Industrial Production and Capacity Utilization: A Revision
The Federal Reserve has revised the index of industrial production (IP) and the related measures of capacity and utilization for the period 1992 to date. For the third quarter of 1998, the revision places the production index at 131.7 percent of output in 1992, compared with 128.2 percent reported previously(table 1). [1] The revision places the capacity index at 161.5 percent of output in 1992, compared with 158.1 percent reported previously. As a result, the rate of industrial capacity utilization--the ratio of production to capacity--was revised up 0.4 percentage point, to 81.5 percent, in the third quarter of 1998.
The updated measures reflect both the typical incorporation of newly available, more comprehensive source data and the introduction of modifications in the methods used to compile selected series. The statistical revisions are principally derived from the inclusion of the 1996 Annual Survey of Manufactures and the 1997 Survey of Plant Capacity and affect data since 1994. The changes in methods were introduced beginning in 1992.
Growth in the output and capacity of high-technology industries is now estimated to have been more rapid than previously shown. Outside of the high-technology industries, revisions to the individual output indexes were largely offsetting and had little net effect on total IP through 1997(chart 1).
Production by Market Groups
The increases in total IP are now about the same in 1993 and 1994 as was shown previously, but are faster in 1995-98(table 3). The revised annual rate of growth has averaged 4.5 percent since 1994, 0.8 percentage point higher than previously shown; the upward revision to growth from 1996 forward was close to 1 percentage point per year. The index continues to show the same pattern of output growth since 1992: No quarter shows a decrease in output, but gains were slower between the second quarter of 1995 and the first quarter of 1996 and again beginning with the first quarter of 1998. The latest slowing reflects the effects of the economic turmoil in Asia.
Among major market groups, the expansion of output was pervasive and substantial in 1996 and 1997, with strength concentrated in business equipment, consumer durables, and related materials; only the production of defense and space equipment declined in these years. The production of nondurable consumer products advanced relatively slowly; the solid growth in the consumer chemical products industry was offset by declines in apparel production from 1995 to the present. In 1998, growth was slower in the production of consumer goods, business equipment other than information processing equipment, and both durable and nondurable materials. The output of information processing and related equipment continued to increase strongly, and the output of construction supplies accelerated after having risen slowly in 1997. The output of energy products and materials also picked up, on balance, a move reflecting the unusual weather patterns since last fall. The output of defense and space equipment edged up after years of substantial declines.
Production by Industry Groups
During the past two years, growth among the broad industry groups continued to be concentrated in durable manufacturing, which advanced 11.0 percent in 1997 before easing to a 4.2 percent annual rate in the first three quarters of 1998. The relatively rapid expansion in this sector has been supported over the years by the sustained rapid increases in the output of computers, semiconductors and related electronic components, and communications equipment. According to the revised index, the annual rate of growth of production in these high-technology industries averaged nearly 40 percent from 1994 to 1997, substantially higher than previously shown(table 4). The growth of output of other manufacturing industries, which revised little on balance over the 1994-97 period, advanced 3.0 percent over the four quarters of 1996 and 4.3 percent during 1997 before edging down in 1998. In 1998, the economic troubles in Asia have, either through more imports or less exports, reduced the domestic production of iron and steel, semiconductors, some chemicals, and other internationally traded goods. However, the revised series for civilian aircraft shows stronger growth in the first half of 1998 than was shown previously.
Capacity
The revisions to capacity and utilization reflect the new IP indexes, updated estimates of manufacturing capital input, new information provided mainly by trade associations on physical capacity and utilization for selected industries, and preliminary results of the 1997 Survey of Plant Capacity conducted by the Bureau of the Census, which yielded utilization rates for manufacturing industries in the fourth quarter of 1997.
As was the case with the IP index, the rate of growth of manufacturing capacity was revised upward from 1995 forward(table 5). The annual rate of capacity growth in manufacturing, which jumped to about 5-1/2 percent in 1995 and 1996, has slowed to 5 percent in the last two years. The rapid growth and upward revisions were again concentrated in durable manufacturing, especially in the high-technology industries. The capacity increase in these industries peaked at 46.3 percent over the course of 1996 and then decelerated to 34.8 percent in 1998. The rest of manufacturing increased capacity approximately 3 percent in 1995 and 1996 and then gradually lowered the rate of capacity growth to an estimated 2.6 percent in 1998. The capacity expansion in mining and utilities was considerably slower. In particular, the North American Electric Reliability Council reduced its estimate of generating capacity for the winter of 1997 and projects increases in capacity that fall short of probable increases in demand. Moreover, the drop in world demand for crude oil and its low price have led to a sharp drop in work in domestic oil fields.
