Tuesday, October 13, 2009

August Industrial Production: Don't Mind The Dip

As before, and for the duration, I'm going to focus on levels rather than growth data. For anyone who's interested, here's the month-on-month growth for Industrial Production Index and its components (log monthly changes, seasonally adjusted):

Annual growth data of course isn't terribly informative with all the growth figures continuing to be in the red, save for the electricity index. If you've followed my last few posts, you'll know that even standard seasonal adjustment methodologies aren't a panacea, since fasting month follows a lunar not solar, calender. As such, August's slight downturn in seasonally adjusted month-on-month growth for all the components save manufacturing, shouldn't be taken too seriously and shouldn't be taken to be the start of something more pernicious.

Looking at the index levels shows a picture of gradual and moderate recovery in industrial output, save for mining, with July and August flattening out (2000=100):

This could in fact be taken to be a good sign, if my hypothesis that fasting month impeded output growth in August and September turn out to be true - more so since the manufacturing index has continued to push higher. On that basis I'd expect much stronger overall growth beginning this month, which we should see confirmed by mid-December.

The level of the electricity index - it's not far off it's all-time high - prompted me to think about capacity utilisation. We don't have official published surveys on this, so speculation is as far as it goes, but fitting trendlines (beginning 2000:01) to the indexes seemed like a reasonable rule of thumb approach to figuring out the gap between production and available capacity, so here goes:

Industrial Production Index

Mining Index

Manufacturing Index

Electricity Index

Adding together the gap between previous highs and the trendline, and the gap between current output and the trendline, as the current output gap, I got these numbers:

Overall IPI: 82.4%
Mining: 89.0%
Electricity: 90.6%
Manufacturing: 78.6%

The manufacturing number appears to too high to me based on media reports, but that's an artifact of assuming that peak production coincided with full capacity utilisation. So these numbers (obviously very rough) would actually represent an upper bound to current capacity utilisation. Still this may be useful barometer to follow in the future.

Technical Notes:
1. August Industrial Production Report is available from the Department of Statistics.

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