Skill Level Appropriate for all
- Have you ever had someone call you industrious? It means that you're hardworking. And if you want to know if the U.S. economy is working hard, you should be watching industrial production data. It's a measure of how much manufacturing, mining, and utilities are producing in the U.S. economy. The data is produced by the Federal Reserve and most analysts and media personalities focus on monthly percent changes. But the really important part of the industrial production data is the trend in long-term levels of total industrial activity.
Industrial production is measured across a few key product groups, including consumer goods, durable goods like autos, as well as non-durables like clothing, business equipment like manufacturing machinery and IT equipment, construction, and materials, like textiles, paper, chemicals and energy. Because the U.S. economy usually grows and expands, industrial production is almost always growing year over year. In fact, if we look back at data through 1919, you can see that industrial production has only contracted year over year during recessions, with one exception.
It contracted year over year during 2015 and 2016, but there was no recession. The industrial production report also includes other data that gets overlooked. Something known as capacity utilization, which some people call CAPU. Let me give you an example of capacity utilization. Let's say there's a factory that manufactures cars. The factory can make 100 cars a day, but it only manufactures 90. The capacity is 100.
The utilization of that capacity is 90 out of the hundred, or 90%. Capacity utilization is important because it shows how much slack there is in certain parts of the economy. It also has a limit of 100%. This is different than industrial production, which has no limit, because industrial production shows how much is being produced rather than the percent of utilized capacity in place.
A high level of capacity utilization is positive for manufacturing in industrial companies. If that auto company is running at 99% utilization, that means it's really cranking out those cars. That's probably good for its stock price and its good for its workers, and planned hiring. But if the utilization rate is only 60%, that's bad. If utilization is low or goes down, companies in those industries could see their profitability fall, because they don't have enough orders to fill.
This means they have slack in their businesses, they may need to lay off people and their stock prices could fall. And capacity utilization is usually at its best during the peak of a business cycle and at its lowest during recessions, as you can see in this graph. Most companies measure their production levels, but does your company or industry measure its capacity utilization? If utilization is high, your company is probably doing well and it might need to expand, grow, and hire more people.
But if the utilization is low, you may wish to start looking around for other professional opportunities.