Posted by: Josh Lehner | September 21, 2012

Oregon Manufacturing Index

One of the indicators used in the Oregon Index of Leading Indicators is U.S. Industrial Production, as reported by the Fed. While industrial production – manufacturing, mining and utilities – does not represent that large of a segment in the economy, it is sensitive to business and consumer demand and also other economic variables like interest rates. For these reasons and the fact that Oregon remains a state that makes stuff – our manufacturing sector is about 15% larger in relative terms than the national average – this makes for a good leading indicator. However, the data is national in scope and we know that Oregon’s industry mix is different than the average state, so one item our office has been working on and off for the past year or two is creating a more Oregon specific industrial production measure. One possibility would be to use the  ISM Western Washington index, constructed in the same manner as the national ISM figures, however the data is reliant primarily on Puget Sound manufacturers which also have a different mix than here in Oregon. Another possibility is to use the extensive industry level data available at the U.S. level and adjust based on Oregon’s unique industry structure. Given that Oregon is not a big mining or utilities state, the focus here is just on the manufacturing sector and the results can be seen below.

The Oregon Manufacturing Index uses the detailed industrial production indexes for each sub-industry and re-weights their contribution to the overall index based on Oregon’s employment shares for each sub-sector. That is, the Oregon measure is more heavily weighted towards Wood Products, Computer and Electronic Products and Food Manufacturing than the U.S. index is. Conversely, the Oregon index is less reliant on activity in the Transportation Equipment or Machinery sectors. As seen in the graph, the Oregon version of the index is very similar to the national indices and the pattern over business cycles is the same as well. One item to note is that the index in Oregon grew more slowly than the national figures during the 1990s however more quickly in the 2000s. As far as I can tell the slower 1990s is a combined result of two sub-sector trends going in opposite directions: Wood Products and Computer and Electronic Products.

To a certain extent, today in Oregon we tend to think that we don’t really do a whole lot of wood products anymore given the declines we have experienced in the past few decades, however relative to the nation overall we are still very much a wood products state*. This also means that the industry does have a large influence on the Oregon Manufacturing Index. However, as employment in the industry declines over time so too does the industry’s influence on the index. [See this previous post for a historical look at the Wood Products industry in Oregon.]

The graph below shows the contribution each manufacturing sub-sector makes to the overall index. The two main trends of Wood Products’ decline and Computer and Electronic Products’ climb are clearly evident.

Finally, at this point in time the newly created index will be used as another measure of economic activity in Oregon and updated periodically and shared here on the blog and in our presentations. However given the similarities to the U.S. figures – which is to be expected given they both use the same underlying data – it will not replace the Industrial Production data in the Oregon Index of Leading Indicators. The hope is that over time as this process continues to evolve and improve, an Oregon specific measure will eventually replace the national data and provide a better leading indicator.

* Fun fact: Douglas County has long been the dominant wood products county in Oregon and in 2011 the county represented a little less than 1% of the national wood products and logging employment in the entire country while only being 0.03% of the population. While 1% may not sound like that much, considering its size that is astonishingly large and these industries combined result in a location quotient for Douglas County of over 36.

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