Industrial Production and Capacity Utilization: The 2022 Annual Revision

Industrial Production and Capacity Utilization: The 2022 Annual Revision

Release Date: June 28, 2022

Release Date: June 28, 2022
The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, revisions to the growth rates for total IP for recent years were very small. In contrast, the utilization rates for total industry are now reported to be appreciably higher in recent years.

Detailed data for manufacturing from the U.S. Census Bureau's 2020 Annual Survey of Manufactures (ASM) were incorporated in this revision. The aggregate effect on IP of those data was minimal, as the rates of change for total IP have revised no more than 0.2 percentage point in any year.[2] The contour of the pandemic period was little changed from the previously reported estimates, and total IP in May 2022 was 3-1/2 percent above its pre-pandemic (February 2020) level, about 1 percentage point less than reported previously.

In the fourth quarter of 2021, capacity utilization for total industry stood at 78.8 percent, about 2-1/2 percentage points above its previous estimate and about 1 percentage point below its long-run (1972-2020) average. A portion of this upward revision reflects higher industry-level utilization rates resulting from downward revisions to industry-level capacity. Another portion, however, results from revisions to industry weights that increased the importance of some industries with generally higher utilization rates, in particular the oil and gas sector. The utilization rates for 2018 to 2020 are about 1 percentage point higher than the previous estimates, on average, and revisions to utilization rates for earlier years are very small.

Annual capacity growth is revised down, 1-1/2 percentage points in 2021 and about 1/2 percentage point, on average, from 2018 to 2020. Capacity for total industry at the end of 2021 is now estimated to be about 3/4 percent lower than at the end of 2017; previously, it was estimated to have increased about 2-1/4 percent over this period.

This revision incorporated newly available annual data on both output and prices. As noted earlier, the updated IP indexes incorporated new data for manufacturing from the U.S. Census Bureau's 2020 ASM. For publishing, the IP indexes folded in data for 2020 from the Census Bureau's Service Annual Survey. The IP index for logging is based on special calculations provided by the U.S. Forest Service that extended previously published data; the IP index incorporated new data for 2020 and revised data for 2019. In addition, the indexes for metallic and nonmetallic minerals were updated with revised annual data for 2019 and with new data for 2020 from the U.S. Geological Survey (USGS). Data on prices from the Bureau of Labor Statistics (BLS) were also incorporated into most of the manufacturing indexes.

The monthly estimates of production have been updated to include late-arriving or revised quarterly or monthly indicator data, including information from the BLS's benchmark revisions to the Current Employment Statistics. The monthly IP estimates also reflect updated seasonal factors.

The revised estimates of capacity and capacity utilization incorporated data from the Census Bureau's Quarterly Survey of Plant Capacity Utilization (QSPC) for the fourth quarters of 2020 and 2021 along with new data on capacity from the USGS, the Energy Information Administration, and other organizations. The revised capacity estimates also included new data on capital spending from the 2020 ASM.

RESULTS OF THE REVISION
Industrial Production
Manufacturing output is now estimated to have fallen about 2-1/2 percent in both 2019 and 2020 before moving up about 4-1/4 percent in 2021; these rates of change are identical to the estimates published previously. Manufacturing output is now estimated to have dropped about 18-1/2 percent between February 2020 and April 2020 because of the pandemic, only slightly less than was originally reported. Factory output has moved up robustly since then, and the index for May 2022 is currently reported to be 3-1/2 percent above its pre-pandemic level, about 1 percentage point less of a gain than the pre-revision estimate.

The revised contour for mining output shows a modest increase in 2019, a sharp drop in 2020, and a substantial rebound thereafter. The rates of change are broadly similar to those published previously, although the gains in 2019 and 2021 are now each about 1 percentage point stronger, and the decline in 2020 is about 1-1/2 percentage points steeper. The index for mining currently stands about 4 percent below its pre-pandemic level; before the revision, the index was 2 percent below its pre-pandemic level. The rates of change for utilities output are moderately higher in 2020 and little different in other recent years.

