INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION: A REVISION
The Federal Reserve's index of industrial production (IP) and its related measures of capacity and utilization have been revised principally for the period 1992 to date (chart 1). For the third quarter of 1997, the revision places the production index at 125.2 percent of output in 1992, compared with 121.5 percent reported previously (table 1). The revision places the capacity index at 151.3 percent of output in 1992, compared with 144.6 percent reported previously. The rate of capacity utilization--the ratio of production to capacity--has been revised downward about 1.3 percentage points, to 82.7 percent in the third quarter of 1997.
The central aspect of the revision is the updating of the comprehensive annual data and of the revised monthly source data used in the estimation of production, capacity, and utilization. Most important was the 1995 Annual Survey of Manufactures, which provided a stronger picture of the growth in output; a stronger picture also emerged from the inclusion of BEA's new quality-adjusted annual price index for telephone switching and switchboard equipment and a more rapid decline in the quality-adjusted price index for semiconductors. More up-to-date results were obtained from 1995 and 1996 annual industry reports, recent information on prices, and revised monthly source data on physical products and on labor and electricity inputs. Using the differences between the new annual and monthly source data, productivity relationships were revised and applied to the individual monthly source data to determine the final individual production indexes. Along with updating the individual production series, the annual value-added weights used in aggregating the indexes to market and industry groups were also updated. The revision of seasonal factors was based on data through mid-1997 or later.
The revisions to capacity and utilization reflect the new IP indexes, updated measures of manufacturing capital input, new information provided mainly by trade associations on physical capacity and utilization for selected industries, and, in particular, preliminary results of the 1996 Survey of Plant Capacity conducted by the Bureau of the Census, which yielded industry utilization rates for the fourth quarters of 1995 and 1996. The new Census data indicated that utilization in manufacturing was lower than the Federal Reserve had previously estimated; utilization in mining was revised downward as well.
The IP index now shows stronger growth in 1993-97 (table 3). The revised annual rate of growth averaged 4.5 percent since 1992, 0.7 percentage point higher than previously shown. From mid-1994 to mid-1995, the new index grew about 2 percentage points faster than formerly. The index, nevertheless, continues to show some slowing in growth in the first half of 1995 after a surge in 1994. Growth accelerated in 1996 and 1997, even though upward revisions averaged only about 1/4 percentage point in those years. Among major market groups, growth has been pervasive and substantial in recent years; only the production of defense and space equipment declined in 1996 and 1997, and the production of nondurable consumer products continued to grow slowly because it was held down by weak activity in apparel and tobacco products.
Among industry groups, growth was strongest in durable manufacturing (9.3 percent in 1997), which was boosted by growth of more than 40 percent in computers and semiconductors (table 4). But strong growth was not limited to the high-technology industries. The output of transportation equipment grew 10 percent in 1997 as assembly of commercial aircraft soared and the production of heavy trucks rebounded. With the strength in durable finished goods and construction activity, the output of primary metals; stone, clay, and glass products; and lumber rose 4 percent or more.
The upward revisions to the growth in industrial production were smaller than those to the growth in capacity, particularly in 1996 and 1997. The annual rate of industrial capacity growth has been revised upward 1.5 percentage points in 1995 and 0.8 percentage point in 1996 and 1997 (table 5). The annual rate of capacity growth in manufacturing has exceeded 5 percent since 1995. The rapid growth and upward revisions were again concentrated in durable manufacturing, especially in the high-technology industries, in which productivity has risen rapidly because of technological advances.
Capacity utilization in manufacturing in the third quarter of this year was revised to 81.6 percent, a level 1.4 percentage points less than the rate previously reported (table 6). Although revised downward a similar amount, the rate in primary-processing industries was nearly 4 percentage points above its 1967-96 average. Utilization rates remained above 90 percent in primary metals, paper and products, and petroleum products. Among advanced processors, utilization rates were below average overall. The capacity utilization rate for mining was revised downward roughly 3 percentage points, with downward revisions in utilization in oil and gas extraction, stone and earth minerals, and coal. The rate of utilization in electric utilities is now estimated to be higher; in the face of deregulation, electric utilities have been reluctant to add new generating capability. The estimated utilization in gas utilities was revised downward.
TECHNICAL ASPECTS OF THE REVISION
Changes in Series Structure
The series structure of the index of industrial production, which comprises 264 individual series, remains essentially unchanged. One series was added, and one was dropped. The measurement of oil and gas field services has been modified to more completely represent activity in that industry. Previously, a single series based on the count of rotary rigs running, issued by Baker Hughes, was used for all of SIC 138. Now there are two series: one for drilling and exploration (SIC 1381,2) and another for miscellaneous oil and gas field services (SIC 1389). The drilling and exploration series continues to be based on the count of rotary rigs running, but a much larger weight is given to each offshore rig than to a land rig, a difference that reflects the much higher rental cost of an offshore rig. For miscellaneous oil and gas field services, the production index is based on active well servicing units reported by Dresser Oil Tools plus workover rigs reported by Baker Hughes. The capacity and utilization estimates for SIC 138 continue to depend on both the new IP series and a fall survey of active and available rotary rigs conducted by the Reed Tool Company.
