G.17 - Industrial Production and Capacity Utilization
Release Date: November 30, 1999

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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 1999, the revision places the production index at 137.5 percent of output in 1992, compared with 135.2 percent reported previously and the capacity index at 170.7 percent of output in 1992, compared with 167.9 percent reported previously. As a result, the rate of industrial capacity utilization--the ratio of production to capacity--was revised up 0.1 percentage point, to 80.6 percent for the third quarter of 1999 (chart 1 and table 1).

Total industrial output increased 4.5 percent per year, on average, over 1995-99. The output of computers, semiconductors and communications equipment accounted for more than half the growth. The rate of increase in the output and capacity of these industries is now estimated to have been more rapid than previously shown, especially in 1998 (table 4). The key factor in the upward revision of the production index for semiconductors was the incorporation of 1998 price data for memory chips and computational microprocessors, which indicated that the prices of these chips had declined faster than previously estimated. The production index for computers was revised up in 1998 and 1999 because of the incorporation of new source data. Outside of computers and semiconductors, revisions to the individual output indexes were largely offsetting from 1995 on. Excluding computers and semiconductors, industrial production increased about 2 percent annually over the period, with no change in 1998 and a gain of 0.9 percent in 1999 (table 3).

The updated measures reflect both the incorporation of newly available, more comprehensive source data typical of annual revisions and the introduction of improved methods for compiling a few series. The new source data are for recent years, primarily from 1997 on, and the modified methods affect data from 1992 onward. In addition, the supplementary series on the gross value of products leaving the industrial sector are now expressed in 1996 dollars; these series begin in 1977.

The updated IP measures include annual data from selected editions of the Bureau of the Census's 1998 Current Industrial Reports and available preliminary data for about 15 percent of manufacturing from the 1997 Census of Manufactures. Annual data from the U.S. Geological Survey on metallic and nonmetallic minerals (except fuels) for 1997 and 1998 have also been introduced. The updating includes revisions to the monthly indicator for each industry (either physical product data, production worker hours, or electric power usage) and revised seasonal factors.

The revision introduces improved methods for measuring the production of computer and office equipment and of motor vehicles. The new monthly production measure for computers is derived from detailed information on the major products produced by the industry. The new measures of motor vehicle production incorporate price weights for the different models of light vehicles; previously, all models of autos and light trucks were weighted equally in compiling an aggregate figure that was eventually benchmarked to comprehensive Census data.

Capacity indexes and capacity utilization rates now incorporate preliminary data from the 1998 Survey of Plant Capacity of the Bureau of the Census, which covers manufacturing, along with other new data on capacity, expressed in physical units, from the U.S. Geological Survey, the Department of Energy, and other organizations.

The Census Bureau's survey is the source of utilization rates for most manufacturing industries. The preliminary results of the 1998 Survey of Plant Capacity, which provided industry utilization rates for the fourth quarter of the year, suggested that trends in manufacturing utilization rates were generally in line with those previously estimated by the Federal Reserve. However, dividing the upwardly-revised industrial production indexes for the computer, semiconductor, and communications equipment industries by the Census utilization rates yielded a noticeable upward revision of capacity in those industries.

The capacity utilization rate for mining was revised very little; the rate of utilization in electric utilities was revised down.

Production by Market Groups

As previously shown, the rate of increase of industrial production accelerated in 1996 and 1997 and then slowed between 1998:Q1 and 1999:Q1 (table 1). The slowing reflects the effects of the economic turmoil in Asia on a number of industries. As Asian economies began to recover in 1999, the economic outlook for some of the weakened U.S. industries brightened as well.

Among major market groups, the revised production index for consumer durable goods has advanced strongly in recent years as the low rate of unemployment and rising income have bolstered the demand for consumer goods. The index, which had risen at an annual rate of 5 percent or more during 1997 and 1998, rose at an annual rate of 7.5 percent over the first three quarters of 1999. During 1999, the output of automotive products, especially light trucks, has continued upward from a high level, with a temporary interruption in September caused by Hurricane Floyd, while the volatile series for household appliances has fluctuated at a high level and the series for carpeting and furniture has, on balance, moved upward. After a pause in mid-1997, the production of home electronics, including computers, surged upward at an annual rate of about 45 percent. The nondurable consumer goods group, which endured a broadly based decline in the second half of 1998, has shown signs of stabilizing in 1999 as an increase in the output of consumer energy products has offset ongoing weakness elsewhere. Producers of cigarettes, clothing, and paper products have suffered setbacks in the past two years.

Although boosted by gains in the output of business computers and office equipment that averaged more than 50 percent per year from 1996 on, the rise in the production of business equipment slowed in 1999 because of declines in the output of industrial equipment, farm equipment, and transit equipment, particularly railroad equipment and commercial aircraft and ships. The production of defense and space equipment resumed its decline in 1999 after an uptick in 1998.

After having risen more slowly in 1997, the output of construction supplies accelerated in 1998 and early 1999, when it was lifted to an elevated level by strong demand for housing and by unusually mild weather, and then flattened in mid-1999. Before recovering in 1999, the output of industrial materials slowed in 1998 reflecting increased import competition and decreased foreign demand as a result of the Asian economic crisis. As a result, the output of several internationally traded commodities, such as steel, paper, and chemicals, was reduced in 1998. Nevertheless, the output of durable materials, which includes the fast-growing series for computer parts and semiconductors, recorded an advance of 7.3 percent in 1998 and 9.4 percent in 1999. With a solid rebound in the production of chemical materials, the output of nondurable goods materials, after declining in 1998, increased 3.4 percent in 1999. The output of energy materials fell about a percent in 1998 and has been about flat so far this year.

