INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION: HISTORICAL REVISION
The Board of Governors of the Federal Reserve System has completed a revision of its measures of output, capacity, and capacity utilization for the industrial sector. The primary feature of the revision was to reformulate the indexes and utilization rates back to 1977 based on weights that are updated annually rather than every five years, as had been the practice. The new formulation eliminates an overstatement of the growth of production and capacity in earlier figures and is designed to provide more accurate current estimates of developments in industrial production and capacity utilization. The cyclical profile of the revised statistics is essentially unchanged. Both the production and capacity indexes are now expressed as percentages of output in 1992; the previous reference year was 1987.
The growth in industrial production (IP) in 1996 (fourth quarter 1995 to fourth quarter 1996) was revised down 0.8 percentage point, to 3.7 percent. Capacity growth was also revised down in 1996; capacity utilization for the fourth quarter of 1996 was revised down 0.2 percentage point, to 83.2 percent.
From 1992 onward, the new estimates of IP and capacity also incorporate additional or updated statistics that are typically available for an annual revision. The primary effect of introducing these data was to lower IP growth in 1994 to a still robust 5-3/4 percent rate. The revised estimates show that capacity utilization reached its most recent high at the beginning of 1995, and that pressures on industrial capacity have been lower since then.
The revised indexes of production and capacity show slower growth over the past two decades, on average, than the earlier estimates. From 1977 to 1996, the annual rate of growth of total IP averaged 2.3 percent, about 1/4 percentage point less than previously shown. The rate of growth of industrial capacity was revised down similarly. As a result, capacity utilization rates were generally little changed.
The capacity indexes and capacity utilization rates were recomputed back to 1977 to reflect the new production indexes and updated physical capacity data for recent years and to fully incorporate revised measures of capital input derived from Federal Reserve estimates of manufacturers' real net capital stocks. Aggregate utilization rates between 1967 and 1976 were revised slightly to improve consistency with the new formulation.
Along with the annual updating, additional changes made to selected production and capacity series improve coverage and reliability of the measures. Some of the series and definitional improvements were introduced before 1992, depending on the availability of source data.
The Federal Reserve's accompanying statistics for industrial electric power use also have been revised. These indexes, which begin in 1972, now more fully reflect the increase in cogeneration that took place in the 1980s and incorporate more complete reports from utilities for the past few years.
New Aggregation Methods
As indicated, the most important improvement for this revision is the introduction of new aggregation methods from 1977 onward. In the new formulations, series that measure the actual or capacity output of an individual industry are still weighted according to their proportion in the total value-added output or capacity of all industries. However, the value-added weights used in the aggregation procedures are now updated annually, and the total IP index and its major industry and market subtotals are constructed using a superlative index formula similar to that recently introduced by the Bureau of Economic Analysis for its featured measure of real output.
If prices and costs were to change uniformly across industries, different weights for different years would not be needed; but relative prices do change. To represent the changing relative price and cost structure of industries, the industrial production index was previously built for the most part in five-year chronological segments, each with value-added weights drawn from the first year of the segment. Chaining the segments together formed a continuous index expressed as a percentage of output in a reference year. The periodic introduction of new weight years for the IP index, as well as for the related capacity statistics, updated the measures so that they reflected the gradual evolution of relative prices over time.
Because of persistent, rapid declines in the relative price of computers, as well as computer peripherals and semiconductors, a quinquennial updating of weights has proved too infrequent to provide the most accurate estimates of current changes in industrial production and capacity. Applying outdated weights to these fast growing industries can also introduce small distortions in current measures of capacity utilization.
In formulating the revised IP measures, the Federal Reserve adapted an approach developed by the Bureau of Economic Analysis (BEA) to create their chain-type annual-weighted quantity indexes. However, rather than follow the BEA practice of applying weights based on the most recently available comprehensive data to all subsequent years (the so-called Laspeyres tail), the Board's adaptation applies estimates of the appropriate annual weights for the most current periods. The estimates are developed from related information or, if required, by extrapolation. As a result, the aggregate industrial production and capacity utilization measures are consistently formulated through the most recent period.
New Methods For Individual Production, Capacity, and Electric Power Use Series
The revision also incorporated improvements in the composition of selected IP market aggregates and enhancements to the structure of selected production and capacity series. As part of the annual updating, from 1992 onward, monthly source data for all IP series-physical product data and measures of inputs to production--were updated to reflect revisions by the data providers and were adjusted to eliminate seasonal, calendar, and holiday variation by the Federal Reserve. The revised IP series reflect further adjustments that control their annual average results to conform to benchmark indexes derived from more comprehensive, and newly available, annual source data.
Measures of industry capital input, which are used in estimating capacity, were updated with Federal Reserve estimates of manufacturers' real net stocks that are now built from investment data expressed in chained 1992 dollars; formerly, the net stocks were derived from investment flows in constant 1987 dollars. No new broad survey results on capacity utilization rates were available for this revision. For the 1997 annual update, the Federal Reserve will have results from the Census Bureau's Survey of Plant Capacity for the fourth quarters of 1995 and 1996.
Modifications to Series
To improve the analytical use of the IP market aggregates, the portion of the output of computer and office equipment (SIC 357) designated as final product is now further split into production of consumer goods, mainly personal computers for home use, and business equipment. Formerly, all of the final product of the computer industry was in business equipment (as in the earlier index, the industry's semi-finished product is allocated to the materials market group).
