Capacity Utilization Rate Gets Revised Lower

A couple of weeks ago, I reported that the monthly data measuring the total industrial production of plastics product in the U.S. was revised downward for 2012 and 2013. This data is compiled and reported each month by the Federal Reserve Board. As part of this effort, the Fed also compiles and reports monthly data on the capacity utilization rate of the plastics industry. Unfortunately, this data was also revised downward significantly.

Before the revisions, the reported rate of capacity utilization in the plastics industry through the first quarter of 2013 was averaging very close to 80% and rising. It had not been above the 80% threshold since before the last recession, but it appeared as if it most certainly would get there very soon. History shows that there is a surge in capital spending for more molds, tooling, and machinery when the rate of capacity utilization in the plastics industry gets above the 85%-level and stays there for a few months. I did not think we would get to this halcyon level this year, but it certainly looked possible for next year.

Now the revised data indicate that the capacity utilization rate in 2013 is averaging less than 74%--that’s right, less than 74%. The revision subtracted nearly six percentage points from the data that was previously reported. And to make matters worse, the trajectory in the data over the past year (the trend) is flatter than it was before. So not only are we much farther away from the 85% range, we are progressing upward at a slower rate. At the current pace of improvement, the data will not get anywhere near 85% for several more years.

On a positive note, I expect the trend in the utilization rate to accelerate as the recovery in the overall U.S. economy and manufacturing sector picks up momentum later this year and through 2014. And the growth in demand for new molds and tooling will also accelerate shortly thereafter. It is too early to tell when or even if this indicator will ever get back up to the 85% level. I will continue to watch it closely and report on its progress.  But for now, the data are stuck in a slow-growth mode, and though I may not be happy about the revisions and what they imply, I cannot argue with them either.