Industrial Production and Capacity Utilization - G.17

Industrial Production and Capacity Utilization: The 2018 Annual Revision PDF  ASCII RSS DDP

Release Date: March 23, 2018

The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, the revisions to total IP for recent years were negative: For the 2015–17 period, the current estimates show rates of change that are 0.4 to 0.7 percentage point lower in each year.[2] Total IP is still reported to have moved up about 22 1/2 percent from the end of the recession in mid-2009 through late 2014. Subsequently, the index declined in 2015, edged down in 2016, and increased in 2017. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2016 Annual Survey of Manufactures (ASM) accounts for the majority of the differences between the current and the previously published estimates.

Revisions to capacity for total industry were mixed. Capacity growth was revised up about 1/2 percentage point for 2016, but revisions to other recent years were negative. Capacity for total industry is estimated to have expanded less than 1 percent in 2015, 2016, and 2017, but it is expected to increase about 2 percent in 2018.

In the fourth quarter of 2017, capacity utilization for total industry stood at 77.0 percent, about 1/2 percentage point below its previous estimate and about 3 percentage points below its long-run (1972–2017) average. The utilization rate for 2016 is also lower than the previous estimate.

This revision incorporated newly available annual data on output and prices. The IP indexes for manufacturing were updated with data from the 2016 ASM (which also includes revised data for 2015), while the IP indexes for publishing reflect new data for 2016 and revised data for 2015 from the Census Bureau's Service Annual Survey. For logging, the IP indexes were updated with 2016 data from the U.S. Forest Service. In addition, the indexes for metallic and nonmetallic minerals were updated with revised annual data for 2016 from the U.S. Geological Survey (USGS). Data on prices from the Bureau of Labor Statistics (BLS) were also incorporated into most of the manufacturing indexes.

The monthly estimates of production have been updated to include late-arriving or revised quarterly or monthly indicator data, including information from the BLS's benchmark revisions to the Current Employment Statistics. The monthly IP estimates also now reflect recalculations of seasonal factors.

The revised estimates of capacity and capacity utilization incorporated data from the Census Bureau's Quarterly Survey of Plant Capacity Utilization (QSPC) for the fourth quarter of 2017, along with new data on capacity from the USGS, the Energy Information Administration (EIA), and other organizations. The revised estimates also include new data on capital spending from the ASM for 2016 and revised data for 2015.

RESULTS OF THE REVISION

Industrial Production

Manufacturing output is now estimated to have declined about 1 1/2 percent in 2015, to have been little changed in 2016, and then to have advanced about 2 percent in 2017. These rates of change are lower than their previously reported values, especially for 2015, which was revised down 1.0 percentage point. The cumulative effect of these revisions leaves manufacturing IP in February 2018 about 5 1/2 percent below its pre-recession peak.

The rates of change for mining have been revised up for 2014 and 2015 and revised down for 2016 and 2017. The contour for mining output shows an especially large gain in 2014 followed by sizable drops in 2015 and 2016; output increased strongly in 2017. The rates of change for utilities output are revised down only slightly for each year from 2013 to 2016, while the gain in the index for 2017 is now reported to be 0.8 percentage point lower than previously published.

Production by Industry Group

The output of durable goods manufacturers is now reported to have fallen in 2015, moved a little lower in 2016, and advanced in 2017; output was previously reported to have risen in 2016, and the rates of change for 2015 and 2017 were also revised down. Within durables, the revisions for the 2015–17 period were widespread across industries. Revisions to the rates of change for nondurables were smaller and more mixed. The revised estimates show the output of nondurables increasing about 1/2 percent in both 2015 and 2016 and rising 2.2 percent in 2017.

The output index for industries in scope for manufacturing IP that are not part of manufacturing under the North American Industry Classification System (NAICS)—that is, logging and publishing—fell sharply in 2014, 2016, and 2017, and was relatively little changed in other recent years. The revisions to this index were mixed, moving the rate of change higher in 2013, 2015, and 2016 and lower in 2014 and 2017.

Production by Market Group

The index for consumer goods has increased in each of the past few years, though the gains in 2014, 2015, and 2017 are now smaller than reported earlier. The rates of change for business equipment were revised down significantly for 2015 and 2016, but the gains were revised up for 2017. The revisions for construction supplies and business supplies were smaller. In addition, the index for materials is now estimated to have fallen more rapidly in 2015 and 2016 and risen more slowly in 2017, with downward revisions for both the energy and non-energy components.

Capacity

Total industrial capacity expanded modestly in each year from 2015 to 2017, and it is expected to increase about 2 percent in 2018. The growth rate for 2016 is now noticeably higher than the value reported earlier, but the gains in other years are now reported to have been smaller. Manufacturing capacity contracted slightly in 2014 and 2015, but it increased between 1/2 and 1 1/2 percent each year thereafter. For 2016 in particular, the gain in manufacturing capacity is larger than stated previously, reflecting a more-rapid increase in capacity for nondurables industries as well as a less-steep decline in capacity for logging and publishing (''other manufacturing'' industries). Capacity at mines declined in 2016 and 2017, but it is expected to jump about 5 percent in 2018. As compared with previous reports, the growth of capacity at mines was significantly higher in 2016 and significantly lower in 2017. Capacity at utilities has grown in recent years; the gain for 2017 was revised up more than 1 percent, but revisions to other years were negative.

Capacity Utilization

Capacity utilization for total industry declined in 2015 and 2016 but rose in 2017.[3] The decrease in 2015 resulted from a large drop in the rate for mining and from smaller reductions in the rates for both manufacturing and utilities. Compared with earlier estimates, capacity utilization for total industry is now reported to have been somewhat higher for 2014, little changed in 2015, and lower for 2016 and 2017.

Utilization at manufacturers fell in 2016 and rose in 2017; the current readings for these years are each between about 1/2 and 1 percentage point lower than previously reported, as capacity revised down by less than output. For the fourth quarter of 2017, the utilization rate at manufacturers is estimated to have been more than 3 percentage points below its long-run average. Within manufacturing, there were sizable downward revisions to the utilization rates for both durables and nondurables for 2016 and 2017.

The utilization rate for durable manufacturing was above its long-run average in 2014, but it fell back in 2015. By the fourth quarter of 2017, the utilization rate for durables was more than 2 percentage points below its long-run average. Of the 11 major categories of durables, about half recorded operating rates below their long-run averages.

The utilization rate for nondurable manufacturing has been below its long-run average for several years. As of the fourth quarter of 2017, the operating rates for all nondurable manufacturing industry groups were around or below their industry-specific long-run averages.

Capacity utilization rates for mining declined sharply in 2015 and fell further in 2016, before rising sharply in 2017. The declines in 2015 and 2016 were largely due to decreased output in the oil and gas drilling and servicing sector. Relative to its previously published rates, utilization at mines for 2017 is about 2 percentage points higher; revisions to other recent years were smaller. In 2017, the utilization rate for mining was 1/2 percentage point above its long run average of 87.0 percent; it had last been above this average in 2014. The operating rates for utilities have been well below their long-run average for the past several years; the revisions to this index were positive except for 2017.

TECHNICAL ASPECTS OF THE REVISION

The IP indexes represent the level of real output relative to a base year. At the monthly frequency, movements of the indexes are based on indicators that are derived using industry-specific data from a variety of government and private sources. The monthly production indexes, however, are anchored to annual benchmarks that are less timely but typically based on more comprehensive data. In most cases, the annual benchmark is nominal gross output reported by the Census Bureau deflated by a suitable price index.

Annual revisions to the IP and capacity measures involve (1) incorporating new annual benchmark data on output, prices, and value-added proportions; (2) incorporating new monthly or quarterly data that were revised or that arrived too late to be included in the regular six-month reporting window for monthly IP; (3) updating seasonal adjustment factors; and (4) updating the methods used to construct the indexes. The current revision also introduces a new structure for the published indexes for electricity generation.

Annual Benchmark Data on Output, Prices, and Value-Added Proportions

Output

The annual benchmark output indexes for IP are measures of real gross output at the six-digit NAICS level. The Census Bureau provides annual figures for value added and the cost of materials for manufacturing industries, which can be summed to obtain nominal gross output. The benchmark indexes for this revision incorporated revised information for 2015 and new information for 2016 from the ASM.

New annual data were also incorporated into several other indexes. The benchmark indexes for metallic and nonmetallic mineral mining were updated with revised 2016 data from the USGS, and the benchmark indexes for logging and publishing were advanced through 2016 based on data from the U.S. Forest Service and the U.S. Census Bureau.

Prices

To obtain individual benchmarks of real gross output, the measures of nominal gross output are deflated by annual price deflators. In general, the benchmark industry price deflators consist of price indexes from the Bureau of Economic Analysis (BEA) through 2011 that are extended through 2016 with the related producer prices indexes (PPIs) from the BLS.[4] However, for a few selected industries, the annual price deflators are constructed by the Federal Reserve.[5]

Value-Added Proportions (Weights for Aggregation)

The IP system is organized as a hierarchical structure where the individual production indexes are combined using a version of the Fisher-ideal index formula to construct broader measures of production. The weights that are used to combine individual IP measures into more aggregate measures are based on the value added from the industry, calculated as gross output less cost of materials. For IP indexes that are defined at the six-digit (or more aggregate) NAICS level, the value-added weights are derived from either the Economic Census or the ASM. For IP indexes that cover only part of a six-digit NAICS industry, the aggregation weights were constructed by allocating value added (as defined by the Census Bureau) for a six-digit industry across the various components of IP that compose that industry. Data from the Economic Census and the ASM on shipments of different types of products within a six-digit NAICS industry were used to determine the share of an industry's value added that was assigned to each component IP index.

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. For electric utilities, the measures of value added incorporate data from the Energy Information Administration of the U.S. Department of Energy and from the Edison Electric Institute. For gas utilities, the value-added estimates incorporate data from the American Gas Association. The weights for aggregation for mining industries are derived from value-added data from the Economic Census. Figures for value added for mining industries in the years between the quinquennial Economic Censuses are estimated based on both output and price changes for the industry.

The weights for aggregation expressed as value added per unit were estimated with data on producer prices for the period after 2016.

Revised Quarterly and Monthly Data

This revision incorporated source data on production, shipments, and inventories that became available or were revised after the regular six-month reporting window for monthly IP was closed. These data were released with too great of a lag to be included with monthly IP estimates but were available for inclusion in the annual revision. The revised IP indexes include information from the QSPC for 2017 and from other industry reports.

Revised Seasonal Factors

Seasonal factors for production-worker hours—which adjust for timing, holiday, and monthly seasonal patterns—were updated with data through January 2018. The updated factors for the physical product series, which include adjustments for holiday and workday patterns, used data through December 2017 where available.

Seasonal factors for unit motor vehicle assemblies have been updated, and projections through June 2019 are available on the Board's website at www.federalreserve.gov/releases/g17/mvsf.htm. These factors are based on production data through January 2018 and were revised back to January 2006. The seasonal factors explicitly incorporate the holiday schedule for the vehicle assembly lines specified in the latest collective bargaining agreements with domestic manufacturers.

Methodological Changes to Individual Production and Capacity Indexes

New Structure for Electricity Generation

This revision introduces more detail to the published indexes for electricity generation, Previously, separate indexes were issued for hydroelectric power (NAICS 221111), for nuclear power (NAICS 221113), and for generation both from fossil fuels and from any other technology (NAICS 221112, 221114, 221115, 221116, 221117, and 221118). With this revision, the last index is broken into separate indexes to be published for fossil fuels and for the other technologies, which are primarily based on renewable energy sources. In addition, a new aggregate that combines hydroelectric power with the index for renewables and other technologies will be published.

