Saturday, October 5, 2013

Another oddity in the annals of capacity utilization

Graph #1: Growth Rates of RGDP (blue) and Capacity Utilization (red)
(Click the graph for a bigger picture in a longer time period)
The 1982 recession was followed by an uncharacteristically large increase in RGDP growth (blue) and an unusually small increase in Capacity Utilization (red).

Hm. If capacity increased fast enough, RGDP might increase faster than we could put the new capacity to use. I wonder: Did capacity grow particularly fast after the 1982 recession?

By the standard of later years at least, it did:

Graph #2: Growth Rate of Investment
So maybe that's it: A vigorous bloom of new capacity allowed economic growth to increase faster than capacity utilization. But the vigorous bloom did not last. There followed almost immediately a great moderation of investment spending.

It looks to me as if the brief bout of vigor was brought on by great expectations, and the end of the vigor by expectations disappointed. And perhaps we know the source of that disappointment -- disappointing profits:

Graph #3: Corporate Profits relative to GDP
There is no more certain extinguisher of expectations, than reality.

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