Use Industrial Production Index to Forecast Market Trends
Features of Industrial Production Index
Industrial Production Index is an economic indicator that measures the volume of production in the mining and manufacturing industries, as well as public utilities. By looking at the changes in production volume, it is possible to forecast economic performance.
Many investors pay attention to the index and use it to analyze economic conditions. This is because that industrial sector represents a high percentage of gross domestic product and it has a great influence on the economy of a country. In addition, it is released on an earlier date than GDP, which makes it an important economic indicator for predicting economic performance.
Many countries publish the industrial production index and the methods of calculation differ from one country to another. In general, the value of the base year is set at a level of 100. The value of the current month is compared with the value of the corresponding month of the previous year to measure the percent change. The indices for US, EU, China and Japan industrial production especially attract investors’ attention.
By looking at the industrial production index, it is easy to understand and predict the economic performance. The industrial production index measures the production output of firms in the mining and manufacturing industries. When the economy is in expansion, personal consumption increases and production volume of companies also increases. On the contrary, the amount of production decreases when the economy is in contraction. Therefore, by examining the changes in the production volume, investors can predict the economic conditions.
In general, when the industrial production index is higher than that of prior month, the economy is likely to expand and investors are likely to buy the currency of the country. On the other hand, if the number is lower than that of prior month, the economy is likely to contract and investors are likely to sell the currency.
US Industrial Production Index Attracts Attention
As it is shown by the features of industrial production index, one of the most important factors that influence foreign exchange rates is the US industrial production index and it attracts investors’ attention. In the United States, the industrial production index, which measures the production activity, is compiled by the Federal Reserve Board (FRB).
The US industrial production index is released in the middle of each month. Compared with the value of the previous month, it measures the changes of production in the mining, manufacturing, and the electric and gas industries. The index does not include agriculture, construction and service industries.
The GDP is released on a quarterly basis, while the industrial production index is released on a month-to-month basis. It is thus important to pay attention to the industrial production index as it provides timely information.
In particular, in the case of US dollar, it has a great influence on other currencies. The base year for the index is 2002. The value of the current month is compared with that of prior month to show the percent change. If the value increases, it indicates that the economy of the US is growing and the US dollar is expected to rise. On the other hand, if the number decreases, it indicates that the economy is in contraction and the value of US dollar is expected to fall. However, it is not enough to just look at the percent changes. It is also necessary to compare with the perceived number to see whether the value is higher or lower than expected.
Even though the result shows a positive value, if the number is the same as forecast, investors would still sell the US dollar as they may predict that the growth is about to slow down. This is also true when the number is lower than expected. Investors would sell the US dollar due to fear of slow down in economic growth
It is the same the other way round. Even if the result shows a negative value, if the number is the same as forecast, investors would buy the US dollar as they may predict that slow down is about to end. If the number is higher than expected, investors would also buy the US dollar.
Use the Index to Examine Other Sectors
The industrial production index is an important indicator of the production activities in the mining and manufacturing industries. From the index, it is also possible to predict the changes in the service sectors and personal consumption expenditures.
For example, when the production volume of household appliances increases, it is possible to see that personal consumption expenditures also increase. In addition, if the production of office equipment increases, it indicates a growth in equipment investment.
In short, from the industrial production index, it is possible to forecast not only production activities in mining and manufacturing industries but also changes in service sector and personal consumption expenditures. For novice binary options traders, it can be difficult to predict changes in other sectors from just one index. To do this, it may be better to get familiarized with the trading beforehand.
Compared with GDP which is released on a quarterly basis, the industrial production index can provide timely information on production activities. However, when you trade binary options by looking at the industrial production index, it is necessary to pay attention to the factor that the index for industrial production is more volatile than the GDP.