When economists refer to industrial production they are referring to the output of industrial establishments, which covers sectors like mining, manufacturing, electricity, gas, and air-conditioning. The industrial production index (IPI) shows us the change in volume of production output from these sectors.
The IPI is published in the middle of the month by the Federal Reserve Board. It measures levels of production and the capacity of the manufacturing sector relative to a base year, which is currently 2012. IPI does not express absolute production volumes, rather the percentage change in production relative to the base year. Revisions are then made to previous estimates based on the data expressed within the index and released at the end of the month.
The IPI is an important economic indicator for economists and investors, especially those investing within specific lines of business. Fluctuations at the industrial level trickle down to other sectors and account for most of the variation in overall economic growth. The monthly index helps alert investors to any shifts in output.
Annual changes in industrial production help us see and better understand the state of our economy and where we are within an economic cycle because the production of consumer durables and capital goods tends to decrease during economic downturns. Even though the industrial sector only accounts for a portion of our economy’s total output (less than 20% of GDP) it is still a leading indicator of economic performance due to its direct link to consumer demand and interest rates.
