“One report that rarely receives enough attention is the Federal Reserve’s monthly report on capacity utilization. The industrial production numbers tend to be more volatile and can fluctuate, but the report on capacity utilization intends to show through time a picture of how employers
are running their shops, factories and operations. While this ties in with today’s report, we are most concerned with the longer-term issues that this poses.
Today’s report showed a 0.4% production gain, versus a 0.2% gain expected. Capacity utilization also came in as expected at 78.3%. The problem is that this capacity reading is dismal, and it shows that the core economy is not running well even though this is nearly a peak report for the cycle.
The theory is simple enough. If capacity is running low, final demand is low and the need to massively hire workers is low. Of course there are exceptions, and nonfarm productivity can be taken into consideration as well. Still, if businesses are running at low capacity rates, then there is little reason to expect waves of hiring from the nonfarm sector.”
