INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION:
THE 2008 HISTORICAL AND ANNUAL REVISION

The Federal Reserve has revised the index of industrial production (IP) and the related measures of capacity and capacity utilization. Although rates of change from January 1972 through February 2008 are affected, the revision has its largest impact on data from 2003 onward. Relative to earlier estimates, measured from fourth quarter to fourth quarter, total IP is now reported to have increased more slowly in 2006, but changes to output in other recent years were more modest.[1] The period from 2003 through 2007 is marked by a steady, moderate rise in industrial output; on average, production increased 2.2 percent per year over this time frame, and the annual rates of change ranged from 1.5 percent to 3.1 percent.

The revision to IP incorporates the U.S. Census Bureau�s 2006 Annual Survey of Manufactures (ASM), which shows a lower annual level of output than previously estimated. In addition to the 2006 ASM, other new source data for this year�s revision to the IP indexes include manufacturing data from selected 2006 Current Industrial Reports from the Census Bureau, annual data on the publishing industry from the Census Bureau�s Services Annual Survey, new annual data on mineral extraction for 2005 and 2006 from the U.S. Geological Survey, and updated deflators from the Bureau of Economic Analysis. The new monthly production estimates also reflect the incorporation of updated seasonal factors and monthly source data that became available (or were revised) after the closing of the reporting window.

Beginning with the release of March data in the Federal Reserve�s monthly G.17 Statistical Release, monthly releases will be based on a six-month reporting window: One month of new data will be reported, and the previous five months of data will be revised. For example, the monthly release to be issued on April 16 will include new data for March and revised data for October through February. Previously, the monthly releases were issued with a four-month reporting window, which covered one month of new data and revisions to the previous three months of data. The incorporation of a six-month window will allow for the inclusion of additional data before an annual revision. Over the past year, a six-month window would have allowed an additional 3 percent to 4 percent of IP to reflect primary source data that otherwise would only have been incorporated at the time of an annual revision.[2] The longer reporting window will cause the latest month of data shown for a few indexes in the supplement to the G.17 release to be as many as five months earlier than the latest value for aggregate IP; the monthly values for detailed production indexes are not shown until either the underlying data are available or the reporting window is closed. Over the past year, the data issued for only one or two of the published indexes would have been affected by this change.

The revision shows that the rates of capacity utilization for total industry in the fourth quarters of 2006 and 2007 were lower than previously estimated. The larger revision was for 2006, when utilization was 0.8 percentage point lower than reported earlier. The downward revision for the fourth quarter of 2007 was 0.5 percentage point; at 81.0 percent, overall utilization was the same as its 1972-2007 (long-run) average.

The revised capacity utilization rates incorporate the results from the Census Bureau�s 2006 Survey of Plant Capacity for the fourth quarter of that year. In addition, the revisions to the capacity indexes and capacity utilization rates incorporate the revised production indexes and newly available data on industrial capacity from the U.S. Geological Survey, the Energy Information Agency of the U.S. Department of Energy, and other organizations.

RESULTS OF THE REVISION

The tables show the summary statistics for the annual revision. Tables 1A and 1B show the monthly, quarterly, and annual average index levels for IP and for capacity and utilization for January 1978 through February 2008, along with percent changes in IP and capacity utilization rates. Tables 2 and 3 show the revised rates of change in IP from 2003 through 2007 for market groups, industry groups, special aggregates, and selected detail. Table 4 shows revised annual rates of change in IP during the 2003-07 period for selected detail, and table 5 shows the rates of change in capacity by industry groups for the same period. Tables 2 through 5 also show the difference between the revised and earlier rates of change. Table 6 shows the revised capacity utilization rates for the final quarters of recent years and the differences between the revised and previous rates. Tables 7A, 7B, 8A, 8B, 9A, and 9B report the revised production, capacity, and utilization series for manufacturing, total industry excluding selected high-technology industries, and manufacturing excluding selected high-technology industries. Table 10 reports the annual proportions in IP by market and industry groups for 2000 through 2007.

Industrial Production

The gains in total IP were revised down, on net, over the 2003-07 period (table 2), although the index continues to rise moderately each year. Compared with the previous estimates, the increases in output are now reported to have been a little faster in 2003 and 2007, little changed in 2004, and slower in 2005 and especially in 2006.[3]

Manufacturing production has expanded in each year since 2003, albeit at a somewhat slower rate, on balance, than initially reported.[4] Across all manufacturing industries, the largest downward revisions generally occurred for 2006, the year that marks the incorporation of the most recent ASM data. For durable goods industries as a whole, output has risen solidly in recent years, although these gains have been moderated by the recent revision. For 2003 and 2004, the revisions to output in most durable goods industries were relatively modest. Relative to previous reports, the current revision reports lower output indexes in 2005 and 2006 for nonmetallic mineral products; computer and electronic products; electrical equipment, appliances, and components; aerospace and miscellaneous transportation equipment; and miscellaneous manufacturing industries. The rates of change for the production indexes for most durable goods industries in 2007 are now higher than in earlier reports.

