Industrial Production vs. Goods GDP: Two Sides of the Same Coin

January 10, 2025

Industrial Production vs. Goods GDP: Two Sides of the Same Coin?

Maria D. Tito¹

Since the early 2000s, there has been a growing divergence between the index of industrial production (IP) and the goods component of GDP-hereafter, goods GDP-breaking the close correlation the two series had maintained in earlier decades (figure 1). This note revisits the factors behind this divergence and provides a novel quantification of their role.

The close historical relationship between IP and goods GDP could be traced to the type of activity they measure. While, on the one hand, the industrial production (IP) index measures the real output of the manufacturing, mining, and electric and gas utilities industries, and, on the other hand, goods GDP aggregates goods spending by households, firms, and governments, goods output should track goods production once accounting for the role of imports.² However, as Steindel (2004) noted, goods GDP includes the output of wholesale and retail sectors-that is, it includes the portion of revenues from the sales of goods to final consumers that is earned by wholesalers and retailers beyond what the producers receive. As a result, those revenues do not affect the IP index.

To make progress on quantifying the importance of the output of wholesale and retail sectors, we look at the relationship between IP and goods GDP components. These comparisons are summarized in figure 2, which shows components of goods GDP (Expenditure) in red and the corresponding IP indexes (Production) in black.

As with the aggregate measures, consumer durables (panel A), consumer nondurables (panel B), and equipment (panel C) spending have diverged from the corresponding production indexes; the discrepancies across these components opened up even earlier than for the aggregates-for example, as far back as the early 1980s in the case of consumer durable goods. Interestingly, the IP index for construction supplies (panel D) has continued to track spending on residential and non-residential investment fairly well even as there is a starker distinction between the two concepts: Indeed, the IP index primarily measures inputs to residential and nonresidential construction, capturing upstream activity relative to the spending component.

As a first step in trying to reconcile measures of expenditure with production indexes, we account for the portion of spending that is imported. It is important to keep in mind that, while the import adjustment of the individual spending components is necessary to line them up with the production concepts, such an adjustment is not required for the topline goods GDP index because the aggregate measure includes net trade. Figure 3 adjusts the three main components of goods' GDP-consumer durables, consumer nondurables, and equipment spending-that have shown a significant divergence relative to production; the dashed blue line denotes the import-adjusted expenditure component. Even as the share of imports out of consumption have significantly risen since the 1980s, imports account only for a small share of the divergence between production and spending on consumer durables (panel A)-on average, 11.7 percent since the early 2000s. In the case of consumer nondurables (panel B), subtracting imports closes substantially more of the gap with production-or, on average, around 50 percent since the early 1990s. Finally, for equipment (panel C), the divergence between spending and production is entirely due to imports. The outsized role of imports for equipment expenditures is consistent with the developments in domestic absorption for this category: Indeed, the share of imports out of domestic equipment consumption has risen the most among final goods, climbing from less than 5 percent in the early 1980s to more than 60 percent in recent years.

My final exercise explores the role of wholesalers' and retailers' output in the divergence between expenditure and production of consumer goods, the two market groups with a lingering substantial gap between the spending and production indexes even after accounting for the role of imports. In this exercise, I rely on producer price indexes, instead of final consumer price indexes, to deflate nominal import-adjusted spending indexes. Indeed, these two sets of price indexes have exhibited markedly different trends since the mid-1980s: while producer prices (figure 4, black line) have generally increased, the trend in final consumer prices (blue line) has either been downward-for consumer durables-or shown a more muted rise-for consumer nondurables.

To understand this divergence, let's think about the concrete example of a chair-a durable good. The dynamics of figure 4.a suggest that the price wholesalers or retailers pay producers for a chair has been slowly continuing to increase, while the price consumers have been paying for the same chair has been coming down. At the same time, profit margins across wholesalers and retailers have been either mostly constant (figure 5, panel a) or increasing (panel b). These two sets of trends are consistent if the service content of the chair-such as marketing, delivery, insurance, repairs, and other services attached to the chair-has been increasing over time.³ An analogous inference is supported by looking at the data on trends in gross output by industry: indeed, since 1998, gross output in wholesale and retail industries rose 2-1/2 percentage points per year more than gross output in manufacturing.⁴

Thus, producer prices would abstract from the growth in the service content of goods, and the producer-price-deflated import-adjusted spending indicators would be also adjusted for the service content of the underlying goods. The producer-price deflated spending indexes are shown as green dotted lines (Import- and Service-Content Adjusted) in figure 6.

Deflating nominal import-adjusted expenditure measures for durables and nonenergy nondurables with producer price indexes almost fully aligns spending with production indexes, with only a relatively modest gap left unexplained in the post-pandemic period, pointing to the significance of this channel.

In all, accounting for imports and for the contributions of wholesalers and retailers to final expenditure solves the puzzle on the discrepancy between individual spending components and related production indexes. For the aggregate, however, the sole source of the growing discrepancy between goods GDP and headline IP remains the remarkable growth in the service content of final goods.

References

Bureau of Economic Analysis (2024a). Gross Domestic Product and Personal Income. Last accessed: Thursday, November 26, 2024.

Bureau of Economic Analysis (2024b). Percent Changes in Chain-Type Quantity Indexes for Gross Output by Industry. Last accessed: Thursday, November 26, 2024.

Federal Reserve Board (2024). Industrial Production and Capacity Utilization - G.17. Last accessed: Thursday, November 26, 2024.

Standards & Poors Global Market Intelligence (2024). Compustat. Last accessed: November 26, 2024.

Steindel, Charles. 2004. "The Relationship between Manufacturing Production and Goods Output." Federal Reserve Bank of New York Current Issues in Economics and Finance, no. 9 (August).

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