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Capacity utilization

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.


Trends in capacity utilization around the world

The capacity utilization rate of a country is constructed as the percentage of resources (i.e., labor and capital) used by corporations and factories to produce enough finished goods to meet demand. In normal times, factories tend to use around 80% of their available productive resources. (Want to learn more?)

The graph above shows the evolution of capacity utilization in the U.S. (light blue), Brazil (red), the U.K. (green), and Germany (purple) from 2000:Q1 to 2017:Q3 at a quarterly frequency. During this period, the average capacity utilization in the U.S. was the lowest in our sample, and it was below 80% most of the time. The average capacity utilization was highest in Germany, with an average of 85% (outside of recessions).

During the Great Recession, all countries experienced a sharp decrease in their capacity utilization. Brazil experienced the shortest decline, which occurred later than in the developed economies. This has often been referred to as “decoupling” of developing countries, which, despite being integrated in the global economy, have been more resilient to the crisis. In the case of Brazil, capacity utilization decreased from 85.1% in 2008:Q3 to 77.4% in 2009:Q1. In the U.S., it decreased from 80.4% in 2008:Q1 to 67.3% in 2009:Q2. After the crisis, capacity utilization in all countries except the U.S. went back to normal. Indeed, for the last two and a half years of the sample, capacity utilization has been declining in the U.S. This is also the case in Brazil. This trend contrasts with the one observed in Germany and the U.K., where capacity utilization has been increasing over much of the same period.

Low capacity utilization usually implies that shortages, bottlenecks, and inflation are not issues in most industries. This allows industries to increase manufacturing production without incurring significantly higher production costs. The data suggest that this is the case in the U.S. In the U.K. and Germany, however, demand seems to have picked up in the past two years, which could lead to an increase in prices in the European countries.

How this graph was created: Go to FRED and search for “Business Tendency Surveys for Manufacturing: Capacity Utilization: Rate of Capacity Utilization: European Commission and National Indicators for Brazil.” Go to “Edit Graph,” select “Add Line,” and add “Business Tendency Surveys for Manufacturing: Capacity Utilization: Rate of Capacity Utilization: European Commission and National Indicators for the United Kingdom.” Repeat to add Germany and the U.S. Go to “Edit Graph,” select “Format,” and choose “Recession shading” to be “On.”

Suggested by Ana Maria Santacreu and Heting Zhu.

View on FRED, series used in this post: BSCURT02BRM160S, BSCURT02DEQ160S, BSCURT02GBQ160S, BSCURT02USQ160S

Capacity utilization rate and the business cycle

The industrial capacity utilization rate is defined as the percentage of resources already installed or paid for by firms, such as capital and labor, actually used by corporations and factories to produce goods. This rate tends to move along with the business cycle: increasing during expansions, when companies are trying to produce more goods to meet demand, and declining during recessions, when demand for goods declines. And as the graph shows, the historical trend of total capacity utilization has been declining, as has real GDP growth.

Indeed, the average capacity utilization rate between 1967 and 1979 was around 84 percent, it declined to 81 percent between 1980 and 1999, and dropped down further to 77 percent between 2000 and 2016. Similarly, average GDP growth fluctuated around 3.3 percent between 1967 and 1999 and declined to around 1.9 percent in the period between 2000 and 2016.

How this graph was created: Select “Real GDP” from the “At a Glance” menu on the home page. Go to “Edit Graph” and under the “Add Line” panel search for “Capacity Utilization: Total Industry” and add it as a new line to the graph. Then, format Line 2 to be on the right y-axis position and change the line style to dash. Finally, select the desired date range.

Suggested by Maria Arias and Yi Wen.

View on FRED, series used in this post: A191RL1Q225SBEA, TCU

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