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Tuesday, August 16, 2011

Capacity Utilization Passing "CACU" Levels

Bloomberg details:
Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent.

The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level. The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972-2010) average.
While output and capacity utilization increased, they are both still well below pre-2008 crisis levels pointing some (including me) to think inflation will be a lesser concern, than most, as there is still plenty of capacity. My own personal devil's advocate is the below chart that compares current capacity utilization levels to rolling ten year averages (call it the cyclically adjusted capacity utilization... through "CACU" doesn't have a ring to it).

On this basis, two of the three sectors are at or above their CACU. If capacity was taken offline (i.e. is not really there) due to the downturn, this would indicate that we would be much closer to a capacity shortage than comparing to previous levels.