Productivity and Capacity Puzzles

The BLS released its revised productivity numbers for the June – September quarter (Q3), which show that productivity leapt by 9.4% over that three month period. The strongest gains in productivity were in the durable goods manufacturing sector – i.e. producers of cars, washing machines, furniture, and capital equipment. That remarkable productivity growth came from two sources. First, those businesses produced more goods. Second, they used less labor to do it. In fact, they were able to squeeze 8% higher production out of their factories while using 6% fewer workers. It’s a pretty remarkable feat.

But I think that this adds to a puzzle that I’ve been thinking about for some time. Why is there still so much excess capacity in the economy? If productivity has been growing so rapidly, and factories are churning out more and more stuff using fewer workers, then presumably that means that businesses are getting better at using the resources that they have. So shouldn’t we see that the US is using more and more of its productive capacity, since its productivity has improved so much recently? Yet total capacity utilization in the US is still incredibly low (see graph here).

There’s another facet to this capacity puzzle. On the one hand, business spending grew at a very fast rate in the third quarter. Specifically, businesses increased spending on equipment and software by 18.4%, which alone accounted for 1.4% of the 8.2% increase in GDP in Q3. That’s the fastest rate of business purchases since 1998. But on the other hand, businesses have tons of spare capacity, as the graph illustrates.

So, to sum up:

– businesses have done an incredible job of squeezing more output out of fewer workers lately, presumably by more fully and more efficiently using the equipment that they have.

– businesses still have tons of excess capacity, which means that they can produce far, far more than they actually are.

– businesses are currently buying new equipment at a remarkably fast rate.

Something here doesn’t fit together. I’m not quite sure what, but something odd is going on here.