Capacity Utilization

The Lehmann Letter (SM)

This month’s letters are focused on the supply side: Production, costs and prices.

The objective: To determine whether or not output is growing in a sustainable fashion and whether or not rising costs and prices threaten.

(Recall that last month’s letters found demand’s bedrock indicators – real estate, motor vehicles and borrowing – to be weak and directionless.)

Yesterday’s letter reported that manufacturers, wholesalers and retailers continued to rebuild inventories on the expectation of rising sales. That’s a good sign.

This morning the Fed announced that capacity utilization remained flat in October:

http://www.federalreserve.gov/releases/g17/Current/default.htm

Capacity utilization hasn’t changed since July. This mirrors industrial production’s record, which also hasn’t grown since July.

Capacity utilization answers this question: What is the current level of output expressed as a percentage of the maximum? Industrial production and capacity utilization have remained flat for a quarter-year, and that is not a good sign. To some extent warm fall weather was responsible because electric output slumped as customers turned off their heaters. But manufacturing didn’t do much either.

Capacity Utilization

(Click on chart to enlarge.)

Recessions shaded

So we will need to keep our eyes on the chart and remain vigilant. Capacity utilization that hovers under 75% is not a sign of robust growth. Historically 80% is a good marker of an economy running close to its full capacity. Anything above 85%risks rising costs and inflationary pressure.

The Bureau of Labor Statistics is scheduled to release its report on consumer prices tomorrow morning. That will provide an opportunity to measure costs and prices.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars a
nd then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann