Recent data on the production of capital goods can put the profile of any jagged mountain range to shame. There have been too many peaks and troughs for comfort.
For example, the government of India said on Monday that capital goods output in July was down 15.2% after a 38.2% expansion in June. That’s a move of 53.4 percentage points in one month.
The question to be asked is this: Is it time for policymakers to look at core industrial production—an index of factory output that does not include capital goods, somewhat akin to the core inflation measures that central bankers use by removing volatile items such as food and fuel from price indices? The Reserve Bank of India (RBI), for instance, looks at non-food manufacturing prices rather than the entire Wholesale Price Index.
The reason central bankers have begun tracking core inflation is that it provides a clear view of the price trend in an economy; food and fuel prices tend to be volatile and hence muddy the waters. Much the same has been happening with the way capital goods data— which accounts for around a one-tenth of the Index of Industrial Production (IIP)—has behaved in recent months.
There is one important difference between the use of a measure of core inflation and one of core manufacturing. The former is based on a sound theoretical footing, while the latter is merely a compromise forced on all of us because of the poor quality of data.
Anyway, the factory output numbers without the volatile data on capital goods—aka core output—suggests that industrial activity is slowing. The recent trends in car sales and the Purchase Manager’s Index (PMI) also point in the same direction.
What does the data minus capital goods tell us? One investment bank report painted a slightly different picture saying: “Excluding this volatile segment, the remaining 90% or so of output is estimated to have picked up for the first time in five months, but remains weak when smoothing through monthly fluctuations. Combined with indicators ranging from domestic vehicle sales to PMI surveys, this adds to the list of evidence that real activity in the Indian economy is slowing.” The big question: Is this enough to convince RBI to hit the pause button on Friday?
Manufacturing slowdown: for real or a data artefact? Tell us at firstname.lastname@example.org