Tuesday, November 17, 2009

U.S. Industrial Capacity Drops

U.S. Industrial production rose 0.1% in October, far less than most economists had expected, following 3 months of more solid gains. Manufacturing alone declined, as did mining, but that was more than compensated by gains in utilities (electricity) production).

One detail that no one, as far as I know, in the financial press has discussed is that in recent months industrial capacity has dropped. The drop is biggest in manufacturing but can also be seen in mining (utilities capacity is still growing, but at a slower rate than last year) As a result, capacity utilization has increased faster than production.

In October 2008, manufacturing capacity was up by 1.8% while mining capacity was up 0.7%. In recent months however, these numbers have turned negative, and in October 2009, manufacturing capacity had dropped 1% while mining capacity was down 0.6%.

These annual declines will likely be even greater in coming months since first of all the level of business investment is low and secondly because much of the current capacity reflects previous malinvestments and can only produce products which people don't demand any more. As that capacity is written off, official industrial capacity will decline further.

Falling industrial capacity will have a stagflationary effect on the economy as it will both limit production and increase the willingness of remaining producers to raise prices as potential supply and therefore also potential competition is reduced.