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Economy Shifting Into Slower Gear

Written by Lance Roberts | Jan, 18, 2013


There has been much more data lately showing that the economy is now shifting into slower mode of growth from the recent declines in the manufacturing indexes from the different Federal Reserve regions to the ISM Indexes.   This has now been confirmed by the recent peaks in the industrial production and capacity utilization reports.

In the chart you can see two very important points being made about the current state of the US Economy.   The first is capacity utilization which may have recently seen its peak for this current economic cycle at 77% which is well below the more normalized peaks close to 85% on the index.   Capacity utilization is a metric used to measure the rate at which potential output levels are being met or used which gives insight into the overall slack that is in the economy at a given point in time .  In theory, if the economy is running at a 70% capacity utilization rate, it has room to increase production up to a 100%.  As stated previously, the peaks have been around 85% which is considered to be at full production and this is also when employment levels are at their highest.     The bottoms in capacity utilization are historically between 70 and 75%.   Therefore, a utilization rate of 76 or 77% is nothing to write home about and the year over year (YOY%) change appears to have reached its peak for this current cycle.

The same holds true for industrial production itself.    Industrial production is the measure of the amount of output from the manufacturing, mining, electric and gas industries.   The amount of output is the direct input into the capacity utilization index.   In other words, at the current level of production how much of the total capacity is being used.   Unfortunately, industrial production appears to have also reached its peak for this current economic cycle while capacity utilization never got up to levels high enough to foster more employment growth.

This last part is the most critical.   In order to make the economy organically grow you need the virtuous cycle of growth to be complete which is where there is more demand by consumers for goods and services which in turn causes businesses to produce more which increases employment and wages which in turn leads to more consumption by consumers.   Unfortunately, this cycle has been driven by artificial stimulus and primarily inventory restocking which has led to increased production but not the completion of consumption cycle.    This is why unemployment remains stubbornly high and consumers, along with small businesses, remain hunkered down and tight fisted on their capital as the clarity about future economic strength dims.

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