To improve coverage and reliability, monthly source data for four IP series were modified. With these changes, the monthly IP index now comprises 264 series for the period since 1992, and the proportion that is derived from physical product data rises 2 percentage points, in 1994 value-added terms, to 42 percent. The output of stone, sand, and gravel mining (SIC 141-2, and 144), formerly an input-based IP series, is now derived from quarterly production data reported by the Department of the Interior. Portions of two equipment series, farm equipment (SIC 352) and construction and allied equipment (SIC 353), which were based on input data, now make up two new series derived from monthly production estimates reported in Stark's Off-Highway Ledger. Production of original equipment parts for new motor vehicles from 1992 onward now derives from monthly production estimates reported in Stark's Component Ledger.
Production of medium and heavy trucks, formerly a single component of business trucks, is now represented by separate series for medium-weight (gross vehicle weight of 14,001-33,000 lbs.) and for heavy trucks (33,001 lbs and over) based on the same monthly production figures as previously used (Ward's Automotive Reports) in combination with information on factory shipments by detailed weight class reported by the American Automobile Manufacturers Association. The compilation of capacity measures for motor vehicles was also improved with a more explicit accounting of the assembly capability for heavy trucks.
Updated Data and New Production Benchmarks
The regular updating of source data for industrial production includes the introduction of annual data from the Annual Survey of Manufactures for 1994 and selected Current Industrial Reports for 1995, both series published by the Bureau of the Census. Available annual data on mining for 1994 and 1995 from the Department of the Interior were also introduced. Individual IP series incorporate revisions to the monthly indicators (either physical product data, production worker hours, or electric power usage) back to 1992. Seasonal factors for electric power and most physical product series were calculated on the basis of data through mid-1996; for production worker hours and the unit counts of motor vehicle assemblies, seasonal factors were updated with data through October. Productivity relationships used to extrapolate input-based IP series beyond 1994 or 1995 were updated using the revised output and input data.
With this revision, from 1992 onward the annual updating of the IP indexes for manufacturing reflects the incorporation of annual benchmarks of real output that are formulated as Fisher indexes. The new or modified series described earlier were adjusted to the newly formulated benchmarks from the initial year of the series. The sources for the basic data used to construct comprehensive output measures used for benchmarking manufacturing IP series in this revision are the same as those used for calculating former benchmarks.
For this revision, the annual IP benchmark quantity indexes for semiconductors and related components and for computers and office equipment were improved from 1977 on. The IP index for semiconductors and related components (SIC 3672-9) was benchmarked to an annual index of real output that incorporated a quality-adjusted price index for domestically-produced integrated microcircuits (the major product of SIC 3674, which is the largest industry covered by the IP series for semiconductors). Board staff constructed this index from detailed price indexes for selected semiconductor components, mainly memory and logic chips, developed by the BEA as part of its recent comprehensive revision of the NIPAs. The BEA also revised its price index for computers for that revision, and the IP benchmark index for computers and office equipment incorporates those results.
Revised Estimates of Industrial Capacity
The capacity utilization estimates fully incorporate the more detailed data from the 1993-94 Survey of Plant Capacity of the Bureau of the Census. At the time of the 1995 annual update, Census survey data on utilization for 1993-94 were generally available only at a two-digit SIC industry level. In early 1996, the detailed Census survey information was incorporated in the models used for the 1995-96 capacity extrapolations. With this revision, the capacity estimates were updated based on the revised production estimates, revised estimates of capital input, and revised or newly available estimates of capacity in physical volume terms for selected industries from 1977 on.
Revised Estimates of Electric Power Use
The Federal Reserve's monthly indexes of industrial electric power use, which begin in 1972, have been revised. The indexes are now expressed as percentages of electric power use in 1992; the comparison base year formerly was 1987. The revisions of the electric power series stem from three sources: more complete reports from utilities and changes in the Federal Reserve's utility reporting panel for recent years; more accurate staff estimates of the increase in cogeneration that took place during the last half of the 1980s; and adjustments of the detailed series on purchased power consumption to annual benchmarks derived from data published in the Annual Surveys of Manufactures from 1972 to 1993. Compared with the previously published data, the revised index of total electric power use in manufacturing and mining shows somewhat stronger growth since 1989 and a slightly greater decline from 1979 to 1982; the overall pattern, however, is quite similar to previous results. The revised cogeneration component grows noticeably faster.
Files containing the revised data and the text and tables from this release are available on the Internet at http://www.bog.frb.fed.us, the Board's World Wide Web site. Files will also be available through the Economic Bulletin Board of the Department of Commerce; for information, 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).
More details on the technical aspects of the revision will be published in the February 1997 Federal Reserve Bulletin. Copies of this article will be available at the Board's World Wide Web site. A summary of the new aggregation procedure is presently available in the 1996 revision announcement on the World Wide Web (http://www.bog.frb.fed.us/releases/G17/rev96.htm).
A document with printed tables of the revised estimates of major aggregates shown in the G.17 release will be sent to subscribers to the release. This document will also be available at the Board's World Wide Web site.
G.17 Revision Release Tables: