June 2010 Industrial Production, Capacity Utilization and Capacity: Data Revisions Muddy the Water a Little

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Industrial production edged up 0.1 percent in June after having risen 1.3 percent in May. For the second quarter as a whole, total industrial production increased at an annual rate of 6.6 percent. Manufacturing output moved down 0.4 percent in June after three months of gains at or near 1 percent. At 92.5 percent of its 2007 average, total industrial production in June was 8.2 percent above its year-earlier level.

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Industrial production of forest products manufacturers dropped off in June – by 2.9 percent for Wood Products and 0.8 percent for Paper.

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The capacity utilization rate at the all-industry remained unchanged in June at 74.1 percent, a rate 5.9 percentage points above the rate from a year earlier but 6.5 percentage points below its average from 1972 to 2009. Not surprisingly, capacity utilization among forest products manufacturers fell in June. In the case of Wood Products, the 2.3 percent retreat broke a three-month streak of increases; Paper, by contrast, has been flip-flopping from month to month, and decreased 0.6 percent in June.

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The Fed’s annual revisions (including changing the base from 2002 to 2007) are perhaps most evident in the capacity numbers – although the overall story is essentially unchanged. The upward trends in industrial production and capacity utilization have not been sufficient to prevent excess capacity from “falling out,” although – at least in the case of all industries – the pace of curtailments appears to be flattening.

As explained in our essay Smokey Bear Economy, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing overcapacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with comparatively 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.