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.
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.