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Industrial Production and Capacity Utilization
During the midpoint of every month, the U.S. Federal Reserve Board issues two key reports that often heavily influence monetary decisions by the nation’s central bank. These twin reports are industrial production and capacity utilization.
Industrial production measures manufacturing, the largest component, as well as mining and utility production. The gains or losses in this index are measured in percentage terms. All told, this gauge of economic output measures the production of consumer durables (such as automotive products) and consumer non-durables (such as non-energy goods) Industrial production also covers the output of business and information processing equipment, defense and space equipment, and construction supplies and materials. When production of consumer products rises, it indicates that consumers are spending again—a necessary condition for strong economic growth. Consumer spending typically accounts for 70% of the nation’s gross domestic product, so it is a critically important measure.
Capacity utilization, meanwhile, measures the rate of factory use at various stages of the production process, the crude stage, the primary and semi-finished stage, and the finished stage. Here, as well, the month-to-month totals are expressed in percentages. Meantime, if capacity utilization is 75%, it means that three-quarters of the nation’s factory capacity is being utilized at that specific point in time. Overall, factory use of about 85% is considered a sign of strong economic activity that can invite inflationary pressures.