US Capacity Utilization - Making New Lows

Yesterday's CPI reading, which showed the first year-over-year decline in consumer prices in the last 55 years is hardly suprising given the very low capacity utilization rates of the US economy. As demonstrated below, capacity utilization dropped to 69.3 in March breaching the lows experienced in the deep 1981-1982 recession. After observing such data, it is very clear why the Federal Reserve is so concerned about deflation. This is particularly the case given the rapid deceleration since last summer. However, what I find most striking about the chart is the sharp increase in utilization rates following each of the last three recessions. While deflationary fears give the Fed cover to inject stimulus into the economy, it will be equally as important for them to put on the breaks once evidence of recovery begins to take hold. If not, we could experience inflation rivaling that of the late 70s. Supply destruction across many segments of the economy (energy & commodities in particular) will only exacerbate this inflationary spike.

While I hope Bernake has the foresight to raise rates exiting the current recession, politics and a desire to keep his post beyond 2010 may cloud his better judgement.