Wednesday, November 16, 2011

Strong Production

The Lehmann Letter (SM)

Today the Federal Reserve reported solid growth in its October index of industrial production:

Capacity utilization measures current production as a percentage of maximum output. You can see from the chart that capacity utilization dipped below 70% in the depths of recession. That was the worst performance since World War II. More than 30% of America's industrial capacity went unused.

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

Capacity utilization rose to 77.8% in October. That signals continued expansion after a sharp bounce-back followed by a spell of stagnation in the summer. It would be nice to see the upward trend resume.

Inventory restocking generated the strong post-recession bounce. Now the core question is: Will aggregate demand grow quickly enough to send capacity utilization through 80% anytime soon. That depends to a large extent on household demand for new residential construction and motor vehicles.

At least there is no sign of a double dip.

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© 2011 Michael B. Lehmann

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