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Economist Charles Steindel investigates the reasons why two key economic measures—the manufacturing production component of industrial production and the goods output component of GDP—diverged during the most recent recession, even though these series would appear to track the same types of economic activity.
This divergence raises a pertinent question: Are manufacturing (or “factory”) production and goods output, despite their similar names, measuring the same type of activity? The author explains that manufacturing production as an indicator of U.S. factory output is in fact a different measure than goods output. Broadly speaking, goods output comprises the sales of U.S. manufacturers, plus a very substantial amount of activity associated with the sale of all goods in the nation—most notably, the merchandising services used in the sale of imported as well as domestically manufactured consumer goods. Manufacturing production is a more limited measure, covering the output of U.S. factories.
Steindel asserts that the discrepancy between the two numbers during the 2001 slowdown is, to a significant degree, consistent with the long-run tendency of goods output to grow more strongly than manufacturing production, but the discrepancy during this period was accentuated by the strength in consumer spending relative to business capital spending. Thus, the author concludes that researchers who analyze only the manufacturing production data have a limited view of the overall goods production process.
The author explains that beginning in mid-2000, manufacturing production experienced significant declines; it fell roughly 6 ¾ percent from June 2000 through December 2001. In the year and a half that followed, production grew very little. Goods output, which accounts for some 40 percent of GDP, saw very little drop in that period, and there has been substantial growth in both goods output and overall GDP since then. The divergence in these figures has caused some to question whether one indicator is flawed, casting doubt on the reliability of the overall GDP or industrial production series. This analysis finds no evidence of error in either series.
Charles Steindel is a senior vice president in the Business Conditions Function of the Research and Market Analysis Group.