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August 23, 2012

Can Total Capacity Utilization Shed Light on Economic Growth?

I was playing around with some economic data and came across total capacity utilization and found some interesting things.  Keep in mind, total capacity utilization is simply the total percentage of output to total possible output.

While capacity utilization recovers during times of economic prosperity, the 45 year trend line is declining. This means that more industrial output power is becoming idle over long periods of time in the United States. Keep in mind that while idle, this potential output still maintains a cost associated with it. Even if the responsible parties are not paying the costs of the idle output, other entities are affected (local governments, banks, etc).

As I examined further, I had to pose the question, is TCU a leading indicator of GDP growth? A close up of TCU over the past decade showed that it certainly moves with economic growth, but does it lead?

I needed a new chart, so I took GDP growth and threw it in with capacity utilization. I found that the inverse was true, GDP growth leads total capacity utilization, however, when I put a trend line in GDP growth, it got me thinking.

The key to GDP growth may come in finding ways to utilize existing capital, thus raising the total capacity utilization closer to 85%. The indisputable way to do that would be to lower the costs of capital for business. It's these indicators that policy-makers should be reviewing to develop real solutions to our economic problems.

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