On top of telling us that manufacturing output rose smartly in real terms in November, this morning’s Federal Reserve’s industrial production report also revealed that capacity utilization in manufacturing hit its highest level since the last recession began in December, 2007.
If you think of capacity utilization as a fancy way of saying “factory running rate,” you can see why the new 79.17 percent figure is unquestionably good news. It signals that the manufacturing sector is making real progress using all the resources that went idle during that last sharp downturn. But capacity utilization trends, which are widely followed, can’t be understood without looking at a related indicator that’s much less widely followed – manufacturing capacity itself.
Here the news is a good deal less bullish, as this capacity is growing much more slowly during this recovery than during its most recent predecessors.
Since the current expansion began, in mid-2009, manufacturing capacity is up 4.27 percent. That’s faster than inflation-adjusted manufacturing output (3.10 percent). But it’s considerably less than the 7.52 percent increase in capacity during the last decade’s bubble-fueled expansion – which ran about a half a year longer than today’s.
And capacity growth during the 1990s expansion left today’s rate of increase in the dust. During that era, which lasted for ten years, capacity shot up by 65.29 percent – 15 times faster!
It’s true that much of that capacity growth stemmed from a bubble in high tech hardware that turned out to be just as insane that the credit and housing bubble of the 2000s. But even leaving out that sector’s uber-performance, manufacturing capacity still grew by a 28.16 percent rate that’s much stronger than domestic industry has generated since.
Moreover, despite the milestone reached in absolute capacity levels in November (which is a preliminary figure), the year-on-year data shows no sign of a pickup. Here they are for the last few Novembers since the recovery began:
In other words, although the capacity utilization figures indicate that manufacturers are absorbing more and more slack, the capacity figures indicate that expansion of the nation’s manufacturing footprint itself keeps under-performing as a growth engine. With enough future overall U.S. and/or global economic growth, manufacturers will eventually need to start boosting that capacity if they hope to keep up with the new demand. Then industrial output could really take off and stay strong enough to start justifying the term “renaissance.” But if overall growth slows, and the demand picture dims, manufacturing output could take an outsized hit, as capacity utilization joins capacity growth in punching below its weight.