Capacity Constraints

Long Term Perspective

The Federal Reserve monitors capacity constraints because they indicate where supply bottlenecks are developing and inflation is beginning to simmer. The capacity utilization rate in the economy’s industrial sector during the latest recession and early recovery was down sharply from the highs established in 1995 and again in 1997. The National Bureau of Economic Research (NBER) declared that the latest business cycle peak was December 2007. Yet, the capacity utilization rate was declining long before the recession began. This rate did rebound with the overall economic recovery.  The employment-to-population ratio is more comprehensive than the jobless rate in revealing labor market conditions. This index peaked about two years before the most recent recession began at the start of 2008. The employment-to-population ratio has been declining since late 2006 with the pace accelerating in 2008 and 2009 and then remaining low in 2010, 2011, and in 2012.

Short Term Perspective

The employment-to-population ratio turned back down in latter 2010 as the labor market saw more layoffs and a rise in the labor force. Earlier, heavy layoffs in latter 2008 and in 2009 pushed the rate down sharply. But in early 2011 and into 2012, moderate employment growth bumped this rate up slightly. Likewise, the capacity utilization dropped sharply in 2008 and into mid-2009 as production has declined during the past recession for both manufacturing and the overall economy.  But with recovery in manufacturing, capacity utilization had been on an uptrend from mid-2009 into early 2012.  A softening in manufacturing in mid-2012 led to an easing in capacity utilization.  In October 2012, the capacity utilization rate slipped to 77.8 percent from 78.2 percent the month before.