August 2010 Industrial Production, Capacity Utilization and Capacity: A Slowing Pace of Growth

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Industrial production increased for the thirteenth time during the past 14 months. Output rose 0.2 percent in August after a downwardly revised increase of 0.6 percent in July. The downward revision in July resulted primarily from newly available data on the output of iron and steel, construction machinery, paper, and pharmaceuticals. Manufacturing output (i.e., excluding mines and utilities) rose 0.2 percent in August, a slowdown in the rate of increase that reflected a fallback in the production of motor vehicles and parts. Excluding motor vehicles and parts, manufacturing output increased 0.5 percent in August after having gained 0.2 percent in July. At 93.2 percent of its 2007 average, total industrial production in August was 6.2 percent above its year-earlier level.

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Industrial production among forest products manufacturers rose slightly in August. Although industrial production at the all-industries level has rebounded noticeably in the past year, output of both Wood Products and Paper is only slightly higher than a year earlier.

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The capacity utilization rate for total industry rose to 74.7 percent, a rate 4.7 percentage points (6.8 percent) above the rate of a year earlier and 5.9 percentage points below its average from 1972 to 2009. Wood Products utilized less than two-thirds of its capacity, while over three-fourths of Paper’s capacity ran in August.

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Capacity at the all-industries level was unchanged in August, but continued to fall in both Wood Products and Paper sectors. Despite ongoing economic growth, we continue to expect that additional capacity could be shuttered because of the headwinds challenging that growth, especially the likelihood of another recession. Long-term, however, as we have previously indicated, rising capacity utilization will eventually slow and ultimately reverse the capacity drawdown. For now, the amount of existing excess capacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with existing production infrastructure. It will be a different story, though, if and/or when new capacity must be built to meet demand.