Understanding this indicator
A change in factory output reaches well beyond the factory gate. It affects demand for energy and materials, the movement of goods and the earnings of businesses along the supply chain. Industrial production therefore provides a useful view of the economic cycle from the activity taking place in the real economy.
The indicator combines the industrial-production growth series in the sample, using their published annual growth readings. Differences in long-term trends and volatility are adjusted before principal component analysis extracts their strongest common movement. The aim is to see through local fluctuations and identify the part of industrial activity that is changing together.
A rising composite indicates a strengthening common pattern in production growth; a falling composite indicates weakening momentum. Growth can improve while output is still below its level a year earlier, just as output can remain above last year’s level while growth slows. Keeping the growth rate separate from the level of production makes the turning points easier to understand.
Compare this cycle with manufacturing surveys, industrial commodities and equities. Surveys describe what businesses report, production statistics describe recorded activity, and asset prices incorporate changing expectations. Differences in their timing can be informative. Reading them together helps show whether a market movement is being accompanied by a broader change in industrial activity.
The green line isolates the 3–4-year Kitchin cycle from the historical data; it is a fitted cycle, not a forecast of the next turn. The lower chart shows the 7–10-year Juglar cycle and the 15–25-year Kuznets cycle. Comparing these time scales can reveal why a shorter upswing sometimes sits within a much longer period of weakness. The two main-chart axes use different scales, so compare their timing and direction rather than the height of one line against the other. Historical curves may change as the data are updated.