Manufacturing Capacity Utilization Breaches New Lows

Manufacturing capacity utilization breached a new post-WWII low, declining to 64.6% in June. As indicated in the chart above, the June results are off the charts when benchmarked against prior recessions in the US (note the prior low was in the severe recession of the early 80s when capacity utilization troughed at 68.6%). While unprecedented money printing by the Fed supports the long-term inflationist view, the massive slack that exists in the economy, suggests that deflation remains the most pressing issue over the near-term. Talk to any homebuilder, retailer, or mall owner for confirmation of the lack of pricing power that exists for a broad swath of US companies.

An interesting takeaway from the chart, which lends some credence to the argument put forth by the inflation bulls, is how sharply capacity utilization ramps up exiting each of the post-WWII recessions. While avoiding a Japanese-style debt deflation is critically important, the Fed must be very careful to ease up the breaks once the economy begins to heal. Should the economy follow the trajectory of prior recessions, a combination of the supply destruction going on in most industries coupled with the massive monetary stimulus provided in the Fed, could stoke an inflationary spiral that puts the 1970s commodity bubble to shame.