Measuring U.S. Industrial Production During a Downturn in Economic Activity

Prepared for the:

OECD Short-term Economic Statistics Expert GroupSeptember 10-11, 2009

John J. Stevens

Federal Reserve Board

Economic Statistics in a Downturn

• Real activity is buffeted both by recessions and by shocks such as labor strikes and hurricanes

• Shocks should not significantly affect the compilation and dissemination of many real-side economic statistics

• Compilation methods should draw on multiple data sources, use robust methods, and seek to minimize avoidable revisions

• Dissemination should be fast but without compromising data quality

• Interpreting statistics in a downturn is challenging, but as data providers we can aid interpretation by offering a meaningful context

Levers of Adjustment: Compilation of U.S. Industrial Production (IP)

An IP index represents the level of real output in some part of the industrial sector for some specified period of time.

1.Examine raw data– Raw data: A physical output measure or a measure of an input to production– Cross-check raw data with other data sources and anecdotes– Use “informed judgment” to edit resulting IP index pending further data

2.Apply “correction factors”– Used to align monthly raw data with comprehensive annual benchmarks– Adjusts for survey coverage or for productivity (for input-based series)– Correction factors are projected beyond most recent benchmark data

3.Apply seasonal factors

Raw data

÷

Working days

=

Adjusted raw data

Real benchmark / Annual average of adjusted

raw data

=

Annual “correction factor”

Monthly adjusted raw data × monthly correction factor

=IP index, not seasonally

adjusted

IP index, not seasonally adjusted

÷

Seasonal factor

=

IP index, seasonally adjusted

Levers of Adjustment: Compilation of U.S. Industrial Capacity

• A capacity index represents the level of sustainable maximum production in some part of the industrial sector.

• Capacity indexes may be based on:– Data collected in physical units (mining, steel, autos, …)– Data from the Census Bureau’s Survey of Plant Capacity (SPC)

• Capacity estimates are refined with measures of capital input– Capital input measures the available flow of services from an industry’s historical

sequence of capital spending– Refinement uses econometric models, so these models are also a lever

Benchmark annual utilization rates

Implied capacity (ICAP), an initial annual capacity index consistent with the published IP index:

ICAP = IP / CUBenchmark

Annual capacity is estimated with a regression model.

Capacity utilization = published IP / monthly capacity.

Interpolate annual capacity to a monthly series.

Adjust capacity for definitional reasons and for historical continuity.

Effect of Establishment Closures

Production and Capacity• Production may be overstated if closures are concentrated among

plants that are not surveyed by BLS, trade associations, etc…

• If production is overstated, then capacity will tend to be overstated. As a result utilization rates may be less affected

Benchmark utilization rates• Closure of large plants should not bias benchmark utilization rates:

Large plants are sampled with certainty and are “self-representing”

• Closure of small plants may introduce a bias if closures are systematically related to the rate of utilization

Revisions of IP/CU Data

Monthly revisions • Initial monthly IP/CU estimates are subject to revision for 5 months• Underlying monthly indicator data may be received with a lag• Underlying monthly indicator data may revise

Annual revisions• Updated annual benchmark data on production and utilization rates• Late-arriving or revised underlying monthly indicator data• Changes to industry and market group structures• Changes to methodology• Changes to data sources• Re-estimate seasonal factors

Mean revision of monthly IP from first to fourth estimate (percentage points)

All months (1973-present) .04

All months (1993-present) .00

All months in NBER downturn -.01

Current downturn (Dec. 2007-July 2009) -.17

Excl. revisions due to hurricanes and a strike -.14

Declines in Capacity Utilization in NBER Downturns(percentage points)

Recession datesData available at the trough

Current data

Jan. 1980 – July 1980 -10.2 -7.8

July 1981 – Nov. 1982 -12.0 -8.7

July 1990 – Mar. 1991 -5.6 -4.7

Mar. 2001 – Nov. 2001 -4.3 -4.3

Dec. 2007 – June 2009 -14.6 -14.2

Note: The estimate for the current downturn reflects benchmark capacity utilization data but not benchmark production data.

Providing a Meaningful Context for Data Users: July 2009 IP Press Release

Option 1: “Industrial production increased 0.5 percent in July. The gain in July marked the first monthly increase since October 2008.”

Option 2: “Industrial production increased 0.5 percent in July. Aside from a hurricane-related rebound in October 2008, the gain in July marked the first monthly increase since December 2007.”

Definitional difference

Summary

• Methods for construction IP/CU indexes have a variety of levers of adjustment

• Current compilation methods appear largely sufficient , but we are expanding our use of the new Quarterly Survey of Plant Capacity

• Recent monthly revisions have largely resulted from revised source data

• Errors in measuring IP and capacity likely offset to some degree. As a result, utilization tends to be little revised.

• Timely release of statistics together with a wide revision window has served us well

Selected List of Actions taken in otherFederal Reserve Data Releases

• H.4.1 Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

– The development and implementation of a number of new lending facilities to address the financial crisis have both increased complexity of the Federal Reserve's balance sheet and has led to increased public interest in it.

• G.19 Consumer Credit and G.20 Finance Companies– Enhancing and upgrading our sample of finance companies.

• Z.1 Flow of Funds Accounts of the United States– Expanded categories and added details related to Fed actions

• Senior Loan Officer Opinion Survey (Bank Lending Practices)– Added special questions