May 2010 Industrial Production, Capacity Utilization and Capacity: Manufacturing the Recovery

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Industrial production advanced 1.2 percent in May – the fastest rate since August 2009. At 103.5 percent of its 2002 average, total industrial output in May was 7.6 percent above its year-earlier level.

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Manufacturing output climbed 0.9 percent last month, its third consecutive monthly gain of about 1 percent, and was 7.9 percent above its year-earlier level. Output also rose in May among forest products manufacturers: by 3.7 percent for Wood Products, and 0.5 percent for Paper.

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The all-industries capacity utilization rate rose 1.3 percent (to 74.7 percent), a rate 9.0 percent above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. Forest products facilities also ran harder in May, although – as with industrial production – the monthly percentage increase among Wood Products manufacturers was larger (4.2 percent) than that of Paper (0.7 percent).

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The jumps in industrial production and capacity utilization were not sufficient to prevent additional capacity from being curtailed, however. The rates of curtailment were equal (0.1 percent) at the all-industries level and among paper producers. Wood Products took a bigger “hit” of 0.5 percent in May.

"We continue to have an economic expansion that's moderate overall and uneven," said Richard DeKaser, chief economist at Woodley Park Research. "Clearly, the factory sector is helping to offset the weakness" in other parts of the economy (e.g., the housing market).

Manufacturing, which makes up about 11 percent of the economy, is benefiting from gains in business spending and global economic growth. U.S. exports have risen 10 of the last 12 months, helped by growth in emerging Asian and Latin American countries.

As explained in our Clearing the Mist essay Smokey Bear Economy, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing overcapacity is helping to keep prices relatively stable at the consumer level because manufacturers can ramp up output with relatively little difficulty. It will be a different story, though, if and/or when new capacity must be built to meet demand.

Of course, it is nearly impossible to predict with any degree of accuracy when that reversal might occur. In light of our expectation for another recessionary relapse during 2011, our best guess is 2012 at the earliest.