Saturday, January 16, 2010

U.S. Industrial Capacity Continues To Drop

Industrial production rose 0.6% in December in America. However, that reflected almost entirely a 5.9% gain in utilities (electricity) reflecting the cold weather conditions. Mining rose only slightly, and manufacturing fell slightly. While that slight fall followed a 0.9% gain in November, it was clearly a weak number, especially relative to the manufacturing purchasing manager's index.

What few have noticed in all of this is that manufacturing capacity is falling at a rapid pace. It was 1.3% lower in December 2009 than December 2008, and the pace is accelerating with capacity dropping 0.5% the last 3 months (which translates into a 2% rate.

The implications of this is stagflationary as lower capacity means in effect lower potential supply, and lower supply means both lower output and higher prices.