Industrial Production and Capacity Utilization: The 2001 Annual Revision

The Federal Reserve has revised the index of industrial production (IP) and the related measures of capacity and capacity utilization for the January 1992 to October 2001 period.�

Measured fourth quarter to fourth quarter, industrial output and capacity are now reported to have increased at a slower rate in 1999 and 2000 than previously reported, but the revision still places the decline in IP in 2001 at about 5­1/2 percent at an annual rate.[1]� The estimated rate of increase in capacity in 2001 was lowered by 0.7 percentage point, to 1.7 percent.�

Despite the downward revision to IP in 1999 and 2000, the general contour is the same as in the earlier estimates.� After having picked up in the second half of 1999 and after having posted rapid gains in the first half of 2000, increases in industrial output abated noticeably at mid-year.� According to the revised data, however, industrial output was weaker in the second half of 2000 than in the earlier estimates.

The rate of industrial capacity utilization (the ratio of production to capacity) as of the third quarter of 2001 was little changed by the revision; at 76.2 percent, the rate is 2-1/2 percentage points below the low of the 1990-91 recession but 4-1/2 percentage points above the low of the 1982 recession.[2]�� For the fourth quarter of 2000, capacity utilization was revised down 0.6 percentage point, to 80.7 percent; a downward revision to the operating rate in manufacturing of 1.2 percentage points was partly offset by an upward revision to the operating rates in mining and utilities.

The updated measures reflect the incorporation of newly available, more comprehensive source data and the introduction of improved methods for compiling a few series.� The new source data are for recent years, primarily 1999 on, and the modified methods affect the indexes from 1992 onward.���

The statistical revisions to the IP index were principally derived from the inclusion of information contained in annual reports issued by the Bureau of the Census: the 1999 Annual Survey of Manufactures and selected 2000 Current Industrial Reports.� Revised annual data from the U.S. Geological Survey (USGS) on minerals (except fuels) for 1999 and some new data for 2000 were also introduced.� In addition, the new monthly production estimates for 2000 and 2001 reflect updated seasonal factors and the inclusion of monthly source data that became available (or were revised) after the closing of the regular four-month reporting window.

The capacity indexes and capacity utilization rates incorporate the revised production indexes, results from the Census Bureau�s 2000 Survey of Plant Capacity for the fourth quarter of the year, and newly available 2000 data on industrial capacity from the USGS, the Energy Information Agency (EIA) of the Department of Energy, and other organizations.� In addition, the relationships used to estimate the current growth of manufacturing capacity reflect the inclusion of the Census data on capital spending by industry for 1999 and indicators of the rate of change in manufacturing capital spending in 2000 and 2001.��

The revised indexes of industrial production and capacity also reflect the updating of the value-added weights used in aggregating the individual indexes to the major industry and market group subtotals and to total industry.� The industry groups in IP and capacity continue to be based on the 1987 Standard Industrial Classification (SIC); in the 2002 revision, the industrial production and capacity utilization data will be constructed and grouped according to the North American Industry Classification System (NAICS).

Beginning with this revision, the capacity index for the extraction of natural gas is based on newly available estimates from the EIA; the new data substantially lower the estimate of the industry�s capacity for the 1995 to 1999 period.� The revision also incorporates new source data for another capacity series (silver); refinements to the methods used to compile two monthly production series (construction machinery and original equipment motor vehicle parts); and new methods and new source data to derive the value-added weights for the IP and capacity series for electric utilities.� The rates of change in the new weights were applied to the old 1992 weight to derive a new series of annual weights (�best­change� method) and result in slightly larger value-added proportions for the electric utility industry.

Results of the Revision

For the third quarter of 2001, the revision places the production index at 139.6 percent of output in 1992 and the capacity index at 183.2 percent of output in 1992 (table 1); both indexes are lower than reported previously (chart 1).� As noted earlier, the capacity utilization rate was little changed for the third quarter of 2001.