Production in nondurable manufacturing industries has advanced in every year since 2003; the largest increases occurred in 2004 and 2006. Within the nondurable goods sector, output in most recent years was little changed compared with previous estimates, except in 2006, when it rose about 1 percentage point less than reported earlier. The current revision reports noticeably lower rates of change in 2005 and 2006 in food, beverage, and tobacco products; textile and product mills; apparel and leather; printing and support; and plastics and rubber products. In contrast, the output of chemicals is now reported to have declined less in 2005, and to have risen more in 2006, than indicated earlier.

The rates of change for non-NAICS manufacturing (publishing and logging) from 2004 through 2007 are lower as a result of the revision. The revised output index for this group fell in 2005, 2006, and 2007, with the largest decrease in 2006. The indexes for mining and utilities are similar to the previously published estimates; the only noteworthy difference is a downward revision to the change in utilities in 2006.

The estimates for selected high-technology industries--computers and peripheral equipment, communications equipment, and semiconductors and related electronic components--incorporate sizable revisions over the 2003-07 period (table 3). On net, output in the high-tech sector is still reported to have posted robust gains in recent years. However, the output indexes are now shown to have registered lower gains in 2004, 2005, and 2006 and to have increased more rapidly in 2003 and 2007 than reported earlier. The index for computers and peripheral equipment has posted gains in each of the past few years; however, those gains are now estimated to have been lower, on balance, than shown earlier. The output of communications equipment is now reported to have expanded less rapidly in 2004 but more rapidly in other recent years. Production of semiconductors and related components has posted solid annual gains since 2003; however, the rate of increase in 2006 is now reported to have been markedly lower than estimated previously.

Production by Market Group

The production index for final products and nonindustrial supplies (table 2) has posted moderate gains in recent years. Compared with the previous estimates, the advance in the index is now reported to have been 1.5 percentage points lower for 2006; overall changes to the rates of increase in other years were smaller.

The rise in the output of consumer goods was revised down, on net, over the 2003-07 period. The output of durable consumer goods rose in 2003, 2005, and 2007 but declined in 2004 and 2006. Over most of this period, the rates of change are now reported to have been lower than earlier estimates suggested. Notably, production gains for home electronics from 2003 to 2007 were revised down appreciably.

The index for consumer nondurables shows moderate gains in output in each of the past several years. Among consumer nondurables, the indexes for foods and tobacco, clothing, and paper products were revised down for 2005 and 2006; however, the output of chemical products is now reported to have increased at a faster pace over the same time period. As revised, the index for consumer energy products posted a modest decline in 2006 rather than a small gain.

The production of business equipment has increased solidly since 2004; however, relative to previously published estimates, the revised index rose more slowly in 2005, 2006, and 2007. For transit equipment, the revision finds that output declined in 2003 and 2007 and that the gains in 2005 and 2006 were less sharp than reported earlier. The production index for information processing equipment is now shown to have risen more rapidly in 2003 and 2006 than in previous reports. In contrast to earlier estimates, the production of defense and space equipment is now estimated to have fallen in 2006 and to have risen in 2007.

The output of construction supplies posted solid gains in 2004 and 2005 but fell back in 2006 and 2007; relative to earlier estimates, the rates of change in recent years are generally lower. Although the production of business supplies edged down in 2006, it increased moderately in all other years since 2003; the rates of change for output in 2005 and 2006 are now reported to have been weaker than previously stated. The index for materials is now estimated to have expanded more rapidly in 2003, 2004, and 2007 and more slowly in 2005 and 2006. In particular, output gains for both durable and nondurable materials were markedly less in 2006 than stated earlier, although the rates of change for both categories are now reported to have been somewhat higher in 2007. The index for energy materials is now shown to have been slightly weaker, on net, from 2003 through 2007.

Capacity

Total industrial capacity is now estimated to have risen 1.1 percentage points more slowly in 2006 than previously stated (table 5). Relative to earlier estimates, changes in other years were more modest. Overall, capacity declined in 2003, edged up in 2004, and then posted moderate gains from 2005 through 2007. The contour of manufacturing capacity and the revisions to that contour are similar to those for total industry. The revision shows that, relative to previous reports, aggregate capacity for the selected high-technology industries rose less quickly in 2005 and 2006 but increased somewhat more rapidly in other recent years. Excluding high-technology industries, manufacturing capacity advanced less in 2006 and 2007 than previously reported; revisions to the changes for earlier years were minor.

