Economists are always looking for ways to better understand and predict the business cycle. Studying capacity utilization can help. Capacity is the maximum volume of productive resources that can be used by firms to produce goods. Capacity utilization is how much of that available capacity is actually being used to produce goods. The capacity index tries to measure the utilization rate of the available productive capacity in different sectors. It sheds light on how much more output firms could produce without adding additional capital stock (structures, machinery, etc.) to the economy. As we can see in the graph, capacity utilization is very volatile in general, especially for the manufacturing sectors, declining sharply during recessions. In particular, capacity utilization for durable-goods manufacturing drops more than for nondurable-goods manufacturing. However, the mining sector and utility sector tend to have a significantly higher capacity utilization rate on average than the manufacturing sectors. In fact, capacity utilization in the manufacturing sectors often starts to decline just before a recession starts; so, the manufacturing sector’s capacity utilization could be a useful leading indicator of a downturn.
How this graph was created: Search for and select “Total Industry Capacity Utilization (TCU).” Then, from the “Edit Graph” panel, use the “Add Line” feature to search for and select the rest of the series, clicking “Add data series” for each.
Suggested by Brian Reinbold and Yi Wen.