Tables 2, 3, and 4 show new data for monthly manufacturing IP and capacity utilization as well as the results for total and manufacturing excluding selected high-technology industries.�� Tables 5 and 6 show the revised rates of change of industrial production for market groups, industry groups, special aggregates, and selected detail for the years 1997 through 2001:Q3; tables 7 and 8 show the revised figures for capacity utilization and capacity.� For production and capacity, the tables also show the difference between the revised and earlier rates of change.� For capacity utilization, the tables show difference between revised and previous rates for the final quarter of the year (third quarter used for 2001).

Industrial production

The revision lowered the increase in industrial output by 0.7 percentage point for 1999 and 1.6 percentage points for 2000 (measured from the fourth quarter of the preceding year to the fourth quarter of the year indicated); the increase in industrial production was raised slightly for 1997 and 1998.�

The somewhat faster increase in IP now shown for 1997 and 1998 reflect both the incorporation of recently issued revisions to the annual Census data and the introduction of refinements and revisions to the price deflators used to construct the annual indexes that determine the trend in each industrial production series from one year to the next.[3]�

For most two-digit manufacturing industries, the new annual reports issued by the Census Bureau implied only small changes to previously published IP figures for 1999.� The output indexes for the transportation equipment industry, the apparel and products industry, and the rubber and plastics industry were revised.� However, new data for the computer industry, mainly for printers and other peripheral equipment, implied a weaker gain in output for the industrial machinery and equipment group.� The output of that industry was also lowered in 2000 because of the inclusion of available data from the Current Industrial Reports.�� Nonetheless, on balance, the revised data still indicate that the production of industrial machinery and equipment increased at a robust rate in both years.�

The revision now places the rise in the production index for the output of high-technology industries�computers and office equipment (SIC 357), semiconductors and related devices (SIC 3672-9), and communications equipment (SIC 366)�at about 40 percent in 2000.� The previously published estimate was appreciably stronger; the new estimates show less rapid gains in the output of semiconductors, computers, and peripherals.� The downward revisions to the indexes for semiconductor output reflect the incorporation of data from the 2000 Current Industrial Report and more comprehensive information on prices.

Excluding high-technology industries, the revised IP series show more pronounced weakness, mainly in manufacturing, in the second half of 2000.� The change reflects the updating of seasonal factors and the inclusion of revisions to monthly source data.� The more pronounced weakness appears in the durable goods manufacturing industries, especially the industrial machinery, motor vehicle parts, instruments, furniture, and stone, clay, and glass products industries.

Among major market groups, the revised production indexes for consumer goods and for construction supplies showed, on balance, little change for 2000 and 2001.� The revised indexes for business equipment and materials production showed slower gains in 2000 but little change in the decline for 2001.�

Capacity

For 2001, manufacturing capacity is estimated to be rising 1.6 percent, more than one percentage point lower than previously published.� On average, manufacturing capacity increased 4.6 percent per year in 1999 and 2000 (previously estimated at about 5 percent) and, on average, expanded 6 percent per year from 1994 to 1998 (virtually unchanged from the previous estimates).� The rapid gains in capacity during the second half of the 1990s were concentrated in industries producing high-technology goods and devices.� Given the downward revision to output in these industries, the pace of capacity expansion was also revised down; nonetheless, from 1994 to 2000 it still averaged nearly 40 percent per year.�� The relatively slow expansion of capacity in these industries in 2001, now estimated at 12.9 percent, is in large part the result of a downshift in capital spending by semiconductor manufacturers.� Outside of the selected high-technology industries, plant capacity for 2001 is estimated to be edging up 0.3 percent, down from the 2 percent pace in 1999 and the 3.2 percent annual average for 1994 to 1998.

Capacity in mining was revised down noticeably for the 1995 to 2000 period, but was revised up substantially for 2001.� The changes were primarily the result of incorporating new EIA measures for the capability to extract natural gas; in value-added terms, natural gas extraction is about 30 percent of mining output.� According to the revised data, from 1995 to 1998, capacity at mines increased a scant 0.2 percent per year, and in 1999 and 2000 it declined about 2 percent per year.� For 2001, however, mining capacity is estimated to be increasing 0.4 percent.

Capacity at electric and gas utilities increased a bit more slowly from 1997 to 2000 than previously reported.� The North American Electric Reliability Council reduced its estimate of generating capacity for 2000 but sharply increased the estimate for 2001; as a result, the rise in capacity at utilities for 2001 was revised up more than one percentage point, to 5.2 percent.� In both the previous and revised data, the rate of expansion of utility capacity for 2001 is the largest since 1974, a surge reflecting the response of producers to the significant shortfall in generating capacity last winter.

Capacity utilization

The Survey of Plant Capacity indicated that the factory operating rate was lower in the fourth quarter of 2000 than previously estimated.� The revised utilization rate for manufacturing is 79.1 percent in the final quarter of 2000, more than 1 percentage point lower than reported earlier.�

Capacity utilization in manufacturing reached 81.7 percent in the middle of 2000, 0.6 percentage point above its long-term (1967-2000) average.� The factory operating rate had climbed to 83 percent in 1997, before the onset of economic turmoil in Asia, but dropped back more than 2 percentage points by the end of 1998.� From the middle of 2000 to the third quarter of 2001, the utilization of manufacturing capacity plummeted� more than 7 percentage points.

Among manufacturing industries in the third quarter of 2001, the utilization rates for primary processors were nearly the same as those for advanced processors.� Since the middle of 2000, the decline in the rate for primary processing industries�nearly 11 percentage points�has been especially sharp.�� Primary processors were operating at relatively elevated rates in the second quarter of 2000; the rates for primary metals, semiconductors, stone, clay and glass products, petroleum products, and motor vehicle parts were above their long-term averages.� By the third quarter of 2001, the only primary processing industries that were operating at rates above their long-term averages were petroleum and products and stone, clay, and glass products.� Among advanced processors, only the producers of light trucks and of chemical products were operating at above-average rates.

Capacity utilization in mining was an upwardly revised 90.8 percent in the third quarter of 2001, more than 3 percentage points above its long-term average.� The utilization rate for electric and gas utilities in the third quarter of 2001 was little changed by the revision, but the rates in 1998, 1999, and 2000 were raised.

Technical Aspects of the Revision

As noted earlier, the annual revision incorporated more comprehensive annual data on industry output, utilization, value added, and capital spending for 1999 and 2000, along with an update of all seasonal factors and monthly data on production, production worker hours, and electric power use.� In addition, the capital input measures used in the construction of capacity indexes incorporate more-recent overall business investment and price data from the Bureau of Economic Analysis.[4]�� Previously issued annual data on output and prices for 1997 and 1998 that were slightly revised by the original source were also included.

The industrial production and capacity utilization data continue to be based on the 1987 Standard Industrial Classification (SIC).� The Census Bureau reported its new 1999 and 2000 data on industry output and capacity utilization, as well as its revisions to 1997 and 1998 data, on the new North American Industrial Classification System (NAICS).� Before being included in the IP and capacity indexes, the data were recategorized by the Federal Reserve according to the SIC system.�

In the 2002 revision, the industrial production and capacity utilization data will be derived according to the NAICS; data from at least 1977 onward will be subject to revision; and the indexes will be rebased, with 1997 equal to 100.� The new NAICS production data will be derived from annual output measures constructed by reclassifying the establishments in historical Censuses of Manufactures and Mineral Industries according to NAICS categories; annual output indexes constructed in this way maximize the reliability and historical consistency of the IP industry detail.

