We propose a new class of approximate factor models which enable us to study the full spectrum of quarterly IP sector data combined with annual non-IP sectors of the economy. We derive the large sample properties of the estimators for the new class of factor models involving mixed frequency data. Despite the growth of service sectors, we find that a single common factor explaining 90% of the variability in IP output growth index also explains 60% of total GDP output growth fluctuations. A single low frequency factor unrelated to manufacturing explains 14% of GDP growth. The picture with a structural factor model featuring technological innovations is quite different. IP sectors technology shocks do not play a dominant
role.
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