Why There Is Still Way Too Much Capacity to Show Robust Economic Growth

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The Federal Reserve released its March reading for industrial production and capacity utilization. Some sources look strong, but also parts of the report look less than robust. It is one thing to see industrial production and output rise, but there are some serious shortfalls in capacity utilization, now and versus longer-term averages, that signal that U.S. companies might be able to churn out far more output without many major capital spending investments.

Industrial production rose by 0.5% in March, which translated to a 4.3% gain year over year. Mining and utilities lead the gains in March. February’s production report was revised from up 1.1% to up a tad less at 1.0%.

Manufacturing output rose just 0.1%, one-tenth of a point shy of Bloomberg’s consensus estimate of 0.2%. February’s manufacturing gain of 1.2% was revised higher to a gain of 1.5%. Volumes were up 3% year over year, but business equipment output and certain high-tech components were strong. Vehicle production was another source of strength in March.

Mining output rose by 1.0%, which the Federal Reserve showed was mostly tied to the gains seen in oil and gas extraction and in support activities for mining. While the materials group rose in March’s monthly reading, the construction segment fell from February. Still, those readings were up on a year-over-year basis by 5.5% for materials and 3.3% for construction.

Capacity utilization was up at 78.0% in March, but that was after the report for February was revised down to 77.7%. This was the highest capacity utilization report in three years, but that old 80% capacity hurdle has remained elusive for far too long — and it also begs the question about why companies should be building newer, better and more expensive plants and facilities when they have so much excess capacity in the system. The Fed showed how the non-mining and non-utility measurements were very weak in March:

Capacity utilization for manufacturing decreased 0.1 percentage point in March to 75.9 percent, a rate that is 2.4 percentage points below its long-run average. The operating rate for durables, at 75.9 percent, was 1.0 percentage point below its long-run average, whereas the rates for nondurables and for other manufacturing (publishing and logging), at 77.0 percent and 61.3 percent, respectively, were further below their long-run averages of about 80 percent for each.

While these numbers have to be very far off against estimates to move the markets, there also have been some very recent annual revisions to industrial production and capacity utilization.