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Tuesday, June 17, 2008

Capacity Utilization and Industrial Production Decline

by Calculated Risk on 6/17/2008 10:07:00 AM

The Federal Reserve reported this morning that industrial production declined 0.2% in May.

Industrial production declined 0.2 percent in May after having fallen 0.7 percent in April. ... The rate of capacity utilization for total industry declined 0.2 percentage point, to 79.4 percent, a level 1.6 percentage points below its average for 1972-2007.
A decline in industrial production is one of the indicators of a recession (see quote at bottom). The following graph shows capacity utilization and recessions for the last 40 years.

Capacity Utilization Click on graph for larger image in new window.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly ("recoupling"), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

"[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
National Bureau of Economic Research (NBER)