Industrial Production And Capacity Utilization
Definition
The Index of Industrial Production is a chain-weight measure of the physical output of the nation’s factories, mines and utilities. The capacity utilization rate reflects the usage of available resources.
Why is it important?
Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won’t lead to inflationary pressures. By tracking economic data like industrial production, investors will know what the economic backdrop is for these markets and their portfolios.
Industrial production shows how much factories, mines and utilities are producing. Since the manufacturing sector accounts for one-quarter of the economy, this report has a big influence on market behavior. The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85%) it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to this report.
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