The separate series on defense nuclear materials has been discontinued because of the loss of source data. The single remaining series for nuclear manufacturing (part of SIC 2819) is based on the amount of electricity used in the production of such materials.
The IP index is an annually weighted Fisher index. 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. The 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 manufacturing and utilities through 1995. The latest value-added data for mining comes from the Census of Mineral Industries for 1992. 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) given the persistence of many relative price trends, extrapolated for the following year.
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 1996 was incorporated in this revision. Revised data on the sales of electricity to industries since 1992 were incorporated as well. The monthly kilowatt-hour sales figures were benchmarked to data on the annual use of electric power reported in the Annual Survey of Manufactures. Data through 1995 were available for this revision; they resulted in an average downward revision in industrial use of electric power of 0.3 percentage point per year over the 1993 to 1995 period (table 8). Seasonal factors for the electric power series have been reestimated using data through May 1997.
Measurement of Capacity
To construct an individual capacity index, we first calculate preliminary, implied end-of-the-year indexes of capacity by dividing a production index by a utilization rate obtained from a survey for that end-of-year period. These ratios are expressed, like the indexes of industrial production, as percentages of production in 1992, and they give the general level and trend of the capacity estimates.
The Census Bureau's survey is the source of utilization rates for most manufacturing industries. The preliminary results of the Survey of Plant Capacity suggested that utilization rates were lower in recent years than those previously estimated by the Federal Reserve. Dividing the industrial production indexes, which were generally revised upward, by the lower-than-expected Census utilization rates yielded a noticeable upward revision of capacity. Compared with the surveys of previous years, the number of plants used for the 1996 survey was increased about 70 percent--from approximately 10,000 to 17,000. Because of the marked expansion of the reporting panel, results from panels of respondents who had previously participated in the survey were reviewed. The final Federal Reserve capacity indexes reflect this review and our efforts to maintain consistency over time. In the past, increasing the size of the reporting panel and including smaller firms in the sample have tended to lower the level of reported survey utilization rates.
Once the preliminary implied capacity indexes are calculated, measures of physical capacity or of capital input are used to estimate and extrapolate the annual movements of the capacity indexes. For most manufacturing industries, physical measures of capacity are lacking; in these cases, the annual growth in the capacity estimates is related to the growth in an industry's capital input. The revised capital input measures incorporate updated BEA estimates of new business investment and deflators by asset type for 1993-97, revised estimates of manufacturing investment in computers for 1968-97, and revised estimates of manufacturing investment in different types of structures for 1978-97. The new estimates of computer investment were developed from sample data collected in conjunction with the Census of Manufactures for 1977, 1982, 1987, and 1992, and the new estimates of detailed investment in structures were based on data collected by the Census Bureau in its 1994 Annual Capital Expenditures Survey.
1. In addition, two individual production series and a handful of capacity and utilization measures were modified between 1987 and 1992. The only substantial change was the restructuring of the production series for oil and gas field services (discussed below), which was carried back to 1987. This modification affects the levels of the aggregate indexes that contain this series prior to 1987 because the production indexes are chain linked and are expressed as a percentage of output in 1992. All aggregate indexes are subject to very small revisions between 1987 and 1992 because of the aggregation methodology; annual indexes were essentially unaffected.
2. The figures for August through October of this year are subject to further revision in the upcoming monthly statistical releases.
3. The aggregation procedures are described in the Federal Reserve Bulletin, vol.83 (February 1997), pp.67-92.
4. Seasonal factors for the worker hours were based on data through October; factors for the monthly physical product series were based on data through June or later in the summer.
5. In contrast with the very preliminary utilization estimates used in earlier annual revisions, which were available only for roughly two-digit industries, the preliminary estimates incorporated into this annual revision were much more refined, and they were available at the four-digit level of industry detail.
NOTICE: Data Availability and Publication Changes
These data were revised primarily from 1992 forward. However, many series were subject to small changes prior to 1992 and a few series were revised prior to 1987. All the changes prior to 1987 were constant adjustments to the level of series that include oil and gas field services as a component; no growth rates were altered. Among the series revised prior to 1987 are the total index, mining, total products, and total equipment. All the revised data and complete lists of the series revised prior to 1987 are available from the following electronic sources.
Files containing the revised data and the text and tables from this release are available on the internet and through the Economic Bulletin Board of the Department of Commerce. Files containing all the historical data for these series can be found under "Statistics: Releases and historical data" at http://www.bog.frb.fed.us, the Board's World Wide Web site. For information about the Economic Bulletin Board of the Department of Commerce, call 202-482-1986.
Diskettes containing either historical data (through 1985) or more recent data (1986 to those most recently published in the G.17 statistical release) are available from Publications Services, Board of Governors of the Federal Reserve System, Washington, DC 20551 (202-452-3245).
A document with printed tables of the revised estimates of series shown in the G.17 release is available upon request to the Industrial Output Section, Mail Stop 82, Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, DC 20551.
G.17 Revision Release Tables: