Is Industrial Production an Accurate Economic Indicator in the Information Age?

by: Mark J. Perry

In Saturday's NY Times, Floyd Norris reports that:

The current recession has become the second-worst in the last half-century and is close to surpassing the severe 1973-75 downturn, according to the Index of Coincident Indicators, based on government data and compiled each month by the Conference Board. Unlike the more widely followed Index of Leading Indicators, which is supposed to help forecast changes in the economy, the coincident index is aimed at simply recording how the economy is doing now.

The index is based on four elements, covering different aspects of economic activity. The two areas in which this is already the worst recession since 1960 are employment and industrial production. The 15.4% fall in industrial production, while worse than in previous recessions, is better than in some countries.

Industrial production is also one of the main variables used by the NBER to determine recessions:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

MP: But is industrial production still as relevant as an economic indicator as it used to be? Probably not, since industrial production is a measure of manufacturing output. Manufacturing jobs as a percent of total payroll employment have declined significantly from 26.5% in 1969 (more than 1 out of every 4 jobs was in manufacturing) to the lowest-ever level of only 9.25% (about 1 in 11 jobs is in manufacturing) in March 2009 (see chart above).

Since fewer than 10% of all U.S. jobs are now in the manufacturing sector, should we continue to rely on industrial production as a key economic variable, when the manufacturing share of overall employment continues to decline to record low levels? Probably not. While it might have made sense to rely on industrial production as a key economic indicator in the 1960s and the 1970s during the Machine Age, it probably doesn't make sense any longer in the Information Age.

To replace or supplement industrial production, what about some alternative Information Age measure of economic activity that might include web traffic, web pages, internet connections, software sales, online retailing activity, etc.?