How Much Has Capacity Grown?

Economists had expected that new data revisions by the Federal Reserve would show that U.S. industry has been adding to capacity in recent years at a far greater rate than originally reported. Such a change would presumably result in a significant downward adjustment in the percent of capacity being utilized and thus allay fears that operating rates were close to an inflationary threshold.

Instead, the latest revisions lowered total capacity utilization only marginally, from 84.9% to 84.6% in October. Before hitting the inflation panic button, however, economist Richard F. Hokenson of Donaldson, Lufkin & Jenrette Securities Corp. suggests that observers take a second look at the data.

Much of the impression of sluggish capacity growth, notes Hokenson, results from the changing treatment of computers and office equipment in the measure--a perennial thorny problem for economic statisticians. Ignoring the impact of this sector, capacity expansion has indeed speeded up.

While overall industrial capacity growth of 2.5% thus far in 1994 was unchanged by the revision, for example, the growth rate for primary processing industries was raised from 1.1% to 1.8%. Excluding computers and office equipment, the annual growth rate of total manufacturing capacity in 1992, 1993, and 1994 is now reported to have been 0.7% higher than previously estimated.

The upshot of the latest data revisions, says Hokenson, is that the definition of "full capacity" for the industrial sector as a whole is now probably closer to 87% than the traditional 85%.