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 indices 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 by 0.8 percent in November to 79.0 percent, continuing an upward trend over the prior few months. Manufacturing capacity utilization rates were 76.8 percent, while mining (which includes petroleum production) was at 89.7 percent, and utilities were producing at 81.0 percent. Reflective of the higher capacity utilization rate in the mining industries, crude production was running at a utilization rate of 88.3 percent, up by 3.5 percent over the last year, while capacity utilization rates for final goods production was at just 75.9 percent (up just 2.5 percent over 12 months). 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 relatively high unemployment rates suggest that there is significant upside in terms of new manufacturing capacity development. That said, capacity utilization is up substantially since hitting a low of 66.9 percent at the height of the recession.
A number of sectors have seen large changes in capacity utilization over the past 6 months, with automobiles, furniture, textiles and apparel experiencing significant growth in utilization. On the other hand, capacity utilization rates are down slightly for plastic products, machinery and computing equipment. Some industries, most notably non-metallic mineral products (like stone, ceramics, etc), printing and miscellaneous manufacturing are operating at below 70 percent of capacity. Other industries like fabricated metal products, paper, electrical equipment 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 recent increases in capacity utilization rates suggests that the job market is likely to continue to strengthen over the medium term. There is also a lot of capital currently sitting on the sidelines or being used for passive investments that may begin to move toward more productive activities if capacity constraints begin to show in specific industries. This could lead to a softening in domestic equity prices which have been pushed up by stock repurchasing activities encouraged by the availability of low or even negative interest rate loans. This is in line with the other economic indicators in the last couple of months that are suggesting that the business cycle is normal but depressed.
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