January 7, 2014

U.S. and Canadian plant usage rates hover near level to drive investment (Part 2)

Continued from Economy at a Glance Part 1.

For the construction industry, while there’s no doubt that it’s nice to hear about the improvement in auto sector sales, there is another statistic that has more pertinent relevance. How close is the industry to operating at capacity?

An industry’s production usage rate has a strong bearing on the priority firms within the sector place on building new facilities.

Climbing above 80%, firms begin to daydream about how they will meet future demand if it continues to grow. Once 85% is exceeded, the issue becomes more critical.

Statistics Canada publishes capacity utilization rates quarterly.

In the third quarter of this year, makers of transportation equipment in Canada were operating at 88.3% of capacity. That was up slightly from the second quarter level of 87.4%, but it was a decline from the third quarter of last year when the figure was an impressive 93.1%.

In the U.S., capacity utilization rates are published monthly by the Federal Reserve. Also included in the Fed’s table are long-term (1972-2012) averages, 1994-95 highs and 2009 lows.

For U.S. motor vehicles and parts, November 2013’s usage rate was 78.4%, which was above the long-term average of 75.0%.

The 2009 recession-low for the industry — when General Motors and Chrysler hid out in bankruptcy protection for a while — was a hard-to-believe 35.0%.

Plant closings, changes in ownership and restructurings of pension and medical legacy costs have helped the U.S. domestic auto industry come galloping back.

The 88.3% usage rate in Canada suggests a more urgent need to expand capacity here than in the U.S., but there are challenges to this assumption. The global geographic structure of auto and parts production is undergoing major shifts.

New investment is more likely to flow into states with “right to work” legislation or other jurisdictions with minimal labour costs, such as Mexico.

Canadian politicians and industry leaders will need to be pro-active with persuasive arguments to ensure carmakers continue to invest major dollars here.

Let’s move on to some other measures of capacity usage in both countries.

Setting aside transportation equipment, there are only two other manufacturing sub-sectors in Canada operating at greater than 85% of capacity: wood products (88.8%) and paper (88.3%).

This does, however, imply a welcome pick-up in the forestry sector.

There are several other mainly resource-centric sectors that contribute to the total industry capacity utilization figure besides manufacturing.

From highest to lowest in Q3, they were electric power (89.1%); oil and gas extraction (87.5%); forestry and logging (86.6%); construction (83.3%); and mining (62.9%). Note that the first three are above the 85% threshold.

Only mining is in a horrendous pit. Stagnant and below-previous-peak global commodity prices on account of lethargic world trade are keeping output levels far below what is desirable.

Total industry capacity utilization in Canada in Q3 was 81.7%, up from 81.1% in Q2. A year ago, the level was 81.4%.

By way of comparison, the U.S. capacity utilization rate for total industry in November was 79.0%, a “smidge” below the 1972 to 2012 average of 80.2%.

During the 1994-95 boom in the U.S., the figure rose to 85.0%. In 2009, it plunged to 66.9%.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

Canadian capacity utilization rates by
industry group – total Canadian industry

An industry’s capacity utilization rate is the ratio of its actual output to its estimated potential output.

Data Source: Statistics Canada / Chart: Reed Construction Data – CanaData.
Industry classifications are as according to NAICS (North American Industry Classification System).

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