The Federal Reserve Board constructs estimates of capacity and capacity utilization for industries in manufacturing, mining, and electric and gas utilities. For a given industry, the capacity utilization rate is equal to an output index (seasonally adjusted) divided by a capacity index. The Federal Reserve Board’s capacity indexes attempt to capture the concept of sustainable maximum output—the greatest level of output a plant can maintain within the framework of a realistic work schedule, after factoring in normal downtime and assuming sufficient availability of inputs to operate the capital in place. The FRB calculates capacity indexes for 89 detailed industries and designs the indices to be consistent with monthly data on production. Capacity data reported in physical units from available government sources, which represent about 25 percent of total industrial capacity. Data for other industries are based on responses to the Bureau of the Census’s Quarterly Survey of Plant Capacity.
According to the FRB, total capacity utilization in the US economy increased slightly in June to 77.8 percent, after having trended down slightly over the prior few months. Manufacturing capacity utilization rates were 76.1 percent, while mining (which includes petroleum production) was at 87.9 percent, and utilities were producing at 77.6 percent. Reflective of the higher capacity utilization rate in the mining industries, crude production was running at a utilization rate of 86.2 percent, down slightly for the month but consistent with the first part of 2013, while capacity utilization rates for final goods production was at just 76.1 percent (down from 76.6 percent in June of 2012). Considering that average capacity utilization rates over the past 40 years are about 80.2 percent, production is running just slightly below its normal levels, but high unemployment rates and low rates of capital utilization suggest that there is significant upside in terms of new manufacturing capacity development. In fact, overall manufacturing capacity in the US economy has been relatively flat since 2000, and is still below levels set just before the 2009 recession. This follows a sizable run of capacity investment in the 1990s.
Looking across sectors, outside of motor vehicles manufacturing there has not been significant growth in capacity utilization rates this year for any industry subgroup. In fact, some industries, most notably non-metallic mineral products (like stone, ceramics, etc), printing and wood products are operating at well below 70 percent of capacity. This may reflect continued weakness in new home construction and new household creation. Other industries like food and beverages, fabricated metal products and petroleum are running at above 80 percent capacity.
Detailed data like the capacity utilization figures provide a great deal of insight into the operations of the US economy. The almost complete standstill in capacity utilization rates suggests that unemployment will not diminish quickly, something reflected in the most recent (July) unemployment figures. In addition, these data also suggest that recent surges in domestic equity prices likely have more to do with financial aspects that actual production and corporate profits. Except for certain “necessary” industries like food, petroleum and electronics, capacity utilization is nowhere near long term averages and suggests that there is still room for economic growth without triggering rapid inflation – at least in industries like wood products, paper production and printing, that are not dependent on internationally traded raw materials.