INSIGHTS

On January 18, 2012

Capacity Utilization in the U.S. Economy

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Today we had a release of capacity utilization numbers that showed a slight increase that was exactly what the market was expecting.  Taking a little closer look into capacity utilization, we notice some under currents of potential growth on the horizon.  Manufacturing numbers have showed some strength for the most part according to the Census Bureau:

• New orders increased 1.8% after slight decreases in October and November.


• Shipments have been up six consecutive months with unfilled orders up 19 of the last 20 months.

Consider the impact of capacity utilization on GDP.

Capacity Utilization and GDP



Source: Bloomberg


Going back to 1967, one notices some correlated movements in capacity utilization and GDP prints.  The correction in capacity utilization has had strong correlated movement over the last decade.  We also know that extreme peaks lead to extreme troughs and vice versa.  The average capacity utilization over the long run is just over 80%, roughly 2% higher than our current reading.

Capacity Utilization and Dollar Trade Weighted Index



Source: Bloomberg


A lot has been made about the weakening dollar and its impact on the economy.  Consider the trade weighted index coinciding with capacity utilization and we see that current levels of the dollar could well lead to sustained gains in capacity utilization.


Though it has been noted of the transforming of the U.S. economy to a more service-based enterprise, our manufacturing imprint is still considerable. To reinforce this long-term trend, consider that the average monthly net number in manufacturing since 1977 is a loss of 14,000 jobs monthly. However, since 2010 we have averaged 14,000 net new jobs monthly in the manufacturing sector.


By no means is the catalyst for a sharp spike in the manufacturing sector, but it does show a positive trend that can help in the transforming of the U.S. economy from the shock of the Great Recession.


 

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