US Capacity utilization

productive capacity & inflationary pressures

is US productive capacity usage causing inflation?

Capacity utilization in US:

• is at 76.29%, moderate, in the lower range of 10-year observations
• has been trending up in the quarter (+0.0)%
• remains below the limit that indicates hot production activity

In summary:
Capacity utilization is limited but growing, and remains below the historical limit that anticipates emerging inflation pressures.

IntroCapacity utilization rate measures the percentage of an organization/region's potential productive output (for both goods and services) that is actually being realized. The capacity utilization rate of a national/regional economy (or a company) is measured to provide an insight into how well it is reaching its maximum productive potential.

In other words and for our purposes, capacity utilization indicates the slack in an economy at a given point in time. Higher capacity utilization runs in periods of economic expansion to meet up with rising demand, while it drops in downturns and demand fades.

Economic implicationsRising demand will normally bring higher production operating rates, pushing for higher wages and rising producer prices, ultimately landing into higher final consumer prices (=inflation). It has been demonstrated that higher capacity utilization (above 80%) has marginal predictive power for inflation, and price changes connected to manufacturing increases ten to be sizeable.

US Output gap

actual vs potential output

how much is being produced in the US vs its potential?

The output gap:

• is currently positive at 1.1%
• is is changing direction, moving down but staying positive. This indicates an environment of declining expected growth that continues to stay above capacity: higher inflation could be justified by a positive gap REWRITE

IntroThe output gap is an economic measure of the difference between the actual output of an economy and its potential output, or its total production capacity (the maximum amount of goods and services an economy can turn out when it is most efficient).

Links to inflationA positive gap - similarly to high capacity utilization on the left hand side of this page - may create inflation pressures. Conversely, a negative gap may cause disinflationary pressures.

MechanicsDuring economic downturns an economy’s output of goods and services declines. When times are good, by contrast, that output (measured via GDP) increases. One thing that concerns economists and policymakers about these ups and downs (commonly called the business cycle) is how close the current output is to an economy’s long-term potential output. That is, they are interested not only in whether GDP is going up or down, but also in whether it is above or below its potential.­

A positive output gap occurs when actual output is more than full-capacity output. This happens when demand is very high and, to meet that demand, factories and workers operate above their most efficient capacity. A negative output gap occurs when actual output is less than what an economy could produce at full capacity. A negative gap means that there is spare capacity, or slack, in the economy due to weak demand.­ In general, an output gap different than zero suggests that an economy is running at a theoretically inefficient rate, either overworking or underworking its resources.­