Production by Industry Group
The output of durables decreased sharply in 2019 and 2020 before increasing rapidly in 2021. Relative to the previous estimates, the declines in 2019 and 2020 are somewhat steeper, and the gain in 2021 is modestly larger. The cumulative downward revision to output growth for durables from 2019 through 2021 was about 1-1/4 percentage points.

The index for nondurables now shows smaller declines in 2019 and 2020 and a slightly smaller gain in 2021 than reported previously. Within nondurables, the revisions to the rates of change were primarily upward, but the estimates for petroleum and coal products were revised downward appreciably. The cumulative upward revision to output growth from 2019 through 2021 was about 3/4 percentage point.

The output index for industries in scope for manufacturing IP that are not part of manufacturing under the North American Industry Classificiation System (NAICS)-that is, logging and publishing-has been recording declines for several years, and it continued to fall each year in the 2019-21 period. However, the declines in 2019 and 2020 are now reported to have been noticeably smaller than previously published.

Production by Market Group
The index for consumer goods now shows notably more output in the 2019-21 period than previously reported; in particular, it is now estimated to have increased 1 percent in 2020, whereas it was previously reported to have declined 3/4 percent. The rate of change for business equipment revised down noticeably in 2019, is somewhat stronger in 2020, and revised up in 2021. Relative to earlier reports, the index for defense and space equipment now increases more in 2019, records a decline rather than a gain in 2020, and increases less in 2021.

Revisions to the index for construction supplies were modest with the exception of a larger decline in 2020 and a larger subsequent increase in 2021. The index for business supplies revised up, on balance, for recent years relative to earlier reports. The output of materials decreased more in 2020 than was previously reported, and the rates of change were modestly stronger in other recent years.

Capacity Utilization
Capacity utilization for total industry decreased in 2019 and 2020 and moved up in 2021 and early 2022; the reading in May 2022 was 80.8 percent, about 1 percentage point above its 1972-2021 average.[3] Earlier estimates displayed a similar contour, but now the declines in 2019 and 2020 are a bit smaller, and the increase in 2021 is substantially larger. Both manufacturing and mining contributed to the declines in the overall operating rate in 2019 and 2020 and its rise in 2021 and early 2022; the latter reflected a particularly large advance in the operating rate at mines. Compared with earlier estimates, capacity utilization for total industry is now reported to have been about 2-1/2 percentage points higher in 2021 and roughly 1 percentage point higher in 2019 and 2020.

Utilization at manufacturers moved down 3 percentage points from 2018 to 2020 before rebounding in 2021 to above its 2018 level. The factory operating rate in May 2022 was 80.3 percent, about 2 percentage points above its long-run average. The current readings for manufacturing utilization are higher than the previous estimates for 2018 through 2021; the estimate at the end of 2021 was revised up about 1-1/2 percentage points. Upward revisions to utilization rates were widespread among manufacturing.

The capacity utilization rate for mining moved down 19 percentage points from 2018 to 2020 before rebounding in 2021 to 85.8 percent, just below its long-run average. Relative to its previously published rate, utilization at mines for the fourth quarter of 2021 is about 8-1/2 percentage points higher. The operating rate for utilities declined roughly 6 percentage points from 2018 to 2021 to 74.3 percent (using annual average rates), 10-1/2 percentage points below its long-run average.

Capacity
Total industrial capacity moved down 3/4 percent and 1 percent in 2020 and 2021, respectively, with declines in capacity for manufacturing and mining partly offset by rising capacity for utilities. In contrast, overall capacity is expected to rise about 1-1/2 percent in 2022. The overall decline in 2020 and 2021 is significantly larger than published earlier. Notably, capacity is now reported to have fallen from 2019 to 2021, whereas it was previously reported to have increased slightly.

Manufacturing capacity is now reported to have contracted 0.6 percent per year, on average, from 2018 to 2021. The new contour displays larger and more consistent declines than the path previously reported, which showed declines averaging 0.1 percent over the 2018-21 period. Downward revisions to capacity growth were widespread across manufacturing industries and were particularly pronounced for nondurable manufacturing industries. New data for 2021 from the QSPC contributed to the downward revision to capacity growth.

