US industrial production in December is projected to increase by 0.4% vs. the previous month in tomorrow’s release from the Federal Reserve, according to The Capital Spectator’s median econometric forecast. The projected gain represents a sharp deceleration vs. the previously reported 1.1% rise for November. Meanwhile, the Capital Spectator’s median projection for December is slightly higher than three consensus forecasts based on recent surveys of economists.

Here’s a closer look at the numbers, followed by brief definitions of the methodologies behind The Capital Spectator’s projections:

R-1: A linear regression model using the ISM Manufacturing Index to predict industrial production. The historical relationship between the variables is applied to the more recently updated ISM data to project industrial production. The computations are run in R.

R-4: A linear regression model using four variables to project industrial production: US private payrolls, an index of weekly hours worked for production/nonsupervisory employees in private industries, the ISM Manufacturing Index, and the stock market (S&P 500). The historical relationships between the variables are applied to the more recently updated data to project industrial production. The computations are run in R.

VAR-1: A vector autoregression model using the ISM Manufacturing Index to predict industrial production. VAR analyzes the interdependent relationships of the variables through history. The forecasts are run in R using the “vars” package.

VAR-7: A vector autoregression model using seven variables to project industrial production: US private payrolls, an index of weekly hours worked for production/nonsupervisory employees in private industries, the ISM Manufacturing Index, the stock market (S&P 500), real personal income less current transfer receipts, real personal consumption expenditures, and oil prices. VAR analyzes the interdependent relationships through history. The forecasts are run in R using the “vars” package.

ARIMA: An autoregressive integrated moving average model that analyzes the historical record of industrial production in R via the “forecast” package to project future values of the data set.

ES: An exponential smoothing model that analyzes the historical record of industrial production in R via the “forecast” package to project future values of the data set.

TRI: A model that’s based on combining forecasts with a technique known as triangular distributions. The forecast combinations include the following projections: Econoday.com’s consensus forecast data and the six predictions generated by the models noted above, i.e., R-1, R-4, VAR-1, VAR-7, ARIMA, and ES. The forecasts are run in R with the “triangle” package. For more information about TRI, see this post.