Capacity Utilization
In 1997 and 1998, the upward revisions to manufacturing capacity were relatively smaller than the revisions to output; consequently, the rate of manufacturing capacity utilization--the ratio of output to capacity--was revised up 0.3 percentage point in the fourth quarter of 1997 and 0.6 percentage point in the third quarter of 1998(table 6). The largest upward revision in utilization was in the transportation equipment industry. Utilization in manufacturing in the third quarter of this year was 80.3 percent, a level 0.8 percentage point less than the 1967-97 average. Although revised in opposite directions, the rates in both primary- and advanced-processing industries fell more than 2 percentage points over the first three quarters of 1998. The utilization rate for computers, communications equipment, and semiconductors declined to 76.9 percent. In contrast to the general easing in manufacturing utilization rates, the rate rose further for petroleum products, to 96.8 percent. The low price of crude oil pushed refining activity toward capacity limits.
The capacity utilization rate for mining was revised downward 2.2 percentage points in the third quarter and was nearly a percentage point below its long-term average. Although utilization at gas utilities was also revised downward to a below-average level, the rate of utilization in electric utilities was revised upward to 98 percent, its highest level since 1970. Strong summer demand for air conditioning due to high temperatures forced some utilities to limit their supply of electricity to industrial companies.
ASPECTS OF THE REVISION
The revision incorporates the updating of the comprehensive annual data and of the revised monthly source data used in the estimation of production, capacity, and utilization. More up-to-date results were obtained from the 1996 Annual Survey of Manufactures, the 1997 Survey of Plant Capacity, other annual industry reports, recent information on prices, and revised monthly source data on physical products and on labor and electricity inputs. With the differences between the new annual and monthly source data in hand, productivity relationships were revised and applied to the individual monthly source data to determine the final individual production indexes. Along with updating the individual production series and seasonal factors, the annual value-added weights used in aggregating the indexes to market and industry groups were also updated.
Changes to Individual Production Series
The industry and market structures of the index of industrial production now comprise 267 individual series, up from 264 at the time of the last annual revision; they have been altered only a little for the period since 1992.
New indexes were developed to measure production in the electronic components industry. Previously, two indexes--one for TV tubes and another for semiconductors and other components--covered SIC 367. Four new indexes now cover electronic components other than TV tubes: (1) semiconductors and related devices. SIC 3674; (2) printed circuit boards, SIC 3672; (3) other electronic components, SIC 3675-8 and part of 3679; (4) printed circuit assemblies and loaded boards, part of SIC 3679. The new monthly quantity index for semiconductors and related devices is constructed from detailed information on physical quantities and average unit values for about 300 distinct devices. The estimates of U.S. production are primarily derived from the Census Bureau's Current Industrial Reports for Semiconductors and the World Semiconductor Trade Statistics monthly survey, issued by the U.S. Semiconductor Industry Association. Detailed information on MOS memory and microprocessor chips are obtained from Dataquest, Inc. and MicroDesign Resources, respectively. The other three series are derived from monthly Bureau of Labor Statistics data on worker hours and productivity trends determined by annual data. The new series appear in the industry structure of the IP index in the subgroup, Electronic Components, SIC 367, and in the market structure in Equipment Parts, a subgroup within durable materials.
Other changes to individual series included revised IP series for coal, lawn and garden equipment, and completed commercial aircraft. The coal series had been based directly on tonnage production. However, the quality of U.S. coal varies by region. A ton of coal from Appalachia provides more heat expressed in British thermal units than a ton of lignite from North Dakota, Texas, or Louisiana. The growth in coal production over the past decade or so has been concentrated in subbituminous coal, which is extracted by surface mining at low cost in Wyoming and West Montana and is relatively low in Btu content. Thus, the revised index of coal production weights the tonnage produced in an area by the Btu content typical of a ton of coal mined in that region.
In the case of aircraft, the goal is for IP to reflect actual aircraft assembly operations. Previously, the production indexes for aircraft were based on production worker hours and used productivity assumptions that were developed from historical trends and estimates of planned commercial aircraft completions. Now, the productivity estimates for commercial aircraft will be revised monthly as data on actual completions (deliveries plus the change in stock) of commercial aircraft become available. The productivity assumption applied to current-period production worker hours will be based on an approximate production measure equal to a forward-looking ten-month moving average of actual completions augmented by future planned completions. The estimates of military aircraft productivity were also improved, using annual information on planned completions.
Using data for production of lawn and garden tractors, mowers, rotary tillers, and snow throwers from Stark's Component Ledger, the staff developed a physical product series for lawn and garden equipment, SIC 3524. The data represent output for the three-month period from the third month of a given calendar quarter through the second month of the following quarter. Through 1992, the monthly indicator for this series remains production worker hours.
