Capacity Utilization Rate

What it Measures:

In macroeconomics, the Capacity Utilization Rate is the economy’s total percentage of factories, equipment and mines that are currently producing. In other words, Capacity Utilization measures the percentage of an industry, or country’s capacity for production which is actually used over a particular time period.

For example, if a company produces 50 units of a product in a day with the possibility of producing 50 more units without their production costs rising, then the company is running at a 50% Capacity Utilization Rate.

What effect it has:

If the U.S. Capacity Utilization Rate comes out higher-than-expected, that usually appreciates the U.S. currency, while a lower-than-expected number will prompt the U.S. Dollar’s decline.

For other countries than the United States, a rising Capacity Utilization Rate will indicate strength in a national economy and will be favorable to the currency of that country when the actual rate of Capacity Utilization is higher than that forecast by economists. Conversely, a decline in the rate would indicate that the economy of that nation was weakening and would tend to depreciate the currency.

How often it is released:

The Capacity Utilization Rate is released monthly and is periodically revised along with the related Industrial Production number. In the United States, both of these economic data releases usually come out 16 days after the month ends and come directly from the Federal Reserve.

Why it is important:

In essence, Capacity Utilization acts as a leading indicator of consumer inflation since industries will tend to incur higher production costs as industry approaches full capacity, thereby passing on higher costs to consumers.

Furthermore, an expanding economy will demonstrate a rising percentage of Capacity Utilization, while a decreasing Capacity Utilization Rate will signal a contracting economy. Also, Capacity Utilization tends to signal a lower potential for growth when an economy is running near full capacity. Weather and other factors can directly influence Industrial Production which is then in turn reflected in the Capacity Utilization Rate.