Mixed Industrial Production Meets Poor Capacity Utilization

Tuesday has been at least somewhat busy for economic reports. The Labor Department showed some positive inflation data via the Consumer Price Index for October, and the Federal Reserve showed some mixed data on industrial production and capacity utilization for the same month.

Industrial production fell by some 0.2% in October, matching the same drop of 0.2% for the month of September. The index for manufacturing moved up 0.4% in October, but the index for mining fell by 1.5% and the index for utilities was down by an even wider 2.5%.

For the third quarter as a whole, total industrial production is now estimated to have increased at an annual rate of 2.6%. This is better than the 1.8% gain that had been reported previously. At 107.2% of its 2012 average, October’s total industrial production was 0.3% above its year-earlier level.

This contains some positive for the overall production, even if it is mixed, but there is bad news on the capacity utilization component in October. Capacity for the industrial sector fell by 0.2% to 77.5% in October. This is moving farther away from the 80.0% threshold that the economy needs to see, and it is a full 2.6 percentage points below its long-run average over the past 40 years.

As a reminder, capacity matters when it comes to future rebuilding of plants and ordering more equipment. Capacity peaked at 79.0% last December and November for the post-recession high. The public hears politicians on both sides of the aisle criticize business for not expanding and not building more advanced factories, but let’s put this in context for the real world. If your base of factories is running at less than 80% capacity as is, why make that investment to build new factories?

In decades past that capacity would run at a floor of 80%, with periods under 80% being very short. Now hitting just over 80% is the impressive benchmark — one that has not been seen since early 2008.

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