Capacity and Capacity Utilization

The annual rate of capacity growth in manufacturing, which averaged 6.1 percent per year in 1996 and 1997, accelerated to 7.0 percent in 1998 and then eased to 4.7 percent in 1999 (table 5). The most rapid expansion of capacity and the upward revisions were again concentrated in durable manufacturing, especially in the computer, communications equipment, and semiconductor industries. The capacity increase in these industries averaged more than 40 percent per year over the 1995-99 period. The rest of manufacturing increased capacity approximately 2-2/3 percent in 1995 and 1996, 3 percent in 1997 and 1998, and 1-1/3 percent in 1999. The capacity expansion in mining and utilities was slower. In particular, the capacity in oil and gas extraction and metal mining declined in 1999, while that for utilities increased 1.4 percent. The North American Electric Reliability Council continues to project increases in capacity that fall short of probable increases in demand.

The rate of manufacturing capacity utilization--the ratio of output to capacity--was revised up 0.1 percentage point in the fourth quarter of 1998 and 0.2 percentage point in the third quarter of 1999 (table 6). Utilization in manufacturing in the third quarter of this year was 79.6 percent, a level 1.5 percentage points less than the 1967-98 average. The rates in both primary- and advanced-processing industries fell a few percentage points from the fourth quarter of 1997 to the third quarter of 1999.

Utilization in mining fell substantially in 1998 and 1999 because of declines in oil and gas well drilling and in metal mining. In the third quarter, utilization rates in mining and gas utilities were at below-average levels; in contrast, the rate of utilization in electric utilities was 95.8 percent, still a high level.

Aspects of the Annual 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 1997 Census of Manufactures, the 1998 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.\1 Along with 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

This revision includes a new method for estimating computer production. The index of the computer and office equipment industry (SIC 357) continues to be based on the aggregate of three individual components: office and computing equipment, business (part of the market group for business equipment); office and computing equipment, home (part of consumer durables), and computer parts (part of equipment parts within durable goods materials. But, whereas monthly input measures were previously used, now quarterly data from Dataquest covering unit sales and unit values for about 1,100 distinct computer models are used to estimate the real output of the computer industry. These new data show a faster rise in output in recent years and indicate that a larger share of output has been sold for home use than did the indexes previously published.

The method for deriving the output of autos and light trucks (SIC 3711pt, 3pt)was improved in order to capture shifts in the product mix and relative values on a more timely basis. Before this revision, the production indexes for autos and for light trucks were calculated from simple counts of units assembled, benchmarked to comprehensive output measures derived from data contained in the Census of Manufactures and the Annual Survey of Manufactures. In this procedure, variations in relative values, resulting at least in part from shifts in the product mix, were often captured only during the annual revision process.

For this revision, the IP indexes for autos and light trucks starting in 1992 are chained Fisher quantity indexes that are calculated using data for each vehicle model that include the number of units assembled monthly and the list price at the beginning of the new model year. Compared with the previous index, the output index for autos is now shown to have increased more slowly, and the production of light trucks, to have risen more rapidly over the entire 1992-99 period. These revisions reflect the changes in the product mix that have occurred in the 1990s. For example, during this time, the production and demand for light trucks, particularly expensive sport utility vehicles, have skyrocketed and have resulted in a pronounced shift in the product mix and in the relative prices of light vehicles. These revisions to the indexes for autos and light trucks were largely offsetting.

The monthly indicators for three other series have changed in this revision. The series on bolts and fasteners (SIC 345) and metalworking machinery (SIC 354) now use production-worker hours in the respective industry as a monthly indicator; previously the series had been based on electric power consumption. The monthly indicator for railroad equipment (SIC 374) now is also production-worker hours; previously, it had been based on quarterly physical product data that are no longer collected.


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. Some available reports from the 1997 Census 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 selected manufacturing industries and utilities through 1997. The latest value-added data for mining comes from selected reports from the Census of Mineral Industries for 1997; otherwise, the 1992 Census was the source. 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 1998 was incorporated in this revision. Revised data on the sales of electricity to industries since 1992 were incorporated as well. Because of offsetting revisions among the components series, the annual revisions of the growth of total electric power use were generally small, except for 1998 (table 8). Seasonal factors for the electric power series have been reestimated using data through April 1999.\3

Measurement of Capacity

The revisions to capacity and utilization incorporated the revised production indexes, the preliminary results of the 1998 Survey of Plant Capacity conducted by the Bureau of the Census, updated measures of capacity in physical units for selected industries, and revised estimates of industry capital input. Improvements in the capital input measures and in the models used to estimate manufacturing capacity were introduced. The new 1992 benchmark capital flows table from the Bureau of Economic Analysis, which is an important determinant of the estimates of the asset composition of each industry's capital stock, was used to refine the estimates of capital input. The improved specification of the models better captures advances in technology that are "embodied" in capital goods. These refinements in the Federal Reserve's method of calculating capacity and capacity utilization will be described in more detail in a forthcoming article in the Federal Reserve Bulletin. 1. Information about the sources of monthly data used to calculate the indexes can be found in

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Last update: November 30, 1999, 10:30 AM