Industrial Production and Capacity Utilization (IPCU) is a measure of economic activity, released on a monthly basis by the United States Federal Reserve. The IPCU report for each month contains data for previous months (for example, June’s report releases information on May) about the total amount of US industrial production for that month, expressed as a percentage of the gross production for a previous baseline year. The report also gives information about percentage changes from month to month and year to year, as well as a detailed breakdown of production by industry grouping, most broadly for manufacturing, mining and utilities. The data in the report is based on employment records that detail the total hours worked by industrial-sector employees.
The report also includes a measure of capacity utilization, meaning the percentage ratio of actual production to potential production. The report presents data about average capacity over a number of years, a record of percentage change in capacity from month to month, and a breakdown of capacity measures by industry and by stage of completeness (from crude to finished materials.)
Traders consider the IPCU report important as a gauge for the future performance of assets in the marketplace. Because of this, the report can also function as a “trigger” to increase buying or selling pressure in certain industries. A capacity utilization percentage of 85% or more can also be considered a signal for imminent inflation, but the inherent difficulty of measuring industrial capacity implies that this measure shouldn’t be exclusively relied on to predict market behavior.
Definition: An index designed to measure changes in the level of output in the industrial sector of the economy. The index is grouped by both products (consumer goods, business equipment, intermediate goods, and materials) and industry (manufacturing, mining, and utilities).
Source: Board of Governors of the Federal Reserve System
Availability: Preliminary estimate released around the middle of the month for the immediately preceding month.
Reason: While the industrial sector of the economy represents only about 20 percent of GDP, because changes in GDP are heavily concentrated in the industrial sector changes in this index provide useful information on the current growth of GDP. The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy which may in turn provide information on the likely future course of inflation.
The index of Industrial Production is a fixed-weight measure of the physical output of the nation’s factories, mines, and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather. Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.
In addition to production, this monthly report also provides a measure of capacity utilization. Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure. Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth. The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously. It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.