Capacity utilization reaches 80%

[NCR85]

Source:
http://www.slate.com/blogs/moneybox/2012/08/20/slouching_toward_recovery.html

US Capacity Utilization is back at 80%. It rarely went above that level prior to the onset of the recession. Does this mean the output gap - despite GDP not having returned to it's long-run trend - is closed and some of the major inflationist arguments will materialize now? Has hysteresis worked it's magic and crushed the keynesian dream of reviving an idle economy by simply raising demand? Is the neo-keynesian argument for low inflation now wiped off the table and will Krugman's smug smirk be wiped off his face?

Apologies for dramatizing a bit, but surely this at least means that GDP growth loses a lot of its momentum now that producing more stuff is no longer a matter of pushing the "on" button on idle machinery?

[lektrode]

Re: Capacity utilization reaches 80%

dunno, but how could the output gap have been any where near closed, with this?

http://www.calculatedriskblog.com/20...struction.html

Last year was the first year with an increase in construction employment since 2006, and the first with an increase in residential construction employment since 2005.

Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential specialty trade contractors in 2001).

Click on graph for larger image.

Construction employment appears to have bottomed, and should add to both GDP and employment growth in 2012.

Other construction indicators - housing starts, new home sales, construction spending - are all increasing (public construction spending is decreasing), and construction employment should also increase this year.

never mind how the unemployment numbers dont even count the millions of subcontractors, sole proprietors, tradespeople that dont get to collect UI ??? but have had our incomes slashed by 75% or more since 2007???

[NCR85]

Re: Capacity utilization reaches 80%

I'm not sure it's realistic to expect employment in construction to return to where it was during one of the largest unsustainable booms in that sector in economic history. Not any time soon anyway.

I would agree in as far as your point is that we should be seeing some slack in capacity utilization correlating to those losses in jobs in construction. It's not entirely clear to me how unemployment can stay around for so much longer than capacity utilization in general. Probably just a matter of wages adjusting less flexibly than prices, though.

[GRG55]

Re: Capacity utilization reaches 80%

One wonders how much of that "capacity utilization" closure is due to the permanent removal of "capacity" since 2008, instead of the ramping up of production. The two bailed out domestic automakers are examples of that...

[don]

Re: Capacity utilization reaches 80%

One wonders how much of that "capacity utilization" closure is due to the permanent removal of "capacity" since 2008, instead of the ramping up of production.

+1

(horseshoeing I've heard is nearing full employment)

[EJ]

Re: Capacity utilization reaches 80%

One wonders how much of that "capacity utilization" closure is due to the permanent removal of "capacity" since 2008, instead of the ramping up of production. The two bailed out domestic automakers are examples of that...

Recovery to pre-crisis 80% capacity utilization indicates the same rate of utilization as before the crisis but of less capacity.

Fro 2008 to 2010, in the wake of the American Financial Crisis, capacity declined a total of 2.7%.

2008: -.1%
2009: -.7%
2010: -1.9%
-------------
-2.7%

During the recovery to date, capacity has increased 1.8%.

2011: .8%
2012: 1.0%
------------
+1.8%

Net loss since 2007: -0.9%.

The loss may be larger due to the methods used by the Fed to measure capacity, but the fact is that theaggregate Industrial Production (IP) number doesn't tell us much about the economy.

On an aggregate basis, IP is back to pre-crisis levels.

But if we look at various components of IP a different and more meaningful picture of the economy emerges. The two main components are durable and non-durable production.

While durable IP is back to pre-crisis levels, non-durable production has only recovered 1/3 of the loss caused by the recession.

Even within durable IP, sub-components such as appliances have only regained half the recession loss. You can see the permanent impact of the past two recessions on US electrical equipment and appliance IP; each recession launch a new wave of offshoring as US firms sought to reduce payroll costs during by shifting manufacturing overseas, which manufacturing remained there after the each recession ended. electrical equipment and appliance IP index fell from 115 in 2000 to 90 after the 2001 recession, then from 100 in 2007 to 72 in 2008. It has not yet recovered to the lowest level it reached in the 2001 recession.

If you cross-reference to the BLS data on which industries employ the most workers, we find that non-durable manufacturing accounts for far more employment than durable manufacturing, which explains why the aggregate can show 100% recovery while the economy remains in an output gap.

The data going back to 1919 are available here.

Difficulties with the concept of "capacity" and cyclical bias of the FRB method are discussed at length in this Fed paper.

[jk]

Re: Capacity utilization reaches 80%

a lot of appliance and electricals manufacture was related to the housing boom. similarly for furniture, rugs, and so on - also housing related, all durable, all still depressed. also, isn't housing construction itself counted as durable manufacture?

that being the case, one wonders what are the durables the u.s. is producing - the mix must be very different than before the housing crash.

ps- just looked at the data here

within durables, the only major industry group that's up above the 2007 baseline is mining.
among market groups that 2 that are up slightly over 2007 levels are business equipment and materials.

