Look at Capacity Utilization

What I said yesterday: "Look at Capacity Utilization."

Here is Total Capacity Utilization (TCU) from FRED, with a "best performance" trend line eyeballed in:

Graph #1: Total Capacity Utilization with my estimate of a Best Case Trend Line

The best, or highest, capacity utilization that we can get shows a consistent decline since the 1960s. Where we were once near 90% utilization, we are now below 80% at best. The peaks in the data are reliably close to trend except for two brief periods which I have circled, and possibly at the near end (see arrow) where we can't say what will happen next.

The circled low peaks occur after the 1980 and 1982 recessions. Note that the circled peak following the 1982 recession is well below trend despite the uncharacteristically high growth of Real GDP at the same time. In my view the utilization peaks run low somehow because of the disturbance created by the Federal Reserve in the process of ending the so-called Great Inflation.

The circled high peaks occur in the mid and late 1990s, during the good years of the "new economy" identified by Alan Greenspan. They occur in the early years of the high productivity period which notably followed 20 years of low productivity. In my view the utilization peaks run atypically high because financial costs were atypically low. With less money going to pay for the money we use to buy things, there was more money available to buy things. That gave a boost to aggregate demand.

You could argue the point, but it looks to me that the final peak (at the arrow) is above trend. That's unusual. It leads me to wonder if perhaps the future will bring a second, equally high peak, as happened in the 1990s. It wouldn't surprise me. Because, you know, financial costs are atypically low again at present.