Industrial production and capacity utilization: the 1997 revision

Business Economics, July, 1997 by Carol A. Corrado

Earlier this year, the Board of Governors of the Federal Reserve System completed a revision of its measures of output, capacity and capacity utilization for the industrial sector. The primary feature of the revision was the introduction of a new formulation for aggregating the indexes and utilization rates based on weights that are updated annually rather than every five years. The new formulation, which was used to revise figures back to 1977, provides more accurate current estimates of industrial production and capacity utilization and eliminates an earlier, small overstatement of the growth trends of production and capacity.

From 1992 onward, the 264 individual industrial production (IP) series also were revised to incorporate additional or updated statistics that are typically available for an annual revision. Moreover, eleven production series were added or altered to improve their market classification, coverage and reliability; some of these improvements were made to pre-1992 figures, depending on the availability of source data. The seventy-five individual capacity indexes were reestimated from 1977 onward to be consistent with the revised IP series and updated measures of manufacturers' capital input. The revisions to both the production and capacity indexes are, of course, reflected in the utilization ratio. Some additional small changes to aggregate capacity utilization rates were made from 1976 back to 1967 to improve their consistency with the new formulation.

Besides the reformulation of aggregates, the annual updating of all measures, and the improvement of selected series, the revised production and capacity indexes are now expressed as percentages of output in 1992. The rebasing affects all series from their start date, which for total IP is 1919, for manufacturing capacity is 1948, and for total industrial capacity is 1967.

The methods and results of the industrial production and capacity utilization revision were described by the author, Charles Gilbert, and Richard Raddock, assisted by Carly Kudon, in the February 1997 issue of the Federal Reserve Bulletin (pp. 67-92); the article also included detailed statistical tables showing the revised production, capacity and utilization series by industry and, for production series, by market group.(1)

REVISIONS TO OUTPUT, CAPACITY, AND UTILIZATION

The revised indexes of industrial production and capacity show slower growth, on average, than the earlier estimates while the cyclical patterns of the revised measures are practically the same as before [ILLUSTRATION FOR FIGURE 1 OMITTED]. One discernible, small change, though, is that the declines in the recessions of the early 1980s now look to have been slightly more severe. Another noticeable difference is that growth over 1994 is now weaker, a result owing to the introduction of more comprehensive output measures for that year.

Both from 1977 to 1987 and from 1987 to 1996, total industrial output grew at an average pace of about 2.3 percent per year - about one-quarter percentage point less than previously estimated. The growth of industrial capacity was revised down nearly as much; consequently, the rate of total industrial capacity utilization was revised down only a fraction of a percentage point at the end of 1996. Like the earlier estimates, the revised ones 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 downward revisions to production and capacity growth arise primarily from the introduction of the new formulation for those measures, which tends to reduce the influence of the fastest growing industries - such as computers - on aggregate growth. In particular, although the revised output and capacity indexes now show slower growth for total manufacturing, growth in manufacturing excluding computers is reduced only a bit as a result of introducing the new formulation.

The largest revisions of the production indexes by market group (upward in consumer durable goods and downward in business equipment) relate to the treatment of computers; the downward revision in equipment reflect both the new formulation and the reassignment of a portion of computer output (mainly personal computers for home use) from business equipment to consumer durable goods other than automotive products. Among major industry groups, the large upward revisions in semiconductors and electrical machinery relate to the use of quality-adjusted price indexes for semiconductor components to develop new annual production benchmarks. Revisions to utilization rates were disparate among industries. On balance, however, upward revisions in utilization rates by the fourth quarter of 1996 for selected industries largely counterbalanced a small downward impact on utilization of the new annual weighting formulation.

Both the revised and earlier statistics show that the industrial sector entered the 1990s operating at a high level only a bit below its peak in April 1989. The construction and motor vehicles industries demonstrated some renewed vigor that kept IP near its high through September 1990. Then, following the spike in oil prices that accompanied Iraq's invasion of Kuwait, a rather shallow six-month recession ensued. Output of durable manufactured goods fell 7 percent to a trough in March 1991. A gradual recovery was completed by the fourth quarter of 1992 when the previous peak was surpassed.