Revised Monthly Data

The product data that are used to measure the monthly movements of many IP indexes were updated to capture data that became available after the closing of the regular four-month reporting window.� For example, monthly data from the Department of the Treasury on the production of alcoholic beverages and cigarettes may be unavailable initially but available for inclusion in the annual revision.�

The input measures were also updated to incorporate revised data on monthly production worker hours (based on the BLS benchmark of employment to March 2000 comprehensive measures) and on monthly electric power use since 1997.� Besides benchmarking data on production worker hour to March 2000 comprehensive measures, the BLS also incorporated data derived from new sampling procedures from 1999 on.� The new estimates reduced the change in manufacturing production worker hours in the second half of 2000, with the bulk of the reduction in industries in which the data on production worker hours are used as the monthly production indicator in IP.

Seasonal factors for all series were re-estimated using data that extend into 2001.��� Factors for production worker hours, which adjust for timing, holiday, and monthly seasonal patterns, were updated with data through October 2001.� Factors for the electric power series, which are developed using multivariate methods, were re-estimated using data through May 2001.� The updated factors for the physical product series, which include adjustments for holiday and workday patterns, used data through at least June 2001.� Seasonal factors for unit motor vehicle assemblies have been updated with data through September 2001 and are on the Board�s website at www.federalreserve.gov/releases/g17/mvsf.htm.

Weights for aggregation

The weights for the aggregation of IP indexes and capacity utilization rates are derived from annual estimates of industry value added.� For manufacturing, the Census Bureau provides such data annually; for mining, quinquennial figures are provided.� For the electric and gas utility industries, the Federal Reserve derives estimates of value added from annual revenue and expense data issued by other organizations.� Estimates of industry value added were updated with annual data through 1999, and the weights for aggregation (unit value added) have been estimated using the most recent data on producer prices.� Table 9 reports the annual value-added proportions incorporated in the IP index from 1993 on.

Beginning with this revision, the methods and data used to obtain estimates of value added in the electric utility industry have been improved.� A change was necessary for several reasons.� First, much of the data that had been used to compute value added was contained in an EIA publication that has been discontinued.� Second, the EIA data on �utilities� include regulated entities only, and data covering all producers of electric power (that is, including the unregulated power generators) are required to avoid a severe understatement of the value added by the entire industry in 2000.� Last, a review of the earlier methods suggested value added was understated for the period preceding the deregulation of the industry.

The Federal Reserve�s new estimates of value added for the electric utility industry were constructed according to the Census definition of value added, that is, industry revenue less the cost of purchased material inputs.� Data on industry revenue (including all establishments that distribute power to final users) were obtained from Statistical Yearbooks issued by the Edison Electric Institute; these data were combined with EIA measures of fuel costs to obtain an estimate of Census value added.� The new figures were applied on a best-change basis for the period from 1992 onward; the 2002 revision will introduce refined results as well as revised figures for earlier years.

Changes to individual series

With this revision, the capacity series for natural gas extraction (part of SIC 13) incorporates new estimates developed by the EIA; the new estimates are substantially lower than the agency�s previous figures that were used to derive the capacity for natural gas extraction.� The new figures are designed to better reflect the ability of producing wells to deliver gas into the gathering and pipeline system, whereas previous EIA figures measured capacity at the wellhead only.

The source data for one other capacity series has changed.� The index for silver capacity is now based on data from the USGS; previously it was derived using a trend-through-peak method.��

The monthly production indicators for construction machinery and original equipment motor vehicle parts were refined.� For construction machinery, the weights used to combine the available product data were updated.� For motor vehicle parts, the indicator is developed from monthly product data (engines, brakes, axles, and transmissions), production worker hours, and motor vehicle assemblies; previously, the series was derived from the product data only.�

Last, the annual estimates of motor vehicle repair parts were improved; their derivation now includes information on the average age of the motor vehicle fleet.

LAN Equipment

The 2000 revision introduced a new IP series for the production of local area network (LAN) equipment (routers, switches, and hubs).� The new series is not published in the monthly statistical release, but it is included in the broader IP aggregate for communications equipment and updated on an ongoing basis (see the March 2001 Bulletin article).� The table below updates the results for LAN equipment originally issued a year ago.