Capacity at mines is still estimated to have contracted from 2003 to 2005 and to have expanded since then. The gains in 2006 and 2007 are now reported to have been stronger than previously published. Capacity at electric and gas utilities has risen each year since 2003. The current estimates show a noticeably slower gain in 2006 than was reported earlier; revisions to other recent years were smaller.

By stage of processing, capacity in the crude stage is now reported to have risen more in 2006 and 2007 than previously shown; on net, revisions to earlier years were small. Capacity at the primary and semifinished stages rose less in 2006 than stated earlier. Relative to previous estimates, increases to the index for finished goods processors were revised down, on net, over the 2003-07 period.

Capacity Utilization

For the past several years, the capacity utilization rate for total industry has remained near its long-run average of 81.0 percent (table 6). For the fourth quarter of 2007, total utilization stood at its long-run average and was 0.5 percentage point lower than reported earlier. The utilization rate for total industry was revised down about 3/4 percentage point for the fourth quarter of 2006, but revisions were smaller in other recent years.

Relative to earlier reports, the factory operating rate was little changed in 2004 and was revised down in 2005, 2006, and 2007. For almost all major categories of manufacturing industries over the 2005-07 period, utilization is now reported to have been lower than stated earlier, and downward revisions were particularly noticeable for 2006. Among durable goods industries, some of the largest downward revisions to utilization over the 2004-07 period were for primary metals; electrical equipment, appliances, and components; motor vehicles and parts; and aerospace and miscellaneous transportation equipment. The durable goods industries that reported the largest net upward revisions since 2004 were computer and electronic products, furniture and related products, and wood products. Among nondurable goods industries, only chemicals registered higher rates of utilization since 2004 than previously reported; for all other categories, operating rates are now reported to have been lower than stated earlier. Capacity utilization in the other (non-NAICS) manufacturing industries was revised sharply downward for 2006 and 2007; utilization in the fourth quarter of 2007 was 79.1 percent, 5.5 percentage points lower than its long-run average.

The operating rates for the selected high-technology industries rose steadily from 2004 through 2006 but fell back last year. Relative to earlier estimates, capacity utilization is now reported to be lower in 2004 and 2005, but higher in 2006 and 2007. In the fourth quarter of 2007, the utilization rate was about 10 percentage points higher than it was in the fourth quarter of 2004, but was only 1-1/2 percentage points above its long-run average. Among the selected high-technology industries for the 2004-07 period, the operating rates for computers and peripheral equipment and for communications equipment are now shown to be lower than reported earlier and utilization rates for semiconductors and related electronic components are now higher than previously estimated.

Capacity utilization in mining was revised up for 2004 and 2005 but was revised down slightly for 2006 and lowered more noticeably for 2007. Nevertheless, as of the fourth quarter of 2007, the utilization rate for mining stood at 90.2 percent, almost 3 percentage points higher than its long-run average. In electric and gas utilities, capacity utilization rates were revised down for 2005 through 2007.

TECHNICAL ASPECTS OF THE REVISION

The benchmark indexes for manufacturing--defined for each six-digit NAICS industry as nominal gross output divided by a price index--were updated to include new as well as revised information from the 2005 and 2006 Annual Surveys of Manufactures (ASM). This revision also incorporates the 2006 Survey of Plant Capacity, other annual industry reports, recent information on prices, and revised monthly source data on physical product and production-worker hours.

As mentioned earlier, the benchmark indexes for most industries incorporate updated price indexes from the industry output program of the Bureau of Economic Analysis. However, the price indexes for pharmaceuticals (NAICS 325412), for semiconductors (NAICS 334413), and for most components of communications equipment (NAICS 3342) are constructed by the Federal Reserve from alternative sources.[5]

As in recent years, the 2006 ASM did not provide data for all six-digit NAICS industries but combined some of them into higher-level industry aggregates. To maintain benchmark references that were consistent over time, the Federal Reserve used detailed information from the 2002 Census of Manufactures to impute estimates of gross output for those industries no longer reported separately.

Changes to Individual Production Series

With this revision, the monthly production indicators for some series have changed, and some new series have been created.

Vacuum Cleaners

The index for household vacuum cleaner manufacturing (NAICS 335212) is now based on monthly data on unit shipments from the Association of Home Appliance Manufacturers (AHAM), with a model-based inventory adjustment. Formerly, the index was based on quarterly data from the Vacuum Cleaner Manufacturers Association (VCMA). In 2003, AHAM assumed responsibility from VCMA for issuing the data. With this revision, the monthly time series was long enough to construct seasonal factors.

The estimates for the change in inventories follow the procedure introduced in the 2004 annual revision; the procedure is currently used for several other industries. In short, manufacturers are assumed to want to hold inventories in proportion to their expected shipments. The estimate of inventory change is computed as the sum of three components: a trend rate of stockbuilding, a portion of the adjustment to inventories that a manufacturer would need to make to reach a desired inventory level, and the effect on stocks of shipments deviating from expected shipments.

High-technology goods

Computers

The index for electronic computer manufacturing (NAICS 334111) was split into separate indexes for certain product classes, and these indexes are now based on new source data and methods. The new product-based indexes are for consumer desktop computers, consumer mobile computers, business desktop computers, business mobile computers, servers that use x86-based central processing units (CPUs), and servers that use CPUs other than those based on x86 architecture.[6] The coverage of the indexes for servers is consistent with classifications commonly used by industry analysts. Although the six product-level indexes are not published in the monthly statistical release, they are included in the broader IP aggregate for electronic computer manufacturing.

All of the product-based indexes for electronic computers are derived from quarterly data on domestic absorption from IDC, an industry research group. To construct the monthly indicator, the nominal absorption data are aggregated to the industry level and converted to industry shipments based on Census trade data (by adding exports and subtracting imports). The industry-level ratio of shipments to domestic absorption is applied to each of the six product-level absorption estimates to obtain product-level shipments. These shipments are then adjusted by model-based estimates of the change in product-level inventories (refer to the discussion under �Vacuum Cleaners�) and divided by the relevant producer price index issued by the Bureau of Labor Statistics (BLS) to compute a production index.

Semiconductors

More detail and new price data were added to the indexes for the MOS (metal-oxide semiconductor) memories portion of semiconductor and related device manufacturing (part of NAICS 334413). Previously, all subcomponents of MOS memories were included in one index. To better track differential movements in specific product categories, this revision split the MOS memory index into three subcomponents: an index for DRAM (dynamic random access memory), an index for flash memory, and an index for all other MOS memories. The underlying source data on nominal shipments for all components of memories continue to be from the Semiconductor Industry Association (SIA). The new indexes for MOS memories will not be published separately but will continue to be included in the larger index for semiconductor and related device manufacturing.

The current revision incorporates quarterly data on prices from iSuppli, an industry research group, for all three categories of MOS memories. Previously, the DRAM portion of the index relied on quarterly prices from Gartner, and the non-DRAM portion used product-level producer price indexes from the BLS that have been discontinued. Monthly interpolations of the quarterly iSuppli prices are based on average sales prices from iSuppli for the DRAM index and on average sales prices from SIA for the flash index and the other memories index.

Communications Equipment

This revision reorganized and introduced new source data and methods for the production indexes associated with communications equipment manufacturing (NAICS 3342). The industry is now represented by six indexes: data networking equipment; enterprise and home voice equipment; transmission, local loop, and legacy central office equipment; wireless system equipment; satellites and earth station equipment; and other communications equipment.

Two of the new components of communications equipment, the index for data networking equipment and the index for enterprise and home voice equipment, are now based on quarterly data on nominal domestic absorption from Synergy Research Group. Information on routers and ethernet switches is used for the data networking equipment index, and information on enterprise voice network equipment such as PBX (private branch exchange) systems is used for the enterprise and home voice equipment index. For both indexes, the quarterly price indicators are based on matched-model price indexes constructed from the detail in the Synergy data.

New quarterly source data on domestic absorption from the Dell�Oro group underlie two other new indexes for the communications equipment industry. The index for transmission, local loop, and legacy central office equipment is based on domestic absorption of optical transport equipment, including wavelength division multiplexers and switches. The index for wireless system equipment is based on domestic absorption of mobility infrastructure, including base transceiver stations, base station controllers, and mobile switching centers. For these two indexes, the quarterly price indicators are based on matched-model price indexes constructed from the detail in the Dell�Oro data. The indexes for satellites and earth station equipment and for other communications equipment are based on production-worker hours.

U.S. Networking Equipment, 1997 to 2006

	Production Index	Price Index	Value of Production (millions of dollars)
Annual Estimates (indexes are 2002=100)
1997	30.1	317.6	13,870.0
1998	50.6	234.4	17,220.1
1999	72.9	194.4	20,677.1
2000	101.1	174.1	25,691.3
2001	118.6	133.2	23,103.2
2002	100.0	100.0	14,602.6
2003	110.0	76.6	12,158.9
2004	129.3	59.9	11,322.5
2005	146.4	54.1	11,559.9
2006	243.9	51.3	18,137.0
Quarterly Estimates (indexes are 2002=100)
1997Q1	22.6	338.0	11,126.7
Q2	26.7	313.3	12,177.4
Q3	32.9	309.8	14,843.7
Q4	38.4	309.3	17,302.9
1998Q1	43.0	257.1	16,108.3
Q2	52.4	236.2	18,054.5
Q3	53.8	219.3	17,220.5
Q4	53.6	225.0	17,579.8
1999Q1	68.6	202.0	20,199.2
Q2	75.3	190.0	20,853.4
Q3	72.6	194.8	20,612.7
Q4	75.7	191.0	21,072.1
2000Q1	93.4	179.8	24,499.6
Q2	104.3	167.9	25,526.5
Q3	103.3	174.6	26,285.0
Q4	103.7	174.3	26,358.4
2001Q1	123.8	145.4	26,242.6
Q2	119.5	135.3	23,571.2
Q3	118.9	126.2	21,887.2
Q4	112.3	126.0	20,632.9
2002Q1	105.6	110.2	16,975.2
Q2	95.4	107.1	14,894.0
Q3	103.7	91.7	13,858.8
Q4	95.3	91.0	12,646.6
2003Q1	93.1	88.6	12,025.6
Q2	108.6	81.8	12,951.5
Q3	123.3	71.8	12,908.9
Q4	114.3	64.1	10,680.0
2004Q1	149.4	61.7	13,439.9
Q2	128.4	60.8	11,380.5
Q3	122.4	59.4	10,590.7
Q4	119.0	57.6	9,993.4
2005Q1	133.4	55.0	10,686.1
Q2	139.9	54.6	11,133.7
Q3	147.2	54.0	11,600.7
Q4	164.7	53.0	12,729.0
2006Q1	167.6	53.0	12,953.8
Q2	201.3	51.7	15,165.9
Q3	262.9	50.6	19,392.3
Q4	338.1	49.8	24,525.7

Reliability of Monthly Estimates

The extended six-month reporting window will allow additional source data to be incorporated into IP before an annual revision. The table below shows the availability of source data during 2007 with a four-month reporting window. The six-month window will permit almost all of the indexes estimated in the fourth month to be calculated from source data.

Availability of Monthly IP Data in Publication Window

(Percent of value added in 2007)

	Month of estimate
Type of Data	1st	2nd
			3rd	4th
Physical product	29	42	56	56
Production-worker hours	42	42	42	42
IP data received	70	84	98	98
IP data estimated	30	16	2	2

Weights for Aggregation

The IP index is a Fisher index. This revision uses information from the ASM to obtain updated estimates of the industry value-added weights used in the aggregation of IP indexes and capacity utilization rates. The Federal Reserve derives estimates of value added for the electric and gas utility industries from annual revenue and expense data issued by other organizations. The weights for aggregation, expressed as unit value added, were estimated with the latest data on producer prices for the period after 2006. Table 10 shows the annual value-added proportions in the IP index from 2000 through 2007.

Revised Monthly Data

This revision incorporates product data that became available or were revised after the regular four-month reporting window for monthly IP was closed. These data were released with too great a lag to be included with monthly IP estimates; however, the data were available for inclusion in the annual revision.

Revised Seasonal Factors

Seasonal factors for all series were reestimated using data that extend into 2007 or 2008. Factors for production-worker hours--which adjust for timing, holiday, and monthly seasonal patterns--were updated with data through January 2008 and were prorated to correspond with the seasonal factors for hours aggregated to the three-digit NAICS level. The updated factors for the physical product series, which include adjustments for holiday and workday patterns, used data through 2007. Seasonal factors for unit motor vehicle assemblies have been updated, and projections through June 2008 are on the Board�s website.

Data Availability and Publication Changes

Files containing the revised data and the text and tables from this release are available on the Board's website, at www.federalreserve.gov/releases/g17. Updated data for the annual revision and for all of the regularly issued series on industrial production, capacity, and capacity utilization are available on the website. The revised data will also be available through the STAT-USA website of the Department of Commerce (www.stat-usa.gov). Further information on these revisions is available from the Board's Industrial Output Section (telephone 202-452-3197).

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.

An expanded version of this release will be published in a forthcoming article in the Federal Reserve Bulletin.

Statistical releases