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The Federal Reserve Takes an Axe to Industrial Production28 Mar 08The Fed slashed industrial production growth in 2006 by half. The revision to manufacturing output growth was even worse, concentrated in core manufacturing. The Federal Reserve took another look at recent industrial production numbers and chopped 2006 output growth by 1.8 percentage points, to 1.7%, and cut 2005 output growth by 0.6 percentage point, to 2.6%. However, 2007 growth was raised by 0.4 percentage point, to 2.1%, while the 2003 and 2004 production gains were raised modestly. The manufacturing sector—which makes up 79% of total production—bore the brunt of the damage. Manufacturing output growth was slashed by 2.2 percentage points, to just 1.1% in 2007, essentially losing two-thirds of the prior estimated growth. As with the broader output measure, manufacturing growth rates for 2007 were raised to reclaim about one-fourth of that lost growth, but still leaving output levels much reduced.
The high-technology sector was revised hard, with 2006 output growth hammered by 6.1 percentage points. The largest revision in percentage terms was in aerospace and miscellaneous transportation equipment (planes and trains), where output growth was slashed by 10.2 percentage points, to show only 4.5% growth. The revisions reflect much finer and more reliable data from the annual Census Bureau surveys (in this case, for 2006), as well as incorporating methodology changes and refinements. Few manufacturing industries escaped the red ink revisions for 2006. Chemicals, paper, and wood were among a select group to see upward revisions for 2006; of those, only wood received a downgrade for 2007. Upward revisions were commonplace for 2007, with only a scattering of downgrades—but the majority of the 2007 gains only recouped between one-quarter and one-third of what was removed from 2006 growth. So-called core manufacturing took it on the chin in the revisions. Production growth in manufacturing excluding high technology and motor vehicles was trimmed by 1.9 percentage points, to only 0.6% in 2006. The 2007 growth rate was lifted by 0.4 percentage point, to 1.4%. But even the combined 2006 and 2007 growth of 2.0% barely exceeded the amount that was trimmed from 2006. The downward output revisions noticeably lowered capacity utilization rates. The factory operating rate was trimmed by 1.1 percentage points, to 79.0%, in fourth-quarter 2006 and by 0.5 percentage point, to 79.2%, in the final quarter of 2007. Recent monthly changes versus the fourth quarter are negligible, but operating rates are weaker than previously believed. Recent output growth is also mostly unaffected, since there is little new short-term data compared with two weeks earlier. The bottom line is that production growth was not as strong as previously believed from 2005 through the present. Rather than core manufacturing doing better than the general economy over that span, it has done worse—much as it has for most of the past decade. by Michael Montgomery
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