Industrial Production and Capacity Utilization
What Industrial Production Measures
The Federal Reserve's Industrial Production Index tracks output in the manufacturing, mining, and utility sectors. Unlike most economic data from the Census Bureau or BLS, this series comes directly from the Fed.
Coverage:
- Manufacturing: approximately 75% of index
- Mining (including oil and gas): approximately 15%
- Utilities: approximately 10%
Index base: 2017 = 100
The point is: Industrial production provides a physical output measure—actual units produced, not dollar values. This makes it useful for understanding real economic activity.
Monthly Movements and Interpretation
| Month-over-Month Change | Interpretation |
|---|---|
| Above +0.5% | Strong expansion |
| +0.1% to +0.5% | Moderate growth |
| -0.1% to +0.1% | Flat |
| -0.1% to -0.5% | Mild contraction |
| Below -0.5% | Significant weakness |
Worked example (October 2024):
- Total industrial production: -0.3% month-over-month
- Manufacturing: -0.5%
- Mining: +0.3%
- Utilities: -0.7%
Manufacturing weakness dominated, partially offset by stable mining output.
Manufacturing Subcomponents
The manufacturing index includes major industry groups:
| Industry | Approximate Weight | Sensitivity |
|---|---|---|
| Motor vehicles and parts | ~5% | Highly cyclical |
| Computers and electronics | ~8% | Tech demand |
| Machinery | ~6% | Capex signal |
| Chemicals | ~12% | Mixed end markets |
| Food and beverage | ~9% | Defensive |
| Petroleum and coal products | ~6% | Energy prices |
The practical insight: Headline manufacturing can be distorted by a single large industry. Auto production swings from plant shutdowns or chip shortages significantly affect the total.
Capacity Utilization: The Inflation Signal
Capacity utilization measures how much of available production capacity is in use:
The calculation: Capacity Utilization = (Actual Output / Potential Output) x 100
Historical thresholds:
| Utilization Level | Interpretation |
|---|---|
| Above 82% | Near capacity; inflation pressure |
| 77-82% | Normal operating range |
| Below 77% | Significant slack; deflation risk |
Long-run average: Approximately 79-80%
Worked example (October 2024):
- Total capacity utilization: 77.1%
- Manufacturing: 76.6%
Readings below the long-run average suggest spare capacity—reducing inflationary pressure from the production side.
Why Capacity Utilization Matters for Inflation
When factories run near capacity:
- Companies have pricing power (supply constrained)
- Lead times extend
- Capital investment increases to expand capacity
When factories have slack:
- Competition intensifies
- Pricing power limited
- Capital investment deferred
The durable lesson: Capacity utilization above 82% historically corresponds to accelerating inflation. Current readings below 78% suggest muted production-side inflation pressure.
Investment Implications
| Utilization Trend | Capex Signal |
|---|---|
| Rising toward 82%+ | Companies may announce capacity expansion |
| Stable 77-80% | Maintenance capex, limited expansion |
| Falling below 77% | Capex delays; industrial company earnings pressure |
For industrial companies: Rising utilization means higher margins (fixed costs spread over more units) and potential capacity investment.
For equipment suppliers: Watch utilization—when it exceeds 80%, equipment orders typically increase with a 6-12 month lag.
Mining Production and Energy
The mining component is dominated by oil and gas extraction:
| Subcomponent | Key Driver |
|---|---|
| Oil and gas extraction | Rig counts, oil prices |
| Coal mining | Utility demand, regulation |
| Metal ore mining | Global commodity prices |
Worked example: When oil prices crashed in 2020, mining production fell 12%. By 2022, the recovery in oil prices brought mining production back above pre-pandemic levels.
Utilities Component
Utility production (electricity and gas) is largely weather-driven:
- Hot summers increase electricity demand (air conditioning)
- Cold winters increase heating demand
- Mild weather depresses utility output
The practical point: Exclude utilities when assessing underlying industrial trends. Include them when analyzing total output or energy demand.
Revisions and Data Quality
The industrial production index is revised more than most Fed data:
| Revision Type | Timing |
|---|---|
| Monthly revision | Each release revises prior months |
| Annual benchmark | July (aligns with new Census data) |
Typical revision magnitude: +/- 0.3 percentage points for recent months
The practical point: Do not overweight any single month. Use three-month moving averages for trend analysis.
Industrial Production and Recessions
Industrial production typically:
- Peaks before official recession start
- Declines throughout recession
- Troughs near recession end
Historical pattern: A year-over-year decline in industrial production of 2%+ sustained for three months has historically coincided with recessions.
Common Pitfalls
- Treating IP as a proxy for GDP: Manufacturing is only ~11% of GDP; services dominate
- Ignoring industry composition: Auto or tech disruptions distort totals
- Using utilization without context: Industry-specific utilization matters more than aggregate
- Missing weather effects in utilities: Adjust for extreme weather months
Checklist for Industrial Production Day
Before the release (mid-month):
- Know consensus for headline and manufacturing
- Note recent ISM manufacturing for directional hint
- Check for known disruptions (auto plant shutdowns, storms)
After the release:
- Compare manufacturing to mining and utilities
- Check capacity utilization level vs. 80% threshold
- Note revisions to prior months
- Calculate year-over-year change for trend
Next Step
Track manufacturing capacity utilization alongside core capital goods orders for six months. When utilization rises above 80% while orders are strong, companies often announce capacity expansion—a positive signal for industrial equipment suppliers and construction firms serving manufacturers.