Industrial Production measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities. The level of Industrial Production is a leading indicator of the state of the economy because the production responds quickly to the ups and downs of the business cycle and correlates with consumer conditions, such as the employment rate. The Industrial Production data are published monthly, usually in the middle of the month.
Many factors influence Industrial Production, but energy prices and supply chains are the main ones. When raw material prices rise, it becomes more difficult for manufacturers to produce the same volume of products at the old prices. As a result, the manufacturers either have to cut production or raise product prices. In the first case, they have to reduce staff, and in the second, they have to raise prices. Reducing staff leads to higher unemployment, and higher product prices lead to higher inflation.
Things are much more complicated with supply chains. But in simple terms, when supply chains are disrupted, as, during the pandemic, factories could not get the necessary components for production on time or in the right quantities. As a result, queues for orders and delays formed. All this also leads to a decrease in production.
How to read the US Industrial Production data?
The Industrial Production data should be evaluated on two levels. The first is to compare the actual data with the economists' forecast. The second is to check the overall dynamics of production in order to understand whether there is a slowdown or growth.
If the US Industrial Production data is rising, but the fact is worse than expected, it may lead to some disappointment for investors. Negativity is usually accompanied by a decline in stock indices, and a rise in the dollar index.
If the US Industrial Production data is rising and the fact is better than expected, it is a sign of the health of the economy. Typically, with such data, stock indices go up, and the dollar index goes down.
If the US Industrial Production data is falling, but the fact is better than expected, it can be seen by the market as a positive. A positive is a rise in stock indices and a decline in the dollar.
If the US Industrial Production data is falling and the fact is worse than expected, it is definitely a negative. On the negative side, indices go down and the dollar goes up.
Of course, this is a general concept, as there are many additional parameters, for example, capacity utilization, the level of production in manufacturing, the level of production in mining, etc. For example, in the US, manufacturing is 80%, and mining is 20%. But in Australia, mining accounts for almost half of the total production.
The Industrial Production data has a general impact on the market and has little effect on the price at the time of the publication.