Beyond Industrial Production, Has Capacity Utilization Peaked?

Tuesday morning’s economic releases included a gain in industrial production for the month of June. Production rose by 0.3%, rather than the 0.2% consensus expected by Bloomberg. Capacity utilization also managed to come in marginally ahead of estimates at 77.8% rather than the 77.7% consensus.

The good news is that this industrial production reading was after slight decreases in May and in April. The bad news is that even though capacity utilization was at the top of the range and ahead, it is still running too low for a recovery. The net result is that factories and plants are only running at 77.8% of capacity.

If you look at this chart for the use of capacity from the St. Louis Federal Reserve, you begin to see what is happening. You also must keep in mind that this includes the factory closures that have been seen. Even after the jobs have been sent overseas and even after plants have been consolidated, the United States is running on lower and lower capacity utilization.

The peak of the 1980s and 1990s at 85% is probably not realistic for a goal in capacity utilization. Getting back to 80% or above, on the other hand, is something that should be a goal. Higher capacity means higher output, even if higher output can be milked out of lower capacity rates as we are seeing. Higher capacity utilization means more jobs.

By the way, did you know that your state’s unemployment rate is influenced by whether it was considered a red state or blue state by the electoral college? It is.

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