The IPI or the industrial production index is in the top tier of economic indicators that define the destiny of any economy in the world. along with other important indices, such as the gross domestic product, the consumer price index, or the consumer confidence index.
Though the industrial production index has a more specific and narrower scope in its analysis of the status of the economy. As it can be surmised from its name, the IPI measures the output of an economy’s industrial section.
Given the importance of the industry in any economy, you can only imagine just how important the IPI is. And in this article we are going to bring IPI under examination. But we are also going to take a look at this index from a different perspective to see just how it is tied with financial markets such as the foreign exchange market.
What Is the Industrial Production Index?
The industrial production index is a report that is published on a monthly basis to provide information regarding the performance of the industry and its different factions.
The IPI measures how much the manufacturers, mining sector, electric sector, and various other industries have been able to produce in their given time period.
In the United States, the industrial production index is published by the Federal Reserve Board of the FRB. Such reports are almost always published in the middle of every month.
The reason why such data coming out of the United States is so important will be clarified further down in this article. But as a forex trader, you need to keep an eye out for the release of this info. Because they can have a slight to great impact on the forex market.
How Does the Industrial Production Index Work?
The entity in charge of publishing the industrial production index, which is the FRB in the US, will monitor all the output by the industry over a period of one month and report their data on monthly intervals.
To gather their data, relevant agencies and organizations will collect data regarding the output by all the mining industry, gas and oil industry, electric industry, all the manufacturing industry, in addition to all the utilities industry. The aggregate of all these data will make up the IPI for an economy.
The industrial production index is a highly important factor to measure the macroeconomic strength and wellbeing. Top investors and economists use this data to understand how the economy is likely to behave in the coming months and even years.
How Is the Industrial Production Index Calculated?
In many cases with the economic indicators and indices, we do not merely have a simple number that represents the index.
Instead, there is a benchmark against which the index is measured. We have various figures obtained in various ways for different indices. Here, for the industrial production index, we have a benchmark that dates back to the year 2012 – please keep in mind that we are only considering the industrial production index released by the United States and therefore presenting the method of calculation for that country. The reason why we are only considering the United States is in the best interest of the forex market, but more on that later.
The benchmark for industrial production index is, as mentioned above, derived from the year 2012. And every month when this data is released, it is compared and contrasted with the benchmark to obtain the current status of the IPI.
So this means, the percentage of IPI does not really represent the actual production or output of the industry in any given month or year, but simply it represents the contrast of industrial production against the percentage of production recorded in 2012.
The specific data that are taken into account can be different depending upon the specific industry in question. For instance, for most of the mining industry, the figures are considered in terms of the mass of the production. While for other industries, merely the sales figures might be taken into account only.
What Are the Purposes of the Industrial Production Index?
The published IPI figures can be useful for a wide array of participants in the economy as a whole. On the largest scale, the industrial production index can be used to understand how strong an economy is doing.
Clearly, the output of the industry is directly tied to the performance of the economy. Although a crude figure, the direct relationship cannot be denied. So however much the output of the industry is high, the better performance can be expected from the economy.
And, on the flip side, if the output of the economy has shrunk compared with previous periods, it is clearly indicative of an economy in decline or one that will be in decline very soon.
On a smaller scale, business owners and managers can also use this data to measure the performance of their own sector in the industry and also compare with other sectors. As such, they can use this data to plan or adjust their path of action.
Why Is It Always the United States?
In a series of various articles, we have covered numerous aspects of fundamental analysis in the form of different economic indicators. But if you are a shrewd reader, then you might have picked up on the fact that the relationship between these economic indicators and the financial market, especially the forex market, always has to do with the data released by the United States.
In certain cases, even though these economic indicators are published by many countries, only the data from the US is taken into account and heeded carefully by forex traders. But why? Why is it always the United States?
The answer can be found in what is being traded in the foreign exchange market – i.e. foreign currencies of course.
The United States dollar has such a great hegemony in the global market that anything that can slightly affect the US dollar will ultimately have a huge impact on the forex market as well.
The hegemony of the US dollar in the world market can be seen in the percentage of the global currency reserves that are in US dollars. Around 60% of all the global currency reserves are dollars.
This staggering hegemony is why any news that comes out of the US is of utmost importance to the forex market.
This, naturally, includes economic indicators such as the industrial production index or any other economic index.
The industrial production index is an economic measure that calculates the total output carried out by the industrial section in an economy. This includes all the production and output by all the industries, including oil, gas, electric, mining, manufacturing, among others. The data is released on a monthly basis by the US Federal Reserve Board. Traders in all financial markets pay attention to the release of such information because it can impact various assets and commodities, including foreign exchange currencies.