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Thursday, 15 May 2014

Capacity What? Utilization?

The Capacity Utilization index for April was published today by the Federal Reserve, of which no doubt a tremendous amount of calculations, endless methodology and a range of assumptions and estimates are involved. Not to mention human resources. The Fed describes the measure as follows:
Capacity Utilization: Total Industry (TCU) is the percentage of resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States (excluding those in U.S. territories).(1) We can also think of capacity utilization as how much capacity is being used from the total available capacity to produce demanded finished products.   
For April, this utilization rate stood at 78.6%.


We could therefore say that currently 21.4% of industrial capacity remain "unused" or "idle" in the U.S. But is there really idle industrial "capacity"? And can it really be measured? Here's what Friedrich Hayek had to say on this subject in general  in his book from 1935, Prices and Production, 2nd (the book that helped him win the Nobel Memorial Prize in Economic Sciences in 1974):
Whatever engineers may tell us about the supposed immense unused capacity of the existing productive machinery, there is in fact no possibility of increasing production to such an extent. These engineers and also those economists who believe that we have more capital than we need, are deceived by the fact that many of the existing plant and machinery are adapted to a much greater output than is actually produced. What they overlook is that durable means of production do not represent all the capital that is needed for an increase of output and that in order that the existing durable plants could be used to their full capacity it would be necessary to invest a great amount of other means of production in lengthy processes which would bear fruit only in a comparatively distant future. The existence of unused capacity is, therefore, by no means a proof that there exists an excess of capital and that consumption is insufficient: on the contrary, it is a symptom that we are unable to use the fixed plant to the full extent because the current demand for consumers' goods is too urgent to permit us to invest current productive services in the long processes for which (in consequence of " misdirections of capital") the necessary durable equipment is available.
You decide yourself, but this is the reason I never monitor this particular piece of statistics (except for the purposes of writing these few words).