Itaú BBA - New Industrial Production Heat Map: Warming Up

Macro Vision

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New Industrial Production Heat Map: Warming Up

December 19, 2017

New methodology, similar result: industry is warming up

We remodeled our Industrial Production Heat Map, seeking a gauge that is more intuitive and allows a clear view which industrial segments are accelerating at the margin. The Industrial Production Heat Map confirms that the rebound in activity is becoming more widespread, but we observe there is still see a lot of slack in most segments.

Methodology: The heat map attributes colors to the performance of the many segments in industry. In the new methodology, the measure for acceleration/deceleration is the difference between the current level of industrial production in a given segment and its 12-month average (we previously used the qoq growth). To make industrial segments with different volatility patterns comparable, we standardize this measure by using the standard deviation of each segment.

Hence, if the industrial production level for a given month is close to the 12-month average, we attribute a 0 score. If the month’s result is half standard deviation above the 12-month average, we attribute a 0.5 score and, thus successively, with scores ranging from -3 (more than three standard deviations below) to 3 (more than three standard deviations above). The table below relates colors with each deviation level.

Warmer colors (orange) show that a given segment is gaining momentum, while cooler colors (blue) reflect a slowdown. The table below shows the heat map between November 2016 and October 2017:

Following our methodology, we also updated our diffusion index for industrial production, which calculates the percentage of industrial segments in each acceleration/deceleration level. Interestingly, the areas for which our indicator shows widespread deceleration (deep blue) strongly coincide with recession dates (set by the Brazilian Business Cycle Dating Committee – CODACE), which are indicated by the shaded areas in the chart below.

Interpretation and recent evolution: The table above shows that industrial production gained momentum in the past six months. This reading is confirmed by our diffusion indicator: after several months “cooling down”, the economy started to pick up in the middle of the year.

Nevertheless, after 11 quarters of recession, the economy is rebounding from a low level. Although most segments are warming up, there seems to be a lot of room for the industrial sector to recover without overheating. The chart below shows that, except for non-durable consumer goods, all categories still operate with more slack than their historical averages.

Pedro Renault

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