Expanding Production, Expanding Capacity

Now that Blogger is letting me post again…

This morning the Fed released data on industrial production – production in the manufacturing, mining, and utilities sectors of the economy – as well as capacity utilization in the US. From the press release:

Industrial production increased 0.7 percent in February after a decrease of 0.3 percent in January. The output of utilities jumped 7.9 percent in February, as the weather moved closer to seasonal norms after January’s warm temperatures… At 110.9 percent of its 2002 average, overall industrial output in February was 3.3 percent above its February 2005 level. Because of the jump in utilities output, the rate of capacity utilization for total industry rose 0.4 percentage point, to 81.2 percent, a level just above its 1972-2005 average of 81.0 percent.

In May of 2004 the US finally regained its production levels of the year 2000, and since then it has continued to grow nicely (with a slight wobble last year thanks to Katrina). However, despite the rising production of the past few years, the nation’s factories, mines, and utilities still have plenty of spare capacity. Production has grown solidly, but US producers have added new productive capacity at nearly as fast a rate as production has grown, so capacity utilization has only crept up gradually. The picture below illustrates.

It’s an interesting situation – the US economy has enjoyed several years of fairly good economic growth, and is (arguably) probably near the peak of the business cycle. Yet there’s still nearly as much unused productive capacity in the economy today as there was during the protracted economic slump of 1991-93.

An obvious question to ask is why US firms continue to add additional productive capacity instead of using exisiting capacity more fully. One possible explanation may be unusually rapid transformation of US industry. If the spare capacity that exists is in different industries from those that are growing, we would expect to see the excess capacity in “old” industries remain unused while the “new” industries add new capacity to keep up with rising production, leaving US aggregate capacity utilization lower than expected at this point in the business cycle. A more detailed industry breakdown of capacity utilization indexes might help test this hypothesis…