What Is the Industrial Production Index (IPI)?
Let me explain the Industrial Production Index, or IPI, directly to you. It's a monthly economic indicator that measures real output in the manufacturing, mining, electric, and gas industries, all relative to a base year.
The Federal Reserve Board, or FRB, publishes it in the middle of every month, and it's also reported on by the Conference Board, which is a member-driven economic think tank. Additionally, the FRB releases revisions to previous estimates at the end of every March.
Key Takeaways
- The industrial production index (IPI) measures levels of production and capacity in the manufacturing, mining, electric, and gas industries, relative to a base year.
- The Federal Reserve Board (FRB) publishes the IPI in the middle of every month, and revisions to previous estimates at the end of every March.
- The composite index is an important macroeconomic indicator for economists and investors.
- Industry-level data, meanwhile, is useful for managers and investors within specific lines of business.
How Does the Industrial Production Index (IPI) Work?
You should know that the IPI measures levels of production in the manufacturing, mining—including oil and gas field drilling services—and electrical and gas utilities sectors. It also measures capacity, which is an estimate of the production levels that could be sustainably maintained, and capacity utilization, the ratio of actual output to capacity.
Calculating the IPI
When we talk about calculating the IPI, industrial production and capacity levels are expressed as an index level relative to a base year—currently 2012. This means they don't show absolute production volumes or values, but rather the percentage change in production relative to 2012.
The source data varies; it includes physical inputs and outputs such as tons of steel, inflation-adjusted sales figures, and sometimes hours logged by production workers. The FRB gets this data from industry associations and government agencies, then aggregates it into an index using the Fisher-ideal formula.
Important to note: the indices are available in seasonally adjusted and unadjusted formats.
Within the overall IPI, there are sub-indices that give a detailed look at the output of highly specific industries. For example, among dozens, you have monthly production data for residential gas sales, ice cream and frozen dessert, carpet and rug mills, spring and wire products, pig iron, audio and video equipment, and paper.
Benefits of the Industrial Production Index (IPI)
Industry-level data from the IPI is useful for managers and investors in specific lines of business, while the composite index serves as an important macroeconomic indicator for economists and investors—fluctuations in the industrial sector account for most of the variation in overall economic growth.
That said, the IPI differs from the most popular measure of economic output, which is gross domestic product (GDP): GDP measures the price paid by the end-user, so it includes value-added in the retail sector, which the IPI ignores. Also, keep in mind that the industrial sector makes up a low and falling share of the U.S. economy—less than 20% of GDP as of 2016.
Capacity utilization is a useful indicator of demand strength. Low capacity utilization, or overcapacity, signals weak demand. Policymakers might see this as a sign that fiscal or monetary stimulus is needed. Investors could interpret it as a coming downturn, or—depending on signals from Washington—as a sign of incoming stimulus.
On the flip side, high capacity utilization can warn that the economy is overheating, suggesting risks of price rises and asset bubbles. Policymakers might respond with interest rate hikes or fiscal austerity. Or they could let the business cycle run its course, which likely leads to an eventual recession.
Historical Data
For historical context, below is the seasonally-adjusted IPI for the 50 years up to October 2017. Data goes back as far as January 1919, so you can access a long-term view if needed.
