Diminished Capacity

Highlights include Applied Materials, Inc. (AMAT - Snapshot Report), Ingersoll Rand Company Ltd. (IR - Analyst Report), Joy Global Inc. (JOYG - Analyst Report) and Caterpillar Inc. (CAT - Analyst Report).

Industrial production fell 0.5% in April following a 1.7% decline in March. The March number was revised down from the initial reading of a 1.5% decline. On a year over year basis, total industrial output is down 12.5%, and is 16.0% below its peak.

Manufacturing output fell 0.3% on the month following a 2.1% decline in March (revised from -1.7%), and was down 14.5%. Output from the nation's mines tumbled 3.2% following a 2.6% decline in March and is 8.6% below year ago levels. In contrast, Utility output rose 0.4% on the month following a 1.9% rise in March and is down just 3.2% from a year ago.

On the other hand, Utility output is affected by the weather almost as much as it is by the level of economic activity. For those looking for "green shoots," one could spin this that the rate of decline in production was much less in April than in March, but grasping at those shoots is grasping at straws. This was another weak report.

On the Capacity Utilization front, things were just as ugly. Overall capacity dropped to yet another all-time (well, since the records started being kept in 1967) record low of 69.1% from 69.4% in March (revised from 69.3%). A year ago, overall capacity utilization was 79.2%.

As can be seen in the chart below (larger version available at http://www.calculatedriskblog.com/), the year-ago level was about normal. In an economic boom, capacity utilization gets up to about 85%, and historically a level of 75% indicates a very severe recession. The only time on record we got anywhere close to the current level of spare capacity was at the very end of the 1982-83 downturn. Well if 85% is a boom, 80% is normal and 75% is a severe recession, what does that make 69.1%?

It is not a coincidence that in the first quarter Investment fell to its lowest percentage of GDP on record (since 1947) and did so by a very wide margin. Investment made up just 11.22% in the first quarter; the next closest low point for investment share of the economy came all the way back in 1949 and was at 12.77%. The long-term average is 15.99%.

If you have a factory with 30 of your 100 lathes sitting and collecting dust, are you really going to go out and buy more of them? This is very bad news for firms that sell factory equipment, ranging from Applied Materials (AMAT - Snapshot Report) to firms like Ingersoll Rand (IR - Analyst Report). If mines are not working at capacity, it means that they will have idle equipment, and are not likely to place new orders with Joy Global (JOYG - Analyst Report) or Caterpillar (CAT - Analyst Report).

Looking a bit more closely, capacity utilization in Manufacturing dipped to 65.7% from 65.8% in March and is down from 77.0% a year ago. Mine utilization tumbled to 82.5% from 85.2% in March and 90.9% a year ago. Utility utilization ticked up to 80.7% from 80.5%; a year ago it was at 85.1%.