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Industrial production is an economic indicator that is illustrated as an index. It illustrates the level of production across key economic sectors, including factories, mining and utilities. Also, demand for broad economic groups is measured in consumer goods, business equipment and construction supplies. Economists and investors alike look to this indicator as a measure of economic health.
A nation's industrial production has an impact on the availability of manufacturing goods and services both domestically and internationally because it influences imports. Certain pockets of manufacturing have a higher output during strong economic cycles, including consumer durable goods such as cars and furniture. When production falters, that weakness has a domino effect and extends to other areas of an economy, including unemployment.
Economists use industrial production as a component to determine when an economy is in a recession. Other signs of a recession include faltering gross domestic product and rising unemployment as well as falling compensation trends, retail sales and personal income. Although the manufacturing sector alone accounts for only a portion of economic activity, it is a closely watched report in the financial markets.
In the United States, industrial production statistics are released on a monthly basis by the Federal Reserve Board of Governors. Revisions to the index could be issued in subsequent releases. This report is one of the deciding factors about when an economic recession begins and when it ends, so the revised numbers matter, because even a slight change can make a difference in an economy's history.
The governing body that establishes interest rate policy in a country, such as the Federal Reserve in the U.S., will pay close attention to industrial production results. This is because folded within this economic report is a measure of capacity utilization, which illustrates at what capacity an economy is operating. If economic sectors are operating at 85 percent of capacity or more, this could lead to rising inflation, which in turn influences interest rates.
Investors in the financial markets are affected by industrial production differently based on the types of securities in which they have invested. A booming economy can be rewarding for investors in the stock market, because a high-capacity utilization usually creates an environment for growing corporate profits. The same economic environment might be less inviting to bond investors because signs of rising inflation are damaging to the value of bonds.