[GRG55]

Re: Capacity utilization reaches 80%

a lot of appliance and electricals manufacture was related to the housing boom. similarly for furniture, rugs, and so on - also housing related, all durable, all still depressed. also, isn't housing construction itself counted as durable manufacture?

that being the case, one wonders what are the durables the u.s. is producing - the mix must be very different than before the housing crash.

ps- just looked at the data here

within durables, the only major industry group that's up above the 2007 baseline is mining.
among market groups that 2 that are up slightly over 2007 levels are business equipment and materials.

These might be some early signs that the USA economy is restructuring despite the best efforts to rekindle the FIRE economy.

Another thought, if so much product supply was offshored by 2007, when the bust finally hit could it be that in many sectors the effect also flowed offshore and is still being felt there, while a more flexible and competitive USA economy is ever so slowly regrouping. For example if the drywall, panel products, appliances, carpets, wiring, plumbing, light fixtures and so forth to build all those McMansions was coming from China, would it not be China's manufacturing sector that felt it most and is in greater need to remove capacity?

[jk]

Re: Capacity utilization reaches 80%

These might be some early signs that the USA economy is restructuring despite the best efforts to rekindle the FIRE economy.

Another thought, if so much product supply was offshored by 2007, when the bust finally hit could it be that in many sectors the effect also flowed offshore and is still being felt there, while a more flexible and competitive USA economy is ever so slowly regrouping. For example if the drywall, panel products, appliances, carpets, wiring, plumbing, light fixtures and so forth to build all those McMansions was coming from China, would it not be China's manufacturing sector that felt it most and is in greater need to remove capacity?

your analysis is essentially that proposed some years ago by gavekal, when they put forward their model of the "platform company." the model was a company like apple, with high value-added r&d and administrative functions in the u.s., and low value-added manufacturing outsourced abroad. when such a company hits a rough patch, much of the suffering is outsourced as well. that, of course, hasn't happened with apple itself, but it has with dell and hp, and as you point out that has indeed been the case in appliances, electricals, rugs and furniture. house construction itself could not be outsourced, of course, so reduction of that bit of durable manufacture is being felt very directly here. mining can't be outsourced either. i wonder about the nature of the "business equipment" which has been a domestic u.s. growth center.

[GRG55]

Re: Capacity utilization reaches 80%

your analysis is essentially that proposed some years ago by gavekal, when they put forward their model of the "platform company." the model was a company like apple, with high value-added r&d and administrative functions in the u.s., and low value-added manufacturing outsourced abroad. when such a company hits a rough patch, much of the suffering is outsourced as well. that, of course, hasn't happened with apple itself, but it has with dell and hp, and as you point out that has indeed been the case in appliances, electricals, rugs and furniture. house construction itself could not be outsourced, of course, so reduction of that bit of durable manufacture is being felt very directly here. mining can't be outsourced either. i wonder about the nature of the "business equipment" which has been a domestic u.s. growth center.

I wasn't thinking about GaveKal's platform companies. I was thinking closer to "smokestacks". The offshoring that went on for many years probably resulted in the closure of a lot of obsolete & uncompetitive production capacity in the USA. The aftermath of the financial crisis probably took out a chunk of what was left. I am guessing there were a lot of variations around this basic theme. One example is US domestic ammonia fertilizer production. A decade ago with nat gas prices (the major input), labour and other costs high, many of the ammonia plants in the USA were being shut down, dismantled and shipped off to China or Russia. I don't have any stats, but with gas prices in the toilet, labour cost inflation probably dead for a generation and farm incomes up I suspect some of that capacity is going to come back...same chemistry but state of the art automation and controls which will make sure they are low cost suppliers. I wonder if that sort of thing is going on in other industrial sectors and 100-year old US infrastructure is finally being turned over.

[gwynedd1]

Re: Capacity utilization reaches 80%

My first instinct is to think capacity shrunk. I will look forward to the comments.

[Chris Coles]

Re: Capacity utilization reaches 80%

Surely the main problem is that, due to the ongoing crisis surrounding the need to prop up government spending with increased borrowing, and thus the lack of parallel mechanisms to fund new business creation; there is no built in mechanism to fund the creation of the new businesses to close that output gap?

For example, all the debate here in the UK is for giant schemes to build new runways as the way out of the gap. That everyone seems to think the way forward is through even more government spending when the money is simply not there to spend.

[don]

Re: Capacity utilization reaches 80%

not to overlook that little devil political economy.

From 1973 to 2006 real wages grew by less than 1% while productivity increased by more than 80%. Then things got really bad . . . .

[NCR85]

Re: Capacity utilization reaches 80%

I understand there are certain complications that render the plain capacity utilization figure too crude to be interpreted the naive way. That being said, though, this looks like it might not be a coincidence:

Producer Price Index: Biggest Headline Inflation Jump Since June 2009
http://advisorperspectives.com/dshor...e-and-Core.php

Could it be the result of capacity utilization limits being reached?