is at the end of March, and the IPI is in the middle of every month.
• Economists and investors use the composite measure to get a good idea of the overall state of the economy.
• On the other hand, industry-level information is helpful for business managers and investors in specific industries.