What are measurements of manufacturing health?
There are certain key indicators of manufacturing health. Knowing and understanding these indicators is important to determine the health of your manufacturing business. These indicators when they are taken together give you an idea of how the manufacturing portion of the economy is faring. Keep in mind that although manufacturing comprises a small piece of the total economy (services and retail are larger); it is still important to the total health of the economy. Each of these measurements looks at the health of the current manufacturing sector and gives an idea of what the future will look like. 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. Keep in mind that all factors must be considered as one measurement alone, does not give a complete picture. Here are the key measurements of manufacturing health-
- Industrial Production- This measurement looks at the country's manufacturing aggregate hours. This is related to whether the cycle is trending up or down, in terms of production. This is important to determine because if the users of their output are carrying big inventories, manufacturers will cut back hours of production. Industrial Production is most often reported as a change from the previous month, and usually falls in the less than one percent range (0.4%, for example). Growth in this number reflects continued orders and inventory replenishing or rebuilding. Negative or flat numbers are an indication that manufacturing customers are not turning their inventory.
- Business Inventories- Business Inventories are a direct measurement of the inventories that are carried by retailers, wholesalers, and manufacturers. In a slow moving or down economy, inventory will not move as quickly and levels may rise. Because of this businesses may not order as much, and production decreases. When the economy begins to pick up, businesses will turn over inventory faster and reorder. High inventories can also mean prices at the respective levels will remain flat, or in some cases fall. The other side of this is when businesses let inventories fall too low, because of weak demand and then must scramble when the economy begins an upturn to rebuild their stocks. Business owners realize that they must have items in stock and on hand to sell to their customers. It is important to note that inventory rebuilding spurs all other manufacturing measurements. Business Inventories are changes that are noted in tenths of a percentage (0.3%, for example). Economists will look for trends and changes in inventories, as indicators to what will happen in the manufacturing sector.
- Capacity Utilization-This manufacturing measurement refers to the amount of usage of the manufacturing output. It gives you an idea of how much more can the manufacturing sector do. One of the real important pieces of information coming from this measurement is how much pressure (or how little), for price increases in the manufacturing sector you can expect. The reported number is a whole percentage (72%, for example). A general rule of thumb is that the closer the number is to 80%, the higher the pressure is for price increases at the manufacturing level. It is important to note that it is not to say price increases are automatic, or across the board in all industries, however once the number hits 80%; economists begin to worry about price hikes. The other problem that can occur when nearing the 80% mark is the danger of slowdowns in deliver of goods, as manufacturers struggle to keep up with demand.This is because manufacturers may not want to ramp up production until they can be certain growth will be sustained.