Capacity at mines rose in 2018 and 2019 and then moved down through 2021, returning to roughly its 2017 level. The decrease in 2021 was led by a decline in capacity for mining support activities. Relative to earlier reports, the overall growth in mining capacity in 2018 and 2019 was larger, as was the subsequent decline. Capacity for electric and gas utilities rose from 2018 to 2021, with particularly large increases in 2020 and 2021. The rates of increase are now modestly lower from 2019 through 2021 than stated earlier.

TECHNICAL ASPECTS OF THE REVISION
The IP indexes represent the level of real output relative to a base year. At the monthly frequency, movements of the indexes are based on indicators that are derived using industry-specific data from a variety of government and private sources. The monthly production indexes are anchored to annual benchmarks that are less timely but typically based on more comprehensive data. In most cases, the annual benchmark is nominal gross output reported by the Census Bureau deflated by a suitable price index.

Annual revisions to the IP and capacity measures generally involve (1) incorporating new and revised annual benchmark data on output, prices, and value-added proportions; (2) incorporating new monthly or quarterly data that were revised or that arrived too late to be included in the regular six-month reporting window for monthly IP; (3) updating seasonal adjustment factors; (4) updating the methods used to construct the indexes; and (5) introducing changes to the industry- or market-group structure of the indexes based on changes to underlying data sources.

Annual Benchmark Data on Output, Prices, and Value-Added Proportions
Output
The annual benchmark output indexes for IP are measures of real gross output at the six-digit NAICS (2017) level. The Census Bureau provides annual figures for value added and the cost of materials for manufacturing industries, which can be summed to obtain nominal gross output. The benchmark indexes for manufacturing for this revision incorporated information for 2020 from the ASM.

New annual data were also incorporated into many other indexes not in the scope of the ASM. The benchmark indexes for metallic and nonmetallic mineral mining were updated with any newly available data from 2019 through 2021 from the USGS, and the benchmark indexes for logging and for publishing were advanced through 2020 based on data from the U.S. Forest Service and from the U.S. Census Bureau, respectively.

Prices
Individual benchmarks of real gross output are obtained by deflating the measures of nominal gross output by annual price deflators. In general, the benchmark industry price deflators consist of price indexes from the Bureau of Economic Analysis (BEA) through 2011 that are extended through 2020 with the related producer price indexes (PPIs) from the BLS.[4] However, for a few selected industries, the annual price deflators are constructed by the Federal Reserve.[5]

Value-Added Proportions (Weights for Aggregation)
The IP system is organized as a hierarchical structure where individual production indexes are combined using a version of the Fisher-ideal index formula to construct aggregate indexes of production. Utilization rate aggregates are calculated on an annual basis through the most recent year as capacity-weighted aggregates of individual utilization rates.

The weights that are used to combine individual IP indexes into more aggregate indexes are based on the value added from the industry, calculated as gross output less cost of materials. For individual IP indexes that are defined at the six-digit (or more aggregate) NAICS level, the value-added weights are derived from either the Economic Census or the ASM. For IP indexes that cover only part of a six-digit NAICS industry, the aggregation weights were constructed by allocating value added (as defined by the Census Bureau) for a six-digit industry across the various components of IP that compose that industry.

The allocation of value added across each component was determined by that component's share of the industry's overall product shipments. As in the 2021 annual revision, this annual revision used data on product shipments based on the new 2017 North American Product Classification System (NAPCS). In earlier revisions, product shipments were classified based on NAICS and were included as part of the Census of Manufactures or ASM. NAPCS is coded independently of NAICS, and a concordance was required to align the recent data with the historical data for the period before 2017. Missing values for specific NAPCS-based products were imputed where necessary.