New Benchmark Index for Drilling Oil and Gas Wells (NAICS 213111)

With this revision, data from the American Petroleum Institute (API) on footage drilled form the basis of a new annual benchmark for the index for drilling oil and gas wells (NAICS 213111) from 1991 forward; this new benchmark also relies on data from Baker Hughes on the number of onshore and offshore drilling rigs in operation. Previously, the index for this industry did not have an annual benchmark—the only source data for the IP index were the weighted onshore and offshore rig counts from Baker Hughes.

The monthly IP index continues to depend solely on the Baker Hughes weighted rig counts, as the final quarterly measures of footage drilled from the API are available too late for inclusion in IP. The IP indexes will incorporate the footage drilled data as part of the annual revision process.

The new annual benchmark for drilling oil and gas wells is constructed as the weighted sum of footage drilled by offshore and by onshore drilling rigs, where the weight for each type of rig reflects its relative value. Historically, offshore rigs have been substantially more valuable than onshore rigs (by a factor of four in the standard calculations for IP). The innovation in this revision is to update the weights to additionally reflect each type of rig's value in terms of footage per rig; the new formula weights footage drilled by offshore rigs slightly more than five times more heavily than footage drilled by onshore rigs.

The construction of the new annual benchmark for drilling oil and gas wells uses detailed information on overall footage drilled and on footage by offshore and by onshore rigs. The API publishes the reported offshore and onshore footage from survey respondents; however, for recent quarters these subtotals are incomplete as some drilling companies may not immediately report values to the API. The API makes adjustments for non-response and does publish quarterly estimates for overall (offshore plus onshore) footage drilled. As the API issues subsequent quarterly reports, it also issues revisions to earlier reports.

The first step in the construction of the new benchmark is to compute annual estimates for the total offshore and total onshore footage drilled. To do so, the raw quarterly subtotals based on survey reports are converted to an annual frequency. Then, a linear regression is run that uses the API's most recent estimate of overall footage drilled as the dependent variable and uses recent vintages of the separate offshore and onshore subtotals as independent variables. Estimates of total offshore and total onshore footage drilled are computed by applying the relevant regression coefficients to the underlying data; each of these estimates is extended back to 1972 by applying the appropriate historical rates of change in the Baker Hughes count for offshore and onshore rigs.

The estimated totals for offshore and onshore footage are divided by the number of rigs of each type to obtain the average footage per rig; this average is calculated for the 2000–09 period. Next, the weight for each type of rig (four for offshore, one for onshore) is divided by the relevant average footage value, and terms are simplified algebraically to obtain the adjusted weights. As noted above, the adjustments result in footage drilled by offshore rigs being weighted slightly more than five times more heavily than footage drilled by onshore rigs.

Incorporation of Quarterly Survey of Plant Capacity into Monthly Estimates for IP Indexes Based on Production Worker Hours

For the IP indexes based on production worker hours, this revision incorporates information from the QSPC into the adjustment factor that aligns the monthly data with the annual benchmark indicator. The standard adjustment factor is calculated in two steps—first, by creating a historical ratio of the annual benchmark indicator to the annual average of the monthly (or quarterly) raw data, and second, by projecting this ratio ahead for years when benchmark data are not yet available. The annual adjustment factor is converted to a monthly frequency for use in the monthly IP indexes. For the IP indexes based on production worker hours, the adjustment factors are effectively measures of productivity. This revision adapts the standard adjustment factor formula for indexes based on production worker hours by including data from the QSPC in the calculation.

For an IP index based on production worker hours, the new annual adjustment factor is constructed as the ratio of the benchmark indicator to the annual average of the production worker hours index, as was done in the past. Likewise, the annual adjustment factor is forecast past the end of the benchmark data as in previous annual revisions, based on a time series model and the QSPC utilization rates when available. Previously, however, the annual adjustment factor was interpolated to a monthly frequency using a procedure that attempted to make the resulting monthly series as smooth as possible. With this revision, the resulting monthly adjustment factors will take on some of the contour of the utilization rates from the QSPC if the annual averages of the QSPC rates are helpful in forecasting the annual adjustment factors.[6]

At this time, QSPC rates are only available through the fourth quarter of 2017. The annual adjustment factors are projected after that period using time-series models, and estimates are made of the QSPC rates implied by those projections. As the actual QSPC rates become available for 2018, the monthly adjustment factors will be modified to reflect the new information.

