When understand manufacturing processes it is important to understand what manufacturing indicators really mean. By understanding what the manufacturing indicators are showing business owners can better grasp the needed concepts of manufacturing process.
The three key measurements of manufacturing health are:
- Business Inventories
- Industrial Production
- Capacity Utilization
These indicators when looked at together give you an idea of how the manufacturing portion of our economy is faring. Although manufacturing comprises a small piece of the total economy (services and retail are much larger), it is still important to the total health of the economy. Each of these measurements will look at the health of the current manufacturing sector and gives some idea of what the future will look like.
- Business Inventories-This is a measurement of the inventories that are carried by retailers, wholesalers, and manufacturers. In a slow economy, inventory will not move as quickly and levels may rise dramatically. As a result, businesses may not be able to order as much and production decreases. When the economy begins to pick up, businesses then can turn over inventory faster and reorder. High inventories can also mean prices at the respective levels will remain flat or in some cases fall. For example, clothing retailers want to move this season's styles off the shelves to make room for not only new styles, but also the changes that come with moving from summer to fall. Auto dealers want to get rid of the older models to make room for the new ones. Conversely when businesses let inventories fall too low because of weak demand they must then scramble when the economy begins an upturn to rebuild their stocks. The bottom line is that you can not sell it if it's not on the shelf. It is important to keep in mind that inventory rebuilding spurs the other two markers in this article. Economists look for trends and changes in inventories as indicators as to what will happen in the manufacturing sector.
- Industrial Production-This indicator looks at the country's manufacturing aggregate hours and is related to whether the cycle is trending up or down in terms of production. If the users of their output are carrying big inventories then manufacturers will cut back hours of production. Industrial Production is reported as a change from the previous month and usually falls in the less than one percent range. Growth in this number reflects a trend of continued orders and inventory replenishing or rebuilding. Negative or flat numbers indicate manufacturing customers are just not turning their inventory.
- Capacity Utilization-This indicator refers to the amount of usage of manufacturing output.
It gives you an idea of how much more the manufacturing sector can do. One of the really crucial pieces of information coming from this report is how much pressure (or how little) for price increases in the manufacturing sector can you expect. The reported number is usually a whole percentage. As a general rule of thumb the closer the number is to 80%, the higher the pressure is for price increases at the manufacturing level. That's not to say price increases will be automatic or across the board in all industries, however once the number hits 80%, economists begin to work about price hikes.
The other problem that may occur when nearing the 80% mark is the danger of slowdowns in deliver of goods as manufacturers will be struggling to keep up with demand. Manufacturers may be hesitant to ramp up production until they can be certain growth will be sustained.
These three indicators will signal important positions in the business cycle and may give a boost or put a damper on market activity depending on their results.