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.