Itaú BBA - Heat Map of Industrial Output

Macro Vision

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Heat Map of Industrial Output

November 21, 2016

The heat map analysis reinforces the fact that activity has stopped retreating, but there are no clear signs of a rebound yet.

We have built a heat map to assess sector evolution for industrial output, as measured by the Monthly Industry Survey (PIM) released by IBGE. Recent data show activity has stopped retreating, but there are no signs of a rebound yet. We will begin publishing regular heat map updates in the next industrial output reports.

The heat map uses colors to express output performance in various industrial sectors. The index measures the behavior at the margin of each sector, where points are assigned for each month’s variation.  A sector will be assigned between -2 and 2 points, depending on the scale of the movement compared with historical performance (see below further information on methodology). Warmer colors (orange) or colder colors (blue) represent stronger or weaker performances, respectively.

Methodology

We use quarterly growth in industrial output for each sector to measure volatility and capture the underlying trend (i.e., we use the rate of growth between the quarter ending in month t and the quarter ending in t-3).  We subtract the mean from each deviation and divide the result by the series’ standard deviation.  This methodology provides a better sense of how important was the deviation in each month.  As such, the final figure (Z) represents the number of standard deviations above (+) or below (-) the mean. 

We classify each Z as follows: if Z is below (-1) standard deviation from the mean, this constitutes a “Very Weak” result and is assigned (-2) points; if Z is between (-1) and (-0.5), the result is “Weak” and is assigned (-1) point; between (-0.5) and (0.5) is a “Neutral” result (0) points; between (0.5) and (1.0) is a “Strong” result (+1) point, and any value above the average standard deviation is “Very Strong” (+2) points.

The heat map below covers the period between October 2015 and September 2016:

We have also built a diffusion index used to calculate the percentage of production segments recording very weak, weak, strong or very strong performances:

Recent evolution

Overall, industrial output is showing stability at the margin, interrupting the cycle of contractions seen in 2015 and 2016. The heat map analysis reinforces the fact that activity has stopped retreating, but there are no clear signs of a rebound yet. Looking ahead, the cyclical inventory adjustment seen in recent months is likely to continue, as demand continues to outstrip output. This scenario, alongside ongoing monetary policy loosening, points to industrial production growth in the future.

We will begin publishing regular heat map updates in the next industrial output reports.


 

Laura Pitta
Lourenço Paiva

 



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