The Federal Reserve derives estimates of value added for the electric and gas utility industries from annual revenue and expense data issued by other organizations. For electric utilities, the measures of value added incorporate data from the Energy Information Administration of the U.S. Department of Energy and from the Edison Electric Institute. For gas utilities, the value-added estimates incorporate data from the American Gas Association. The weights for aggregation for mining industries are derived from value-added data from the Economic Census. Figures for value added for mining industries in the years between the quinquennial Economic Censuses are estimated based on both output and price changes for the industry.

The weights for aggregation, expressed as value added per unit output, were estimated with data on producer prices for the period after 2020.

Revised Quarterly and Monthly Data
This revision incorporated source data on production, shipments, and inventories that became available or were revised after the regular six-month reporting window for monthly IP was closed. These data were released with too great of a lag to be included with monthly IP estimates but were available for inclusion in the annual revision.

Revised Seasonal Factors
IP indexes are adjusted to remove from the underlying data the predictable movements related to timing, holiday, workday, and monthly or quarterly seasonal patterns. Individual indexes are adjusted using the Census X-13ARIMA-SEATS seasonal adjustment program. The seasonal factors are based on the full history of data back to 1972, where available.

Seasonal factors for indexes based on production-worker hours were updated with data through January 2022. The updated factors for the physical-product-based indexes used data through December 2021 where available. Extreme movements in indexes are often explicitly treated as additive outliers in the seasonal adjustment procedure and thus excluded from the calculation of seasonal factors. In recent years, the pandemic-related swings in most of the indexes were deemed outliers; in addition, February 2021 was deemed an outlier for many industries because of the extreme cold weather that caused widespread outages.

Seasonal factors for unit motor vehicle assemblies have been updated, and projections through June 2023 are available on the Board's website at https://www.federalreserve.gov/releases/g17/mvsf.htm. These factors are based on production data through January 2022 and were revised back to January 2017. The seasonal factors explicitly incorporate the holiday schedule for the vehicle assembly lines specified in the latest collective bargaining agreements with domestic manufacturers. The seasonal factors identify production data for February and September 2021 as outliers due to intense supply chain disruptions.

Methodological Changes to Individual Production and Capacity Indexes
Change in Source Data for Five Production Indexes
With this revision, three indexes that previously were based on physical product data are now based on production-worker hours. For two other indexes, the source for the underlying physical product data was changed from one organization to another. In all cases, the change in source data arose because the organization issuing the original data source discontinued the report.

The three indexes that are now based on production-worker hours are for farm machinery (NAICS 333111), construction machinery (NAICS 33312), and engines (NAICS 333618). Each of these IP indexes is based on production-worker hours for the first several years of their existence; each is based on data from Stark's News Service from 1987 (for construction machinery) or 1992 (for farm machinery and engines) through 2016, and on production-worker hours thereafter.

The two IP indexes now based on physical product data from a new organization are for pig iron (NAICS 3311,2 pt.) and for metal can, box, and other metal containers (NAICS 33243). The index for pig iron is now based on data from the American Iron and Steel Institute for the period from 1972 through 2016, and on data from the USGS beginning in 2017. The index for metal can, box, and other containers is based on production-worker hours for 1972 through 1976, on data from the Can Manufacturers Institute (CMI) from 1977 through 2016, and on data from the Aluminum Association combined with data from the CMI for the period beginning in 2017. The new estimates replace data on beverage can production, which were discontinued by the CMI, with data on the production of aluminum can stock.

Change in Source Data for Allocating Motor Vehicle Production to Business and Consumer Segments
The indexes for automobiles (NAICS 336111) and light trucks (NAICS 336112) each comprise two components-one for vehicles purchased by businesses (such as rental fleets) and one for vehicles purchased by consumers. This annual revision incorporates data on vehicle registrations from IHS Automotive to allocate vehicles to business or consumer segments. Previously, the business and consumer allocations were made using data from other sources, including the National Truck Equipment Association and Ward's Communication.

Change to Capacity Index for Fertilizer
With this revision, the capacity index for fertilizer (NAICS 32531) for the period beginning in 2017 is based on data from the QSPC. For the 1997-2016 period, the capacity inde