0:17
Learning goals, after watching this video,
you will be able to understand and explain industrial production and
capacity utilization and the effect industrial production and
capacity utilization data has on the stock markets,
bond markets, and currency markets.
0:49
Industrial production covers nearly everything
that is physically produced in the economy and includes the making of cars,
umbrellas, paper clips, medical equipment, steel, what have you.
It makes no difference whether these two goods are for domestic buyers,
foreign consumers, or get stocked as inventory.
1:32
Market participants look at how much industries in the economy are presently
producing.
And then compare that output with what they can potentially produce
if the industrial sector was running at maximum capacity,
at the maximum possible capability.
This data is significant in three respects, at least three respects.
Firstly, a nation's economic power is judged by its ability to produce goods
when they are needed.
It reflects the strength and flexibility of the industrial sector.
2:43
It actually measures the changes in the volume of goods produced,
that is industrial production doesn't take the price of these products into account.
So, there is no need to worry about the distorting effects of inflation.
3:27
So let me give you an example.
So let's understand this using a hypothetical example of a bike
making firm.
Let's say that this firm has a capacity to manufacture 500 bicycles a month,
but is currently producing only 350.
So it's operating at a capacity utilization rate of just about 70%.
Now let's assume that the rest of the bike industry is operating at
the same low level.
So you can produce 500 bicycles, but you're producing only 350.
So that's only 70% capacity utilization.
And if we assume that the bike industries operating at the same low level under such
circumstances getting spare parts I don't think should be a problem, right.
Because there is likely to be a lot of extra bike tires,
brakes, etc., available from suppliers.
Nor would there be reason to hire additional workers or
invest in new bike making machinery because there are not enough buyers
out there to purchase what can already be easily produced because
people are operating at 70% capacity utilization.
But all this will change when demand surges, and
the industry starts churning out bikes at close to 100% of its capacity,
i.e., it's operating very close to its maximum capacity.
If that feverish pace continues for an extended period of time,
bike manufacturers will begin to experience shortages in parts.
5:12
They key lesson here is that as the industry gets closer to operating at
full capacity, shortages in resources emerge.
And this can generate inflation.
High capacity utilization rates can also lead to new investments in
factory equipments and planned expansions so
that companies can increase output in the future.
5:36
As you might guess, the capacity utilization rate for manufacturing
typically climbs when the economy is vibrant, and falls when demand softens.
So what effect does this data have on stock markets,
bond markets, and currency markets?
Stocks, industrial production is not one of
those high profile indicators which are known to roil the equity markets.
Strong production is generally considered to be supportive of stock prices because
it signifies more economic growth and better corporate profits.
The only concerns for stock investors is if higher production leads to
excessively tight capacity and higher prices.
6:33
What effect does it have on bonds?
Should industrial production and capacity utilization jump by a greater than
expected amount, this can prompt a sell off in the bond markets.
This is particularly the case if utilization rates climb about 80%,
a zone which can begin to drain resources,
can create bottlenecks, and definitely accelerate inflation.
On the flip side, slow production along with falling utilization rates
could raise bond prices and
lower interest rates because the threat of inflation would have subsided.
Or the expectation that inflation would increase is much lower, and
therefore bond prices will increase.
Vaidya NathanLecturer
