Tuesday, September 15, 2009

Capacity Utilization vs. Unemployment

August's capacity utilization figure to be released tomorrow is forecast at an improved 69.6% from 68.5%. The importance of that figure is it tends to be a leading indicator of inflation. Per the NY Fed:

The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy which may in turn provide information on the likely future course of inflation.
More importantly perhaps, capacity utilization has been a rather reliable leading indicator of the future unemployment rate. The below chart shows just that with unemployment rate in blue (left hand side) vs. capacity utiliation in red (reversed on the right hand side).

Though it should be noted that August should include a substantial bump in capacity utilization via the cash for clunkers program. Thus, it will important to look at the breadth of any rebound in utilization.