NAICS Conversion of Capacity Estimation

With this annual revision, industry-level data for capital expenditures, capital stocks, and capital input used in the estimation of industial capacity have been converted to a 2012 NAICS basis. Estimates of industrial capacity are based on regression models that relate end-of-year capacity indexes to economic determinants of annual capacity growth. One determinant of capacity growth used in these regression models is capital input—defined as the flow of capital services from the capital stock—which is constructed using industry- and asset-level capital expenditures information. Previously, these variables had been constructed on the basis of earlier NAICS systems.

Introduction of Additional Detail for Communications Equipment Prices

In the future, the Federal Reserve will publish new detail for communications equipment prices. Previously, the Federal Reserve released quarterly and annual price indexes for four product classes that composed a subset of the primary products of the communications equipment industry (NAICS 3342). The forthcoming release will include 25 annual price indexes that cover the full range of output in the communications equipment industry: indexes for 19 primary products plus indexes for secondary products and for miscellaneous receipts for each of the three component 6-digit industries. The annual price indexes are constructed from Federal Reserve research using private data, published price indexes from government organizations, and independent research by outside economists. The forthcoming release will also include annual price indexes for each of the three 6-digit industries (NAICS 334210, NAICS 334220, and NAICS 334290) within communications equipment.

In addition, the forthcoming release will include annual estimates of nominal production corresponding to the 25 newly published price indexes. The nominal production estimates are derived from Census Bureau data combined with private information on product market size, as discussed in Byrne and Corrado (2015).[7] The nominal estimates are used to weight the individual product price indexes to the six-digit industry level. The Federal Reserve uses these six-digit industry price indexes to deflate nominal output in the construction of the benchmark indicators of real output. A more detailed explanation of the communications equipment prices will be available on the Board's website at www.federalreserve.gov/releases/g17/g17_technical_qa.htm.

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, as are updated data for the annual revision and for all of the regularly issued series on IP, capacity, and capacity utilization. Other changes are listed on the Board's website at www.federalreserve.gov/releases/g17/g17_revision_series.htm.

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.

[1] The revision affected rates of change for IP from 1972 forward. When necessary to maintain consistency with any revisions to the data for 1972 and subsequent years, the levels of the production for the years before 1972 were multiplied by a constant. However, the rates of change in IP for the years before 1972 were not revised. Utilization rates and capacity growth rates were revised minimally between 1968 and 1971, but unchanged before then.
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[2] Rates of change are calculated as the percent change in the seasonally adjusted index from the fourth quarter of the previous year to the fourth quarter of the year specified.
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[3] Unless otherwise noted, rates of capacity utilization are reported for the fourth quarter of the reference year.
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[4] Overall, at the industry level, the BEA and PPI measures are quite similar, as the BEA used weighted product-level PPIs to derive its industry-level shipments deflator.
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[5] For selected industries, the Federal Reserve constructs price indexes from alternative sources. These industries include communications equipment (NAICS 3342), computer storage devices (NAICS 334112), semiconductors (NAICS 334413), and pharmaceuticals (NAICS 325412). Updated price indexes for data storage devices and for selected components of communications equipment will be available on the Board's website at www.federalreserve.gov/releases/g17.
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[6] A regression model of the log of the annual adjustment factor is estimated using the log of the ratio of the QSPC rates over production worker hours as an independent variable. The coefficient for the QSPC variable is constrained to be between 0.0 and 0.5 so that the production worker hours are always at least as important as the QSPC in estimating the IP index.
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[7] David M. Byrne and Carol A. Corrado (2015), ``Prices for Communications Equipment: Rewriting the Record,'' Finance and Economics Discussion Series 2015–069 (Washington: Board of Governors of the Federal Reserve System, February), https://www.federalreserve.gov/econresdata/feds/2015/files/2015069pap.pdf.
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Last Update: March 23, 2018