|
Written by Polina Vlasenko
|
|
Monday, 08 December 2008 00:00 |
|
The October increase in industrial production gives a misleading picture of the overall state of the economy. According to the Federal Reserve, production increased in by 1.3% in October, after decreasing by 3.7% in September. Often, the overall level of industrial production can be affected by large output swings in only a couple of industries. In this case, the fall in September output and the rebound in October both are largely the result of Hurricanes Gustav and Ike and their effect on oil and natural gas operations in the Gulf of Mexico.
The Federal Reserve’s diffusion index of industrial production gives a better picture of how widespread the production decline is among the sectors of the economy. The index has followed more than 300 manufacturing, mining, and utilities industries since 1967. The value of a diffusion index varies between 0 and 100. A value below 50 means that a larger number of industries experienced a decline in production than experienced an increase, indicating a widespread decline in output. The diffusion index of industrial production since 1967 is shown on the chart below, with shaded areas indicating recessions. 
As can be expected, the index falls sharply during recessions. Most recently, the index fell to 30.8 in September, from its August value of 46.2. This means that in September for every industry that increased its output, there were more than two industries that reduced output. In contrast, in August, the balance between industries was approximately even. Output decline is spreading across an increasing number of industries, and the index now is close to the lowest value it had during the 2001 recession. That recession was fairly mild, definitely milder than the one we are currently facing. It is reasonable to expect that further declines in output and further deterioration in the index of industrial production are still to come.
|
