This morning the Federal Reserve released its April report on Industrial Production and Capacity Utilization.

The Fed's Index of Industrial Production measures the output of the nation's factories, utilities, mines, and oil and gas wells. Over the years, the Index has proven to be a reliable measure of the current state of the overall economy. It is one of the four indicators that the Department of Commerce uses in generating its monthly Composite Index of Coincident Economic Indicators.

Industrial production advanced 0.9 percent in April after a decline of 0.5 percent in March, attributed mainly to the GM strike. If we ignore the impacts of the strike and the strike resolution on the March and April index, we find that the index rose 0.3 percent in March and was unchanged in April.

This followed a upsurge of 1.2 percent in February and a drop of 0.2 percent in January. But, part of the big gain in February was due to a bounceback from the temporary disruptions caused by the blizzard that hit the East coast in early January, and the return to work of striking Boeing workers.

All this demonstrates what I've said many times before. One data point doesn't make a trend. You have to look at the data over a longer period, say a year, to get an idea of what's really happening. In the year ending in April, the Index of Industrial Production rose 2.6 percent. Looking back over the past few months, the year-to-year change in March was +1.3 percent. For February it was +1.6 percent, and in January it was +0.1 percent. So, in recent months, the year-over-year growth in the index has been increasing. In other words, economic activity is gradually expanding. Will this trend persist? We'll find out in the months to come.

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Moving on to the second part of today's Fed report, capacity utilization rose 0.5 percentage point in April, to 83.0 percent. Capacity Utilization measures the percentage of the nation's productive capacity that was employed during the month.

In January of 1995, capacity utilization hit a peak of 85.1 percent. Between then and December 1995, the indicator declined steadily to a reading of 82.1. For January through April the readings were 82.4, 83.1, 82.5, and 83.0. So, since the first of the year, capacity utilization has been fluctuating in a narrow range and essentially moving sideways.

History has shown that capacity utilization and the unemployment rate are inversely related to one another. When one falls the other one rises, and vice-versa. Perhaps the current action in the capacity utilization data is telling us that the current unemployment rate is not apt to change very much in the near term.

Byline: Lafferty (MF Merlin)