Friday, November 28, 2014

Industry Capacity Utilization Rates in Canada

Capacity utilization is the ratio of the output that is actually produced to the output that can be produced given the existing capital stock and available labor. It indicates both the prevailing economic condition (boom or slack) and how intensively capital and labor are being used.  Businesses operating in Canada are classified into twenty eight industries and data on their capacity utilization rates are quarterly published by Statistics Canada.  

The three-dimensional figure below is the distribution of the capacity utilization across these industries over the period 1997-2014.

Distribution of Capacity Utilization across Canadian Industries, 1997:Q1-2014:Q2
Distribution of Capacity Utilization across Canadian Industries, 1997:Q1-2014:Q2
In 2000, the capacity utilization was close to 100% in the industry of electrical equipment appliance and component manufacturing and in the industry of computer and electronic product manufacturing as new consumer durables such as LCD and plasma TVs, digital cameras, and personal computers became popular and affordable [here]. The total industrial capacity utilization was 87 %, on average.
Between 2003 and 2004, many industries including the petroleum and coal products manufacturing, paper manufacturing, wood product manufacturing, mining, and miscellaneous manufacturing experienced their highest capacity utilization, which averaged 85 % across the economy.
The economic climate was favorable at the beginning of the 2000s with annual real gross domestic product (GDP) growth rate reaching 5.1 %. This explains why the distribution of the capacity utilization is skewed to the right, on the figure, at the beginning of the millennium.

There were also high extreme values in 2008 during the financial crisis. In the third quarter of 2008, the forestry and logging and the metal manufacturing industries were running at 99 % of their capacities while the economy was averaging 79 %. This was due to the worldwide increase in the demand for these commodities.

As a consequence of the crisis, real GDP fell by 2.7 % in 2009. Industries such as: mining, wood product manufacturing, leather and allied product manufacturing, textile product mill, plastic product, and non-metallic mineral product manufacturing experienced their lowest capacity utilization. This is why the distribution shifted to the left in 2009.

Increase in the capacity utilization occasions inflation. In 2000, prices increased by 2.7 % while the total industrial capacity utilization was averaging 87 %. Likewise, in 2004, inflation was at 2.8 % while the whole economy was using 85 % of its capacity. But in 2009, when the total industrial capacity utilization fell to 73 % due to the crisis, inflation was low at .3 %.