G.17 - Industrial Production and Capacity Utilization
Release Date: December 5, 2000

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The Federal Reserve has revised the index of industrial production (IP) and the related measures of capacity and utilization for the period 1992 to October 2000. In the third quarter of 2000 (2000:Q3), the revision places the production index at 148.4 percent of output in 1992, compared with 145.8 percent reported previously; it places the 2000:Q3 capacity index at 180.1 percent of output in 1992, compared with 177.1 percent reported previously. Because IP was revised up slightly more than capacity over this period, the rate of industrial capacity utilization--the ratio of production to capacity--was revised up 0.1 percentage point, to 82.4 percent for 2000:Q3 (chart 1 and table 1).

The updated measures of industrial production reflect the incorporation of newly available, more comprehensive source data, the introduction of new series, and changes in methods. For this revision, two new years of comprehensive data on manufacturing became available; otherwise, the statistical updating was typical of annual revisions.

The statistical revisions to the IP index are principally derived from the inclusion of information contained in annual reports issued by the Bureau of the Census: the 1997 Census of Manufactures, the 1998 Annual Survey of Manufactures, and selected 1999 Current Industrial Reports. Revised annual data from the U.S. Geological Survey on minerals (except fuels) for 1998 and new data for 1999 have also been introduced.

The capacity indexes and capacity utilization rates now incorporate the preliminary results from the 1999 Survey of Plant Capacity, issued by the Bureau of the Census; the survey covers manufacturing and provides data for the fourth quarter of the year. The revised measures also include newly available 1999 data on industrial capacity, expressed in physical units, from the U.S. Geological Survey, the Department of Energy, and other organizations.

New production measures were introduced for individual series in four industries: communications equipment, computer and office equipment, drugs and medicines, and bearings. The new series measure production using detailed information on the major products of the industries. The revision also incorporates improved source data for three existing production series: electricity generation, electrical housewares, and truck trailers.

With this revision, the weights used to calculate the production and capacity aggregates change every month, rather than once a year. The refined aggregation method begins with data for 1992 and has a small effect on the intra year changes in monthly IP. Finally, the definitions of advanced- and primary-processing industries were modified; the change alters the utilization rates for these groups in the recent period.

Results of the Revision

Total industrial output increased 5.4 percent per year, on average, over the 1996-2000:Q3 period. The rates of increase in output and capacity are now estimated to have been more rapid than previously shown. For most manufacturing industries, the annual reports issued by the Bureau of the Census implied stronger output growth in 1997 and 1998 than had been previously reported. Textiles and industrial machinery and equipment, which includes computers, are the only two-digit industry groups whose production in 2000:Q3 is now lower than shown previously. Within industrial machinery and equipment, the output of the computer industry was lowered noticeably in 1998 because of the inclusion of the new Census data.

The Survey of Plant Capacity indicated that the factory operating rate was higher in the fourth quarter of 1999 than previously estimated. The revised utilization rate for manufacturing was 81.6 percent in 2000:Q3, a level 0.5 percentage point more than the 1967-99 average. After having incorporated the revised production indexes and new information on manufacturing capital spending, manufacturing capacity is now estimated to have increased 5.1 percent in 1999 and to be increasing 5 percent in 2000 (here and in subsequent references, growth rates for 2000 are measured from the fourth quarter of 1999 to the third quarter of 2000 and annualized). The previous estimates reported that manufacturing capacity was growing 1/2 percentage point more slowly in 2000 than in 1999.

The capacity utilization rate for mining was revised up, on balance, while the rate for utilities in 2000:Q3 was slightly lower than previously reported.

Production by Market Groups

After having been held down in 1998 by aftershocks from economic turmoil in Asia, growth in industrial production rebounded in 1999 and accelerated further in 2000. In 1999, robust domestic demand, a rebound in foreign demand, and the easing of import competition combined to boost the change in IP over the four quarters of the year, to 5.1 percent. IP has risen 6.0 percent in 2000, with all the acceleration in the first half of the year; output growth slowed noticeably in the third quarter. Although the acceleration in 1999 was fairly broad-based, the pickup in the first half of 2000 was concentrated in the production of high-technology goods (table 5).

Among major market groups, the revised indexes show that the production of consumer durable goods advanced strongly from 1997 to 1999 and has fallen back in 2000. The decline in the index over the first three quarters of 2000 reflected declines in the production of automotive products and other durable goods. The output of automotive products has edged down 1.3 percent this year from the high level reached in 1999. The output of other consumer durables has fallen so far in 2000, with weakness in appliances, home electronics, and miscellaneous consumer durables partly offset by an increase in the production of carpeting and furniture.

After stabilizing in 1999 from a broad-based decline in the second half of 1998, the production of nondurable consumer goods has increased 2.4 percent in 2000, pulled up by rebounds in the production of both energy and non-energy items. The rise in the output of non-energy nondurable consumer goods in 2000 has been led by rebounds in the production of paper and food and by continued gains in the production of consumer chemicals--notably pharmaceutical preparations.

After having decelerated in response to weak export demand and heightened import competition in 1998-99, the output of business equipment accelerated in 2000, increasing at an annual rate of 12.6 percent. This year's pickup has reflected not only another robust gain in the production of information processing and related equipment but also rebounds in the production of industrial equipment and other business equipment; the output of transit equipment has fallen at a 5.4 percent rate this year, after a drop of nearly 9 percent in 1999. Among other types of equipment, production of defense and space equipment and of manufactured homes have declined further in 2000, while the drilling of oil and gas wells increased a brisk 22.5 percent, largely in response to higher oil prices.

After posting growth rates of 4.0 percent or more for four years, the output of construction supplies, which peaked in the spring, has risen at only a 2.0 percent rate in 2000, a deceleration that has largely reflected the slowdown in residential construction. In contrast, the output of durable goods materials has accelerated further as a result of the surge in the production of semiconductor chips; the output of other durable goods materials has been little changed, on balance, so far this year. The production of nondurable goods materials has dropped back 4.2 percent in 2000; the widespread declines in the underlying series stem, in part, from heightened foreign competition. The output of energy materials has increased modestly so far this year.

Capacity and Capacity Utilization

The growth of manufacturing capacity is now estimated to have accelerated from 6.1 percent in 1996 to 7.2 percent in 1998 and then to have eased to around 5.0 percent in 1999 and 2000 (table 7). The most rapid expansion of capacity was concentrated in durable manufacturing, especially in the computer, communications equipment, and semiconductor industries. Over the 1997-2000:Q3 period, the capacity increase in these industries averaged more than 40 percent per year, while the capacity increase in the rest of manufacturing averaged only about 3.0 percent per year. The capacity expansion in mining and utilities was slower. In particular, the capacity at mines contracted over the 1998-2000:Q3 period after having risen only 2.0 percent in 1997--a pattern that reflected changes in the capacity for oil and gas well drilling. An increase in capacity at utilities moved up from 1.0 percent in 1997 to more than 3.0 percent in 2000--a pickup that reflected the expansion of electricity generating capacity.

The rate of manufacturing capacity utilization--the ratio of output to capacity--was revised up 0.3 percentage point in the fourth quarter of 1998, 0.6 percentage point in the fourth quarter of 1999, and 0.2 percentage point in the third quarter of 2000 (table 8). Utilization in manufacturing in the third quarter of this year was 81.6 percent, a level 0.5 percentage point more than the 1967-99 average. The utilization rate for primary processing industries increased throughout 1999 and into 2000, rising above 86 percent (in the second quarter) for the first time since 1995. In contrast, the operating rate for advanced-processing industries fell though most of 1999 before picking up some this year.

In this revision, the definitions of advanced- and primary-processing industries were modified to more accurately reflect the distinction between industries that produce final products and those producing goods for further processing. Specifically, the measures for production, capacity, and capacity utilization in primary processing now include the series for semiconductors and related electronic components (SIC 3672-9) and for motor vehicle parts (SIC 3714); previously, these industries were included in the measures for advanced-processing industries.1

Utilization rates for the modified aggregates are shown in chart 2. The utilization rate for primary-processing industries averaged 82.1 percent from 1967 to 1999, and the rate for advanced-processing industries averaged 80.6 for the same period. These long-term averages are about the same as those for the previously published measures. In more recent periods, capacity utilization rates for the modified aggregates differ from the measures that were previously reported: The operating rate for advanced-processing industries in the third quarter of 2000:Q3 is now 79.9 percent, below the long-term average and lower than the previously published rate. Primary-processing industries are now shown operating at 85.6 percent in the same period, above their long-term average and higher than previously reported.

After having fallen sharply between the fourth quarters of 1997 and 1998, utilization in mining rose more than 2.5 percentage points from 1998:Q4 to 2000:Q3. In the third quarter of 2000, operating rates in mining and gas utilities were at below-average levels; in contrast, the rate of utilization in electric utilities was 93.6 percent, still a high level.

Technical Aspects of the Annual Revision

The revision incorporated 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 Annual Survey of Manufactures, the 1999 Survey of Plant Capacity, other annual industry reports, recent information on prices, and revised monthly source data on physical production and on labor and electricity inputs.2 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.

The Bureau of the Census reported its 1997 and 1998 data on industry output according to the new North American Industrial Classification System (NAICS). Before being included in the IP index, the manufacturing data for both years were placed on the 1987 Standard Industrial Classification (SIC) basis. The conversion was developed from information provided by the Census.

Changes to Individual Production Series

In this revision, the production indicators for several industries have been improved. Output in three of the new industries (telephone and telegraph apparatus, computer printers, and pharmaceutical preparations) are now measured as chain-type quantity indexes that are calculated using highly detailed monthly or quarterly physical product data obtained from industry sources. In addition, the bearings industry is now represented by a weighted combination of unit bearings counts, and the electric houseware industry is represented by deflated shipments.

The production of telephone and telegraph apparatus (SIC 3661) is now based on two components: a series for routers, switches, and hubs computer equipment used for local-area networks (LANs) and a series for all other telephone and telegraph apparatus. The new index for LAN equipment is based on (1) quarterly data from Dataquest on the revenue and unit counts of sales of different types of these devices and (2) annual price indexes for routers and switches developed from hedonic regressions that used data from a variety of sources. The incorporation of the new index for LAN equipment into the broader IP index for communications equipment (SIC 366) resulted in a faster rise in output in recent years than had been shown by the previously published index. The monthly indicator for the other component of telephone and telegraph apparatus continues to be production-worker hours.

Similarly, the production of computer and office equipment (SIC 357) is now measured as the aggregate of three components: Computers, computer printers, and other computer and office equipment. The index for computer output is based on the data that previously were used to measure the production of computer and office equipment as a whole; these data are highly detailed quarterly estimates from Dataquest on the revenue and unit count of sales of personal computers, notebook computers, and workstations/servers.

The revision introduces a new index for computer printers based on similar data--that is, highly detailed quarterly figures on the revenue and unit count of sales of computer printers, also from Dataquest. The index for other computer and office equipment is represented by combining the data for computers and computer printers.

This revision also includes a new method for estimating the production of pharmaceutical preparations (SIC 2834). The production of drugs and medicines (SIC 283) is now measured as the aggregate of two components: pharmaceutical preparations and other drugs and medicines. The production index for pharmaceutical preparations is based on monthly data from IMS-Health covering dollar shipments and price measures for 500 product classes. IMS-Health provided chain-type price indexes for each product class that it constructed using highly detailed product data; we then used these indexes to create a chain-type index for pharmaceutical preparations as a whole. The other drugs and medicines series (medicinals, botanicals, diagnostic substances, and biological products--SIC 2833,5,6,9) is derived from Bureau of Labor Statistics monthly data on production-worker hours and productivity trends determined by annual output data.

We have also improved the production estimates for two other industries by obtaining and incorporating new source data. The production of electrical housewares (SIC 3634) is now measured using data provided by the Association of Home Appliance Manufacturers; the production of ball and roller bearings (SIC 3562) is now measured using quarterly data from the American Bearing Manufacturers Association. Previously, these series were derived from monthly input data.

Finally, our measure for electric power generation (SIC 491) has been expanded to include electricity generation by plants owned by non-utilities (the so-called "power brokers"), a growing segment of this industry. Finally, the source data for three other physical product series have changed. For two series--textiles (SIC 226) and metal cans (SIC 341), the sources now report data quarterly, rather than monthly. The source for the production of truck trailers (SIC 3715) is now Americas Commercial Transportation Research.

Aggregation and Weights

This revision includes a refinement to the method used for aggregating industrial production. Previously, the aggregate industrial production indexes were annually weighted chain-type indexes with annual weights that were reestimated in the middle of the year.3 With the publication of this revision, the weights change monthly rather than at midyear for the period since July 1992. This change affects industry weights within each year and does not affect weights from one year to the next.

The 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. Reports from the 1997 Census of Manufactures and the 1998 Annual Survey 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 1998. The latest value-added data for mining camesfrom reports from the Census of Mineral Industries for 1997. 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 estimated from available data on producer prices through the most recent month.

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 1999 was incorporated in this revision. Revised data on the sales of electricity to industries since 1996 were incorporated as well. Large upward revisions in the reported data for 1999 generated a 1.3 percentage point upward revision to the change in electric power use that year; revisions to data for earlier years were small (table 10). Seasonal factors for all series were reestimated using more recent data.4

Measurement of Capacity

The initial step in constructing a capacity index for an individual industryis to divide a production index by a utilization rate obtained from a survey for the end-of-year period, thereby obtaining a preliminary, implied end-of-year index of capacity. Those preliminary indexes are expressed, like the indexes of industrial production, as percentages of production in 1992, and they give the general level and trend of the individual capacity estimates.

Once the preliminary implied capacity indexes are calculated, measures of physical capacity or of capital input are used to refine the annual movements in capacity and to extrapolate the annual changes in the capacity indexes beyond the most recent Census survey date. For most manufacturing industries, physical measures of capacity are not available; in these cases, the annual changes in the capacity estimates are related to the changes in an industry's capital input. The capital input measures are developed principally from investment data reported in the Annual Survey of Manufactures and Census of Manufactures; also used were revised estimates of business investment from the Bureau of Economic Analysis and its deflators by asset type through mid-2000.


1 The new utilization rates for primary and advanced processing were recomputed from January 1967 on and spliced to the earlier aggregates from January 1948 to December 1966. The new production and capacity indexes for primary and advanced processing begin with data for January 1967.

2 Information about the sources of monthly data used to calculate the indexes can be found in table 1, "Industry structure of industrial production: classification, value-added weights, and description of series," on the Board's web site at www.federalreserve.gov/releases/g17/About.htm.

3 The aggregation procedures are described in Carol Corrado, Charles Gilbert, and Richard Raddock, "Industrial Production and Capacity Utilization: Historical Revision and Recent Developments," Federal Reserve Bulletin, vol .83 (February 1997), pp. 67-92.

4 Seasonal factors for the production worker hours were based on data through October 2000; factors for the electric power series were reestimated using data through May 2000; and factors for the monthly physical product series were based on data through June (or later in the summer) 2000.

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