Weights
The IP index is an annually weighted Fisher index.[2] The annual value-added weights for the aggregation of IP and capacity utilization, which are derived from annual estimates of industry value added, were updated and extrapolated. The Annual Survey of Manufactures as well as revenue and expense data reported by the Department of Energy and the American Gas Association provided industry value-added data for manufacturing and utilities through 1996. The latest value-added data for mining comes from the Census of Mineral Industries for 1992. The weights are expressed as unit value added. Generally, the unit value-added measures track broad changes in corresponding producer prices. The weights required for aggregating IP in the most recent period are (1) estimated from available data on producer prices through the most recent year and (2) extrapolated for the following year, given the persistence of many relative price trends.
Revised Monthly Data
The monthly physical product data that are used to measure the monthly movements of many IP indexes have been updated to capture data that became available after the closing of the regular four-month reporting window. Monthly data on production-worker hours or sales of electric power in kilowatt-hours to industry groups, along with estimates of trends in output per worker-hour or kilowatt-hour, are used to indicate the monthly change in output for many individual IP indexes. The Bureau of Labor Statistics benchmark of the employment data for March 1997 was incorporated in this revision. Revised data on the sales of electricity to industries since 1992 were incorporated as well. The monthly kilowatt-hour sales figures were benchmarked to data on the annual use of electric power reported in the Annual Survey of Manufactures. Data through 1996 were available for this revision; they resulted in an average upward revision in industrial use of electric power of 0.3 percentage point per year over the 1994 to 1996 period(table 8). Seasonal factors for the electric power series have been reestimated using data through May 1998.[3]
This revision also introduced an improvement in the adjustment of monthly electric power data for systematic influences of the weather. Electric power use by establishments in fifty three-digit SIC industries are used as monthly indicators for production in forty-two component IP series. At times, unusual hot or cold temperatures appeared to cause the use of electricity to rise or fall independently of their use in production. Staff research indicated that the usual seasonal adjustment techniques did not adequately capture the influence of the weather on electric power usage in thirteen industries, which are used to infer production for almost 16 percent of IP. The new adjustment procedure uses data on heating and cooling degree days to model the effects of weather more accurately in those industries.
Measurement of Capacity
To construct an individual capacity index, we first calculate preliminary, implied end-of-the-year indexes of capacity by dividing a production index by a utilization rate obtained from a survey for that end-of-year period. These ratios are expressed, like the indexes of industrial production, as percentages of production in 1992, and they give the general level and trend of the capacity estimates.
The Census Bureau's survey is the source of utilization rates for most manufacturing industries. The available results of the Survey of Plant Capacity suggested that trends in manufacturing utilization rates were roughly in line in the 1990s with those previously estimated by the Federal Reserve. However, dividing the industrial production indexes for high-technology industries, which were generally revised substantially upward, by the Census utilization rates yielded a noticeable upward revision of capacity in those industries.
Once the preliminary implied capacity indexes are calculated, measures of physical capacity or of capital input are used to estimate and extrapolate the annual movements of the capacity indexes. For most manufacturing industries, physical measures of capacity are lacking; in these cases, the annual growth in the capacity estimates is related to the growth in an industry's capital input. The capital input measures are developed principally from investment data reported in the Annual Survey of Manufactures; revised BEA estimates of business investment and deflators by asset type through mid 1998 were also incorporated.
1. The figures for August through October 1998 are subject to further
revision in the upcoming monthly statistical releases.
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2.The aggregation procedures are described in Carol Corrado,
Charles Gilbert, and Richard Raddock, "Industrial Production and
Capacity Utilization: Historical Revision and Recent Developments,"
Federal Reserve Bulletin, vol.83 (February 1997), pp.67-92.
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3. Seasonal factors for the worker hours were based on data through
October; factors for the monthly physical product series were based on
data through June or later in the summer.
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NOTICE: Data Availability and Publication Changes
These data were revised from 1992 forward. One new market group is being published with this revision: Semiconductors, printed circuit boards, and other electronic components.
Files containing the revised data and the text and tables from this release are available on the Internet and through the Economic Bulletin Board of the Department of Commerce. Files containing all the historical data for these series can be found under "Statistics: Releases and historical data" at http://www.federalreserve.gov, the Board's World Wide Web site. For information about the Economic Bulletin Board of the Department of Commerce, call 202-482-1986.
Diskettes containing either historical data (through 1985) or more recent data (1986 to those most recently published in the G.17 statistical release) are available from Publications Services, Board of Governors of the Federal Reserve System, Washington, DC 20551 (202-452-3245).
A document with printed tables of the revised estimates of series shown in the G.17 release is available upon request to the Industrial Output Section, Mail Stop 82, Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, DC 20551.
G.17 Revision Release Chart and Tables:
