The "Capacity Utilization" Rate in March 2012: 78.7%
As economic indicators go, "capacity utilization" doesn't get many headlines. Yet because it's a measure of the extent to which factories are in use, it's a good gauge of how the U.S. manufacturing economy is doing. So it's encouraging to see the number hold fairly steady in March at 78.7 percent -- off a hair from February, but strong enough to suggest that manufacturing continues to sustain its comeback after bottoming out in June 2009. That was when capacity utilization fell to 66.8 percent, its lowest mark since the Federal Reserve began compiling the stat in 1967.
Photograph by Daniel Acker/Bloomberg
Why It Matters
Capacity utilization tends to be a canary in the coal mine. Sharp falloffs in the number have come just ahead of five of the seven most recent recessions in the U.S. The exceptions were special situations, however, because they were crisis driven -- in 1973 by the Arab oil embargo and in 2007 by the looming global financial crisis. The other recessions resulted from the regular ebb and flow of the business cycle. The capacity-utilization rate has been rising generally for almost three years and is now close to its historical average of about 80 percent.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
The strength of capacity utilization suggests broad growth ahead -- rather than recession -- and may indicate that stocks have a bit more room to run. It's worth keeping an eye on this metric also as an inflation alarm: If it tops, say, 80 percent, that might be enough to prompt the Fed to curtail its easy money policies in hopes of slowing the economy. For now, because capacity utilization is so near its historic norm, it probably indicates the economy is running neither too hot nor too cold.
Photograph by George Frey/Bloomberg