Capacity Utilization Rates

November 18, 2005 9:40am by

I’m travelling today, so light posting.

But check out this fascinating chart regarding Capacity Utiliatization Rates, via Chart of the Day:

20051118

20051118b

COTD writes: 

"While the Asian economic boom has pushed up commodity prices, those increases have yet to translate across the board since low cost Asian labor in conjunction with artificially low Asian currency exchange rates have made it difficult for US workers to compete. A low capacity utilization rate suggests that labor is not yet in a strong position to demand higher wages and when it comes to inflation, labor costs tend to play a more significant role than commodities. Today’s chart illustrates that a below average capacity utilization rate has tended to coincide with a declining core inflation rate."

Kinda clarifies why private sector job creation has been so anemic . . .

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  1. Fede commented on Nov 18

    So, the “big sucking sound” from Asia keeps wages low and so inflation is tamed in spite of high commodity prices? Is this the reason why the global economy is behaving in such a classy manner in spite of the exceptionally high price of oil? Please clarify when you get back. Thanks.

  2. rich commented on Nov 18

    What does “actual capacity” look like over this period of time. I’m not sure how to define that term but…..it appears to me that we have lost a significant amount of manufacturing capacity therefore comparing the current to past percent utilization may notproduce any valid information.

    So I guess my question is….Have we lost capacity over the time period shown on the graph?

    rt

  3. cm commented on Nov 18

    rich: Of course. Capacity may not have been lost but “uninstalled”. I figure 100% is “online capacity”, in the sense of “can start production within X weeks” (but I don’t know for sure). It’s also important not to conflate capacity non-utilization and “missing” jobs. I a situation where plants are disassembled and shipped offshore, i.e. declining capacity, the latter may be much higher.

  4. calmo commented on Nov 18

    Greetings cm,
    I’m not sure whether rich is merely pointing out the decreasing role of manufacturing and therefore the declining usefulness of ‘plant utilization’ or whether he is looking for the update on what ‘capacity’ now refers to.
    ‘Appreciate that distinction between ‘lost/uninstalled’ but wonder if there is a technical definition that we need to learn to cover this general manufacturing decline that has been with us for decades (the 50s?)

  5. spencer commented on Nov 18

    Go to http://www.federalreserve.gov/releases/g17/current/table8.txt

    You will find that over the past decade total industrial capacity — including utilities and mining — grew at a 3.5% rate . For manufacturing it was 4.0% as high tech capacity grew at a 28.5% rate and old line industrial capacity experienced a 1.8% growth rate. For example, at the peak of the boom semiconductor capacity was actually growing at over a 100% rate.

    The capacity and capacity utilization rates are derived from data on how the various companies rate their own capacity. If you are looking at many of the old line industries the relevent question is more at what price, rather then at what rate of technical capacity use. At one price for pound we can produce so much aluminun, for example. But if we increase the price to 1.25% of x we can produce a lot more aluminum.

  7. Quant Jock commented on Nov 18

    Hi,

    Just landed on your blog while looking for inverted yield curves :)- Its a great site..

  8. Blackwood commented on Nov 18

    I had a friend just tour China and apparently the air pollution is so bad that just breathing the air there is equivalent to smoking eight cigarettes a day. Cheaper labor is only part of the equation. Lack of pollution controls, workplace safety law is the other.

  9. rich commented on Nov 18

    I’m an experimentalist by training and I really don’t trust other people’s numbers unless I really know the person/organization AND really understand the numbers….how they were taken from raw numbers to “finished product”

    I guess we are getting so incredibly efficient that we don’t need very many people to create hugh volumes of stuff…hence we have a growing capacity in manufaturing.

    http://delong.typepad.com/sdj/manemploy.gif

    And even if we are that efficient….if we cannot employ more people this is really not a great story…we have a few earning much and many with significantly less….not a stable situation.

    But, I guess I should believe that the current administration really does know what they are doing and is indeed looking out for the country’s best. I need to bury that experimentalist attitude.

    rt

  10. cm commented on Nov 19

    spencer makes a good point — the capacity “reference” is really a product: facility size * production runs/shifts = volume per week, or something to that effect.

    OTOH, how is the output that a facility generates measured — units, “normalized units” (e.g. by weight) or “sales units” — (dollar) price? Physical normalization methods (i.e. boosting units 20% when switching from 10 oz jars of jam to 12 oz jars of jam) work only for products of least complexity.

    Ultimately the universally applicable utilization is “sales volume”. Output then depends on actual vs. nominal inflation. The way the USD has gone I can easily imagine “capacity growth”.

    spencer, any perspective on this?

    Actually, this relates to the productivity discussions as well.

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