A Guide to the Index of Production

1. Introduction

The monthly United Kingdom (UK) Index of Production (IoP) provides a timely
indicator of growth in the output of production industries at constant prices. The IoP
is a key economic indicator and one of the earliest short-term measures of
economic activity and shares exactly the same industry coverage as the
corresponding quarterly series within UK Gross Domestic Product (GDP).

The main output is a seasonally adjusted estimate of total production and broad
sector groupings of mining & quarrying, manufacturing, energy and water supply &
sewerage. In general, seasonally adjusted output estimates are available down to
the National Accounts Supply Use Table (SUT) level. Output estimates are
calculated by taking value estimates and adjusting them to remove the impact of
price changes, or by using direct volume estimates. The total IoP estimate and
various breakdowns are widely used in private and public sector institutions,
particularly the Bank of England and Her Majesty’s Treasury, to assist in informed
policy and decision making.
2. Conceptual Basis

IoP is an estimate of the UK production industry’s Gross Value Added (GVA). GVA
is defined as ‘total outputs minus total inputs’. To produce this on a constant price
basis, both inputs and outputs should be deflated, which is known as double
deflation.

In practice, it is difficult and considered too burdensome to ask respondents to

supply data on inputs, therefore the majority of industries in IoP measure output as
a proxy for GVA. In general, the ratio between total output and total input remains
fairly constant, thus measuring output is a valid proxy of GVA. The main exception
to this rule is electricity data where we have data on both inputs and outputs and
can therefore produce a GVA index.

3. Defining Production

The industries included in the Index of Production are as defined by the United
Kingdom Standard Industrial Classification (UKSIC) 2007, sectors B to E inclusive.

Businesses within MBS are classified according to a Standard Industrial

Classification (SIC) based on their predominating business activity. The SIC 2007
classification was introduced in the August 2011 release in October 2011 and
represents the first major revision of the classification structure since 1992.

The geographical coverage includes all businesses whose primary output resides
within the United Kingdom. This includes England, Scotland, Wales and Northern
Ireland but excludes the Isle of Man, Channel Islands and the Falkland Islands.

The table contained in Annex A shows the levels at which production statistics are
released. The industry groups and subgroups are defined, as well as the proportion
of production represented by each group.
4. Data Sources

The majority of data used to compile the manufacturing sector, and thus the Index
of Production, is collected via the Monthly Business Survey (MBS). The data
collected is sales turnover excluding Value Added Tax (VAT). This data is then
deflated using Producer Price Indices (PPI) [see section 9]. Within the
manufacturing sector we also receive direct volume data from:

Department of Energy and Climate Change (DECC) for fuel industries;

Iron and Steel Statistics Bureau (ISSB) for steel industries.

The mining & quarrying sector is mainly comprised of data from DECC,
including volume of oil & gas extraction and coal extraction.

The majority of data used to produce the energy sector index is also from DECC
and includes energy and gas supply output.

A comprehensive list of the IoP source data can be found in the GDP(O) source
catalogue, under 3. Methods in the link below:

https://www.ons.gov.uk/economy/economicoutputandproductivity/output/methodolog
ies/indexofproductioniop

5. Scope and Coverage of MBS

In January 2010, The Monthly Business Survey replaced the Monthly Production
Inquiry (MPI) and the Monthly Inquiry into the Distribution and Services Sector
(MIDSS). The MBS brings together for the first time short term turnover information
for the production and services sector.

The MBS covers businesses which are engaged in production activity in the UK
(England, Scotland, Wales and Northern Ireland) and the provision of services in
Great Britain (England, Scotland and Wales). Neither include the Isle of Man,
Falkland Islands or the Channel Islands.

6. Sampling and Data Collection

6.1 Sampling
1
The Inter-Departmental Business Register (IDBR) is used as the sampling frame for
the MBS. A stratified random sample is used to ensure small and large businesses
are represented according to the production and services sectors’ population
structures. The MBS sample of approximately 33,000 businesses is drawn from a
total number of 1.6 million businesses within the UK (production) and Great Britain
(services) industries.

1
http://www.ons.gov.uk/ons/about-ons/products-and-
services/idbr/index.html
Turnover data are collected from a sample of approximately 6,000 production
businesses across the UK and 27,000 service providers across Great Britain. The
sample, which represents the whole production sector (with the exception of
agriculture, forestry, fishing, as well as electricity & gas suppliers) and the whole
services sector (with the exception of financial service providers), includes all large
businesses and a representative sample of smaller businesses. Collectively, all of
these businesses cover approximately 95 per cent of these sectors in terms of
turnover.

Band 0–4
one
Band 5 –9 5 – 19
two
Band 10 – 49 20 – 99 20 – 149
three
Band 50+ 100+ 150+
four
Band Bands two and three with turnover
five of greater than £60 million.

Band 0–9
one
Band 10 –49 10 – 99
two
Band 50 – 149 50 – 249 100 – 249
three
Band 250+
four
Band Bands two and three with turnover
five of greater than £60 million.

A random sample is taken from bands one, two and three, while bands four and five
are fully enumerated. The employment threshold that corresponds to each band
differs slightly depending on the concentration of businesses within the industry.
6.2 Questionnaire

Production businesses are asked to provide total turnover exclusive of VAT and the
proportion of this which is generated from goods exported outside the UK.

Businesses producing alcohol and tobacco are also asked to provide the value of
excise duty.

Businesses producing potable water are asked to provide the volume in

megalitres.

Service providers are asked to provide total turnover exclusive of VAT and, in some
industries, the value of their commission or grants.

Most businesses are able to report data for the requested calendar month although
some provide data for a similar accounting period. The questionnaire asks respondents
to indicate the dates to which the reported turnover data relates i.e. accounting period
or calendar month.

In addition, each quarter, a sub-sample of 20,000 businesses are asked to provide

information on employment including divisions of male and female, and full and part
time employees. These data are then used in the Workforce jobs section of the UK
2
Labour Market statistical bulletin.

6.3 Mode of collection

For the majority of the sample (33,000) data are collected using telephone data
entry (TDE). Respondents are sent a paper TDE letter specifying the questions and
instructions on how to return their data through the TDE system.

Approximately ten percent reply to the survey by a mode other than TDE.

2
http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/index.html
7. Editing, Validation and Imputation

7.1 Editing and Validation

The MBS uses an editing and validation approach known as selective editing. Selective
editing is an internationally recognised method that uses a data based approach to
assess the influence of business estimates on the aggregate outputs.

The selective editing approach means that the editing process should be more
efficient and effective since it will only edit potential errors that have a significant
impact on final outputs

Under selective editing, key variables on the questionnaire are defined and scores
derived. The scores compare returned values with expected values, where the
expected values are generally estimated using past data or other available information
related to the variable, for example, from administrative sources. The scores from ‘key’
variables are then combined to derive an overall score for every return. This derived,
single score for the business’ return is then tested against a methodologically set
threshold. If the score is higher than the defined threshold then the individual returns
will fail and be flagged for manual editing. Thresholds have been derived and set to
ensure minimum bias is introduced from not editing values that may have once been
edited under the previous system. Thus selective editing will not result in an adverse
impact on output quality.

Prior to passing through selective editing, individual returns are subject to a number of
user defined checks, including exports exceeding total turnover, turnover being zero
or impossible dates.

7.2 Imputation

Each month MBS achieves a response of approximately 78 per cent, providing

approximately 88 per cent of turnover. Ratio imputation is used to provide estimates for
non-responders.

The basic method is to impute for the current response Yt using the response from the
previous period Y t-1 and a growth factor (or imputation link) R.
8. Estimation

Estimation is the process of approximating characteristics of a population, in this case

production turnover in the UK and services turnover in Great Britain, when information
is available only for a sample of the population.

In order to provide estimates of the full production and services sectors, combined or
separate ratio estimation is used. Ratio estimation is used when the ratio of the study
variable over an auxiliary variable, such as turnover in the business register, is roughly
constant and the variance of the study variable can be assumed to be proportional to
the auxiliary variable. The estimate is then given by the product of the estimate of the
ratio by the population total of the auxiliary variable.

9. Deflation

The value estimates collected by the MBS reflect both price and volume changes. To
remove the direct effects of price changes, value data are deflated to produce IoP
volume measures. SUT Industries are broken down by product and deflators are
applied prior to aggregation back to SUT Industry level.

In the majority of cases, the deflators used are a combination of a home deflator
and an export deflator. Home deflators are Producer Price Indices (PPI) and export
deflators are Export Price Indices (EPI). These deflators are weighted together
using the proportion of export sales as a weight.

The volume series received from other government departments do not require
deflating.

10. Indexing

Index numbers provide a measure of the average level of prices, quantities or other
measured characteristics relative to their level for a defined reference period or location.
It is usually expressed as a percentage. Estimates of production output are published in
index form rather than in monetary form.

10.1 Reference Period

The reference period is the year for which the index is scaled to equal 100. IoP indices
are currently published in index form with a reference year of 2013 equal to 100.

To keep IoP consistent with the UK National Accounts, the reference year is updated
3
each year when weights are available from the Blue Book . The change to the
reference year is a simple calculation and does not impact on the movements of the
series.

3
http://www.ons.gov.uk/ons/guide-method/method-quality/general-
methodology/index-numbers/index.html
10.2 Chain Volume Measures

The chain volume measures of IoP are annually re-weighted chained (Laspeyres
weights) indices referenced to current price values, currently in 2013. A Laspeyres
index is a fixed base index whose index numbers are weighted arithmetic means of
price (or other) relatives, using value (or equivalent).

For each year, the values for each SUT in current prices and previous year prices
are calculated. These values are then aggregated using weights for each SUT
industry derived from fully balanced National Accounts SUT.

Each year the series is re-referenced and comparability with previous years is achieved
by chain-linking the series together to form a continuous time series. An average of the
values for October, November and December is used to provide the link factor.

Chain-linking starts at the lowest possible level of aggregation. For IoP, this means that
aggregation begins at the SUT level. These estimates are used to create a chain-linked
estimate for all businesses for each SUT. Higher level chain linked aggregates are
derived in a similar way.

The chain-linking method used is consistent with the standard National

Accounts method.

11. Seasonal Adjustment

IoP indices are seasonally adjusted by estimating and removing systematic effects
due to the time of year and the arrangement of the calendar from the non-seasonally
adjusted estimates. Seasonal adjustment is performed each month using the
standard, widely used software package X-13-ARIMA-SEATS. The annual seasonal
adjustment review is also performed using X-13-ARIMA-SEATS.

The seasonally adjusted estimates have corrections for trading days effects (the
number of each day of the week in a month) and Easter effects, which are caused by
the date of Easter moving between March and April. Prior corrections are applied as
necessary. Corrections are estimated and applied where there is a statistically
significant effect.
12. Revisions Policy

The IoP adheres to the National Accounts constraining policy. This means that each
release of IoP data is constrained to only take on revisions from a pre announced
date. This helps ensure the IoP is consistent with the wider Gross Domestic Product
estimate.

13. Links with GDP

IoP indices are consistent with those used in the production of the output measure
of GDP. Currently based on 2013 GVA weights, the production sector represents
14.6% of the total UK economy.

For the preliminary release of GDP, which is released around 24 days after the end of
the reference period, IoP provides a forecast for the third month of the quarter. This
forecast is produced using Arima models and analysing early returns to the Monthly
Business Survey and early estimates from DECC.

14. Confidentiality and Disclosure

The Index of Production is compliant with the National Statistics Code of Practice,
Principle 5, Practice1, which states:

‘Ensure that official statistics do not reveal the identity of an individual or

organisation, or any private information relating to them, taking into account other
relevant sources of information.'

All necessary steps are taken to protect the confidentiality of data collected from
respondents. This includes statistical disclosure controls to ensure that individual
respondents are not identified in the published statistics.

When data are shared with other bodies, for example Eurostat and the Scottish
Government, it is done so under legislation and using secure electronic file
transfer methods.
15. Dissemination

Statistics covering IoP estimates are disseminated monthly through:

The Index of Production Statistical Bulletin:

http://www.ons.gov.uk/ons/rel/iop/index-of-production/index.html

The Index of Production Statistical Bulletin presents the key messages within the data,
a detailed sector summary focusing on the four main aggregates: mining & quarrying;
manufacturing; energy and water supply & sewerage.

Time series data are available for users to download. This can be found at
http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?dataset=diop

Index of Production publication dates can be found on the UK National

Statistics Publication hub release calendar.
https://www.gov.uk/government/statistics/announcements

16. Reliability of Estimates

There are two possible types of error in estimates of manufacturing turnover, sampling
error and non sampling error.

Sampling error occurs because a sample, rather than the entire population, is
surveyed. It is the difference between the true value for the population and the
estimated value. One way of measuring this difference is through standard errors.

