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 March to 79.2 percent, continuing a slow and unsteady growth pattern over the prior few months. Manufacturing capacity utilization rates were 76.7 percent, while mining (which includes petroleum production) was at 89.1 percent up by almost 1 percentage point on the month, and utilities were producing at 85.0 percent. Reflective of the higher capacity utilization rate in the mining industries, crude production was running at a utilization rate of 87.0 percent. Considering that average capacity utilization rates over the past 40 years are about 80.1 percent, production is running just slightly below its normal levels. This is a concern considering that the business cycle is well into its middle or later stages, and both growth and capacity utilization should be topping out prior to the next recession – which we believe should be starting to show by 2016. In fact, overall manufacturing capacity in the US economy has been falling on a trend basis since the early 1970s, and is still slightly below levels set just before the 2009 recession.
Looking across sectors, capacity utilization rates are below 70 percent in the non-metallic minerals, textile and miscellaneous production sectors, while they are approaching 90 percent in both mining (which includes oil production) and the petroleum and coal products industries. Only a few industries – specifically fabricated metal products, machinery, electrical equipment, motor vehicles and mining are operating at capacity utilization rates above their long term average.
Detailed data like the capacity utilization figures provide a great deal of insight into the operations of the US economy. Outside of just a few sectors – particularly energy – industrial production is not growing rapidly and plants are still operating at below pre-recession peaks. This suggests the economic growth, wage growth and employment growth will continue to be lethargic. It also confirms that (again outside of the energy sector) new investments are not being made, and that companies are neither seeing pricing power nor a need to increase output. They also continue to confirm that recent surges in domestic equity prices likely have more to do with financial aspects that actual production and corporate profits.
Subscribe to the Monthly Manifesto
Why subscribe to the JDA Monthly Manifesto?
This monthly economic newsletter is one way John Dunham & Associates assists clients and friends to better communicate and manage issues using sound economic and fiscal research — what we call Guerrilla Economics.
For more information on how we can help on your legislative issues, please contact us at 212-239-2105.