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 July to 79.2 percent, continuing a very slow growth trend so far in 2014. Manufacturing capacity utilization rates were 77.8 percent, while mining (which includes petroleum production) was down slightly at 89.4 percent, and utilities were producing at 75.9 percent. Reflective of the higher capacity utilization rate in the mining industries, crude production was running at a utilization rate of 87.0 percent, down slightly for the month but consistent with the first half of 2014, while capacity utilization rates for final goods production was at just 77.6 percent (up from 75.6 percent in the prior year). Considering that average capacity utilization rates since 2000 have rarely been above 80 percent, production is running at about its normal level. That said, continued high unemployment rates, weakness in wage growth, and low rates of capital investment suggest that there is significant upside in terms of new manufacturing capacity development even though growth in overall manufacturing capacity in the US economy has been relatively flat since 2000.
Looking across sectors, over 2014 most industries are seeing utilization rates approaching 80 percent, with motor vehicle production and mining approaching the 90 percent mark. This too suggests that most industries would benefit from additional capital investment and wages and hiring should be growing.
Detailed data like the capacity utilization figures provide a great deal of insight into the operations of the US economy. High capacity utilization is generally a sign that wages and prices should be increasing; however, that has generally not been happening. This is partly due to price and wage pressure exerted by manufacturers in low-wage countries like China or Mexico, but may also reflect better inventory and production control at the factory level. If this is the case, one may expect wage and employment growth to continue to be slow as companies continue to squeeze profits out of existing plant and equipment – if not, we can expect inflation to ramp up quickly.
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