Non sampling error arises from inaccuracies in coverage, collecting, recording and
processing of the data. The most significant of these errors are: misreporting of data
items; deficiencies in coverage; non-response and processing errors. Every effort is
made to minimise reporting error by the careful design of questionnaires, building and
maintaining the sampling frame, intensive training and supervision of editing and
validation staff and efficient data processing procedures.
Annex A – Published Statistics

Weight SIC Description

1000 All Production Industries

120.4 B Mining and quarrying

0.9 5 Mining of coal and lignite
96.2 6 Extraction of crude petroleum and natural gas
23.4 7+8+9 Other mining and quarrying plus mining support

700.4 C Manufacturing

114.2 CA Food products, beverages and tobacco

86.3 10 Manufacture of food products
16.0 10.1 Processing and preserving of meat and meat products
12.4 10.2-3 Processing and preserving of fish, fruit and vegetables
1.2 10.4 Vegetables, animal oils and fats
5.0 10.5 Dairy products
5.3 10.6 Grain mill products, starches and starch products
16.8 10.7 Bakery and farinaceous products
26.0 10.8 Other food products
3.7 10.9 Prepared animal feeds
23.1 11 Manufacture of beverages
17.6 11.01-6 Alcoholic beverages
5.6 11.07 Soft drinks, minerals and bottled water
4.8 12 Tobacco products

25.4 CB Textiles, wearing apparel and leather products

12.1 13 Textiles
10.4 14 Wearing apparel
2.9 15 Leather and related products

51.0 CC Wood, paper products and printing

10.9 16 Wood and wood products except furniture
18.5 17 Paper and paper products
21.5 18 Printing and reproduction of recorded media

9.2 CD Coke and refined petroleum products

9.2 19 Coke and refined petroleum products

39.8 CE Chemicals and chemical products

39.8 20 Chemicals and chemical products
5.0 20A Industrial gases, inorganics and fertilizers
8.8 20B Petrochemicals
3.5 20C Dyestuffs and agro-chemicals
6.0 20.3 Paints, varnishes and similar coatings
9.4 20.4 Soap, detergents and cleaning products
7.1 20.5 Other chemical products

58.7 CF Basic pharmaceutical products and preps

58.7 21 Basic pharmaceutical products and preparations
55.0 CG Rubber, plastic products & other non metallic mineral products

36.1 22 Rubber and plastic products

18.9 23 Other non-metallic mineral products
10.3 23OTHER Glass, refractory, clay and stone products
8.6 23.5-6 Cement, lime, plaster and articles of concrete

83.1 CH Manufacture of basic metals and metal products

15.1 24 Basic metals
7.2 24.1-3 Basic iron and steel
7.8 24.4-5 Other basic metals and casting
68.0 25 Fabricated metal products except machinery & equipment
59.4 25OTHER Fabricated metal products excl weapons and ammunition
8.6 25.4 Weapons and ammunition

36.2 CI Computer, electronic and optical products

36.2 26 Computer, electronic and optical products

20.9 CJ Manufacture of electrical equipment

20.9 27 Manufacture of electrical equipment

50.6 CK Manufacture of machinery and equipment n.e.c

50.6 28 Machinery and equipment n.e.c

92.0 CL Manufacture of transport equipment

50.8 29 Motor vehicles, trailers and semi-trailers
41.2 30 Other transport equipment
6.2 30.1 Building of ships and boats
29.6 30.3 Air and spacecraft and related machinery
5.4 30OTHER Other transport equipment

64.4 CM Other manufacturing and repair

15.9 31 Manufacture of furniture
21.0 32 Other manufacturing
27.5 33 Repair and installation of machinery and equipment
1.9 33.15 Repair and maintenance of ships and boats
8.4 33.16 Repair and maintenance of aircraft and spacecraft
17.2 33OTHER Rest of repair; installation

104.5 D Electricity, gas, steam and air conditioning supply

104.5 35 Electricity, gas, steam and air conditioning supply
73.9 35.1 Electric power generation, transmission and distribution
30.6 35.2-3 Manufacture of gas and distribution of fuel

74.7 E Water supply, sewerage and waste management

22.0 36 Water collection, treatment and supply
20.6 37 Sewerage
31.5 38 Waste collection, treatment and disposal activities
0.7 39 Remediation and other waste activities