Capacity utilization low and steady as she goes…

Here is the latest reading on capacity utilization. Data for August 2013 released yesterday.

cap u monthly 1

Link to graph.

It has been flat-lining for over a year and a half. Look familiar? Similar thing was happening before the crisis.

Note: To really appreciate capacity utilization, here is a table giving the sectors of industrial output involved and their value-added weights. Capacity utilization covers 3 stages of processing goods; Crude, Semi-finished and finished.

Industrial sectors include food, oil & gas extraction, chemicals, petroleum & coal products, transportation equipment, computer & electronic products, pharmaceuticals & medicines, plastics & rubber products and electric power generation.

I have heard it said that industrial production only accounts for around 16% of the economy and thus does not carry much weight.  Remember that imports are also around 16% compared to real GDP. But beyond that, there are a lot of industries adding value onto industrial production, which include advertising, sales, marketing, distribution, packaging, healthcare, infrastructure projects and even construction. The demand that these industries encounter for their products and services determines capacity utilization in industrial production.

Capacity utilization is a powerful indicator for the utilization of resources for the whole supply chain from raw materials through processing to the final consumer.

“In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology.”

A typical supply chain begins with the ecological, biological, and political regulation of natural resources, followed by the human extraction of raw material, and includes several production links (e.g., component construction, assembly, and merging) before moving on to several layers of storage facilities of ever-decreasing size and increasingly remote geographical locations, and finally reaching the consumer.” (source)

So anyone who discards capacity utilization is not seeing its importance as an indicator of resource utilization throughout the supply chain.

Still, it is not a good sign to see capacity utilization stalling out around 78%. Effective demand is tighter than ever before… and constraining both capital and labor utilization.