Diverging Measures of Capacity Utilization: An Explanation
The Differences Between The Federal Reserve Board And The Institute For Supply Management Measures Are More Apparent Than Real
By Norman Morin and John J. Stevens
John J. Stevens is an economist
in the Division of Research and
Statistics at the Federal Reserve
Board, where he constructs estimates
of U.S. industrial capacity
and analyzes issues related to
the industrial sector. His current
research interests include
exploring the relationship
between plant size and plant function, and studying the
implications of flexible manufacturing for the measurement
of industrial capacity. He received a Ph.D. in economics
from the University of Minnesota.
In the wake of the recent recovery in manufacturing production, the capacity utilization rates published by the Federal Reserve Board (FRB) have rebounded much more slowly than those published by the Institute for Supply Management (ISM). As a result, some observers have speculated that the manufacturing sector may have considerably less slack than is indicated by the FRB measures. Our view is that the two characterizations of manufacturing slack are not as incongruent as they first appear. This paper discusses the practical and conceptual differences between these measures of capacity utilization, and concludes that the recent divergence simply reflects the character of the latest business cycle.