Quite a interesting chart....
<<http://www.bog.frb.fed.us/releases/G17/Current/ipg.gif>>
The relationship between rate hikes and capacity utilization can be clearly seen, the 1994-95 hikes were associated with capacity utilization spike that peaked at 84.8% representing the total industry. The bottle-necks were created in 1995 due to high capacity utilization as 'capacity growth' in industrial production lagged behind. From 1990 to 1995 'industrial production' rose from 100 to 115 that is nearly 15% almost 3% /annum.
1988- 89 saw a peak of 86% in capacity utilization and a fall in 91 to 76%, the economy was hit by recession that cost Bush senior his presidency in 92. Interest rates hikes and cuts of 88 to 92 can be explained by industrial production and capacity utilization.
Now post 1995 environment is quite different, look at this simple chart, we overlook simple things and get caught in complicated issues in an effort to define market trends, look at the pace of the increase of capacity growth, the line representing industrial production is far steeper, now that 1995-2000 5 year period has seen industrial production capacity growing from 115 in 1995 to 145 in 2000, a cumulative growth of 27% plus representing 5.4% /annum nearly double of 1990-95 period.
Now higher capacity utilization leads to eventually capacity constraints or bottle necks that is what economists are worried about, however if I look at this number of 82% I will like this capacity utilization to stay here or inch up higher for two reasons, first a large portion of the capacity is being utilized to create more capacity, that is a virtuous cycle not a vicious spend cycle. The consumer durable goods are being produced and business equipment and mining has the highest percentage growth amongst sector breakdown. The steep rise in industrial production capacity is helping higher productivity, the exponential growth in production if seen microscopically points to spending on investments not consumption.
AMAT growing its capacity for example or INTC growing its CPU capacity appears as higher production but these spending are non-inflationary, AMAT at the primary level and INTC at a secondary level plus MSFT at the tertiary level all help create a product that enhances productivity and its prices have been falling although the computational efficiencies are increasing, I was going through other cycles from 1960 to 1995 even in 1990-95 period I could not nail the virtuous events of production that are so non-inflationary and productive. I just don?t think that present tools that define constraints above 84% capacity do justice to present cycle of economic activity.. Every number has a spin a virtuous one and a vicious one, it all depends on our capacity to understand the spin.. the way we like and the way are minds are trained.. |
