Part III. Fundamental Analysis / Chapter 11. Indicators of the Manufacturing Sector

Manufacturing sector indicators include:

• Indicator of industrial production (Industrial Production);
• Capacity utilization (Capacity Utilization);
• Factory Orders (Factory Orders);
• Durable Goods Orders (Durable Goods Order);
• Commercial, or trade, stocks (Business Inventories);
• Commodity stocks in warehouses of wholesale trade (Wholesale Inventories);
• Index of productivity and costs (Productivity and Costs).

Industrial Production: This indicator reflects the overall development of a country's economy and receives special attention as it informs future financial policy decisions. Increasing values of Industrial Production indicate a strengthening economy, which can subsequently enhance the competitiveness of goods in international markets. This, in turn, leads to an improvement in the country's trade balance and eventually boosts the currency exchange rate.

The values of the Industrial Production indicator are based on data regarding the output of factories, mining industries, and utilities. The data from various enterprises are grouped into 255 sectors. Additionally, a specific indicator called the Production Diffusion Index is calculated, which represents the percentage ratio of sectors where production has increased to the total number of sectors. The indicator values are published on the 15th of each month at 17:15 Moscow time.

Capacity Utilization: This indicator reflects the ratio of industrial production to the total productive capacity across all sectors. The Capacity Utilization indicator can be considered a lifeline in challenging situations as it has a direct relationship with the business cycle. Based on the capacity utilization of production sectors, one can infer possible policy decisions by central banks.

It is generally believed that an optimal Capacity Utilization level is around 85%. Values above this level indicate inflationary processes as the country's economy is operating at an overheated state. However, it is important to note that overproductive manufacturing, leading to inflation, can also result in increased interest rates and a stronger currency. Conversely, if the indicator values fall below the optimal level, it indicates economic weakness and a possible currency depreciation. The data for Capacity Utilization is published simultaneously with the Industrial Production index on the 15th of each month at 17:15 Moscow time.

Factory Orders: This indicator reflects the demand for both durable and non-durable goods by industrial sectors. Higher values of the Factory Orders indicator indicate increased demand and more active production, which can serve as a stimulus for expansion. Conversely, when the indicator values are low, production contracts. Based on this, a direct proportional relationship between currency exchange rates and changes in the indicator values is formed. The data for Factory Orders is published on the first business day of the month at 18:00 Moscow time.

Durable Goods Orders: Durable goods are defined as products that are used for several months or years, such as televisions, refrigerators, and automobiles. The Durable Goods Orders indicator reflects statistical data on orders for these types of goods. The statistics cover orders that are contractually or obligatorily bound and are based on a survey of 5,000 manufacturers. Orders are categorized into four sectors: machinery, metalworking, transportation, and electrical equipment.

Для исключения влияния изменчивых транспортных и военных заказов, используют два дополнительных индикатора: Durable Goods Orders Excluding Defence (не учитывает заказы оборонной промышленности) и Durable Goods Orders Excluding Transportation (не учитывает заказы транспорта).

To exclude the influence of volatile transportation and defense orders, two additional indicators are used: Durable Goods Orders Excluding Defense (which excludes defense industry orders) and Durable Goods Orders Excluding Transportation (which excludes transportation orders).

Business Inventories: This indicator reflects the volume of manufactured goods stored in inventories. The higher the value of the indicator, the weaker the sales of goods for various reasons, such as a decrease in consumer income or weak product competitiveness. As a result, an increase in the quantity of inventory leads to a decrease in the currency exchange rate. Data for this indicator is collected based on reports from manufacturers, retail, and wholesale trade. The Business Inventories indicator is considered a lagging indicator because during an economic downturn, the values of the indicator rise faster than during a recovery phase.

Data for Business Inventories is published every month, 6 business days after the publication of Durable Goods Orders, at 16:30 Moscow time. The data is presented in three reports: inventories, sales, and the inventory-to-sales ratio.

Wholesale Inventories: This indicator shows the relationship between wholesale and retail sales of goods. An increase in the values of the indicator indicates negative processes of economic stagnation and inventory buildup. Although the indicator does not have a significant impact on the market, prolonged trends can have a serious impact on the currency exchange rate. The report on wholesale inventories is published on the 10th of each month at 18:00 Moscow time.

Productivity and Costs: This index reflects the relationship between the output of goods and the time spent on production. Essentially, the indicator shows the relationship between productivity and costs. In practice, the dynamics of the index are used to forecast production growth and inflation. Data for Productivity and Costs is published on the 7th of the second month of each quarter at 16:30 Moscow time.

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