E Is USA Low Capacity Utilization Low Enough To Prevent Recession?

Low capacity utilization and weak labor are with us in full force. Capacity utilization still runs below the fifty year average of 80.31 percent in the United States:



As an economic indicator:

Running above an 80-85 percent capacity utilization rate can signal high demand for the products being produced and that capacity is about to be maxed out. When capacity utilization rates get close to 100 percent product, consistency can suffer and the business can lose some control over production or customer service. 

However we very well may be at a point where our low capacity utilization is simply not low enough:

Low capacity utilization will more often than not lead to lower prices, which in turn will stimulate demand and increase the capacity utilization. Many businesses increase prices in an attempt to increase profit margins; however, this kind of move only acts to lower the demand for the products and can then lower capacity utilization even more. 

Dr. Edward Lambert, who follows capacity utilization closely in formulating his theory of effective demand says this about inflation:

As far as inflation, capacity utilization is low partly because of high profit rates. Low capacity utilization keeps inflation down. 

Dr. Lambert makes the point that firms have high debt, but are locking into low rates, also increasing profit margins. While the Fed wants to raise rates, and it is, as he says a tricky thing to do, Dr Lambert believes there is room for the Fed to raise rates some. 

But he makes two other significant points regarding excess reserves and inflation. He views the United States as being in some ways similar to Europe and Japan:

Excess reserves have come down a bit as the Fed rate rises. So the future of excess reserves is linked to the future of the Fed rate. So if we get a recession in 6 months, the Fed rate goes back down to zero, and excess reserves are here to stay.
And inflation is not dependent on interest rates at the moment. It is much more a dynamic of high profit rates, low capacity utilization, increased inequality, weak labor power and weak effective demand from lower labor share.
This scenario applies to other countries like Japan and Europe. 
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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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Moon Kil Woong 3 years ago Contributor's comment

One can't blame businesses for their actions. The Federal Reserve's low rates and QE have encouraged companies to not invest in capital equipment or save but rather run up debt and pay dividends and buy back stock shares. Companies have grown by buying up competitors and eating small businesses rather than trying to grow organically in a zombie economy. This is why the S&P is up even though the economy isn't growing significantly. Like a zombie, we are eating each other rather than growing the economy.

It is not greed driving the market, but rather a poorly managed economy that is separating from economic fundamentals as we speak thanks to the Federal Reserve's obsession with a socialist, managed economy tools.

Gary Anderson 3 years ago Author's comment

Well, Moon, it isn't classic socialism as business is still private. I suppose we could call it socialism. But there is only so much the Fed can do. I remember that Business Insider's Henry Blodget had the answer, that companies should simply pay better wages. We would not need Fed helicopter money to even out the economy, just a fair wage. Henry pointed out that there needs to be some Henry Ford's out there. The Fed cannot force companies to pay a wage that would ultimately make them more money with more monetary turnover. Money trickles back up, so the Fed and business are both chicken. Put money into the hands of the people. It is a no brainer. Want fewer customers, then automate everything. You will win for awhile, but not for the long term.

Moon Kil Woong 3 years ago Contributor's comment

QE is a command economy tool as is extreme manipulation of interest rates not used for countering downturns. Of course, business is still private. It is business that suffers from the loss of free market signalling when the Federal Engages in such tools.

Gary Anderson 3 years ago Author's comment

Yes, QE has certainly failed to bring many back into the work force. It wasn't that good for main street as we look back on it. Powell admitted there is slack in the labor force. That is a pretty big admission considering you seemed to hear only that the labor market was tightening, from the current Fed chairman and her minions.