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Industrial Capacity is Back

When looking for economic data that tells us all how we’re all doin’, sometimes you just can’t beat the classics.

Long ago, the US was a nation that made stuff. Economic expansions or contractions could be measured by industrial output with a rather high degree of precision. Lower output meant that people were losing their jobs and the nation was slowing down.

The industrial capacity figure hasn’t been used much lately because we don’t rely on manufacturing for the bulk of the jobs anymore. At about 12M jobs, it’s just over 10% of all employment. But it still means a lot, and the results are encouraging.

The capacity utilization of US industry is calculated monthly by the Federal Reserve. They have data on the total potential output of all industry in dollar figures and take a survey of what has been made in any given month. The results are given here in this handy chart since the year 2000.

Data and chart from the Federal Reserve.

Data and chart from the Federal Reserve.

Note that it rarely goes has gone much about 80%, the average since 1972. “Capacity” is a funny thing, with plants and machinery coming online or being scrapped based on what the company thinks are its long-term prospects. It’s hard to operate much over 80% without there being bottlenecks somewhere in the system that gum up all the works. So that is the magic number that we’re all shooting for.

The Good Old Days.  ?

The Good Old Days. ?

The huge decline in utilization that came with the two official recessions in the 2000s were pretty harsh, but the one in 2009 bottomed out at 67%, a low never seen before. It bounced up fairly quickly to 75%, but that probably means that a lot of factories were taken offline, never to be counted again.

We are now at 78.8% in August 2014, off from the recent high of 79.1%. It’s very close to 80%, signaling a period of expansion. At this rate we will probably hit that figure in late 2015 or early 2016, which is when the real fun begins.

Barataria has lamented many times that companies are not investing in themselves through this era of cheap capital, meaning that we’re never going to turn the corner no matter how much money the Fed pumps into the system. But when capacity hits 80% we can expect more investment in machinery and other “durable goods”, which is to say that demand really turns on.

This, like so many other things, is looking to start becoming important right around 2017, which is to say that the real expansion is still on schedule to come right like clockwork.

Manufacturing tends to look more like this now.

Manufacturing tends to look more like this now.

Naturally, there are many things that can upend this trend and we can always revert back if there is another recession. With globalization there are also many reasons to believe that new capacity may not be built here, or for that matter might suddenly come back here if there were changes in tax policies or a big US Dollar devaluation. The period since the last recession has been a quiet one on both of those fronts, but you never know just what might be around the corner.

All in all, the capacity utilization figure shows how much we have expanded since the last official recession of 2008 – and how close we are to a point where things can be expected to finally turn around. It’s a good thing, even if it hasn’t been moving all that quickly since it bottomed out five years ago.

Like it was back in the good old days, or at least the smokier old days, capacity utilization is a figure worth keeping an eye on. It doesn’t influence as many jobs as it used to, but a period of expanding capacity helps everyone at least a little. And it is on the verge of an important milestone on the road to a genuine recovery – a new economy with renewed life.

9 thoughts on “Industrial Capacity is Back

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