Wednesday, December 16, 2009

Capacity Destruction?

Upon further review of capacity utilization...

The chart below shows the year over year change in industrial production, capacity utilization, and the difference between the two. In a world in which productivity is booming (it is), that means people are making more... with less. Thus, productivity "should" be rising more than capacity utilization all else equal. However, as the chart below shows... it is not.

Why? Well, here's my theory... capacity utilization is utilized capacity / total capacity. This means that the change in capacity utilization may not only be due to a change in the numerator (utilized capacity), but in the denominator as well (overall capacity). And my guess is overall capacity is actually decreasing for the first time since the telecom overbuild collapse in the early 00's.


Source: Federal Reserve


Reader Dennis Oullet points out that while I am correct, I went the difficult route (overall capacity data is available on the Fed's website).