Submitted by Taps Coogan on the 9th of October 2017 to The Sounding Line.
Back in early 2016, we warned that US capacity utilization was declining at a rate that typically only occurs shortly before or during formally declared recessions. The US Federal Reserve tracks industrial capacity utilization in the US and defines it as:
“Total Industry Capacity Utilizat dont ion (TCU) is the percentage of resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States (excluding those in U.S. territories). We can also think of capacity utilization as how much capacity is being used from the total available capacity to produce demanded finished products.”
At the time we noted:
“One useful way to assess the health of the US economy is to analyze the percentage of the nation’s existing industrial production capacity that is actually being productively utilized. In a healthy or recovering economy, with growing demand for goods, one would expect to see increasing utilization of production capacity. Conversely, in a weakening economy, with slowing demand for goods, capacity utilization would be diminishing.”
Since writing the first article, capacity utilization improved modestly from 75.4% in May 2016 to a peak of 76.9% in July of 2017. However, that improvement appears to have been short lived. This August the index fell once again, this time by 0.8%, its largest monthly decline since March 2009 when the economy was in the midst of the financial crisis.
Despite new all time high stock prices day after day, non-financial economic fundamentals such as capacity utilization remain weak, both from a long term historical perspective and relative to their performance over the last couple years. At this point in the economic cycle, nearly a decade since the onset of the last recession, indicators like this should be setting news highs not languishing at such low levels. Periods of economic expansion don’t last forever.