Friday, July 18, 2008

Factory Output and Unemployment

Bloomberg reports that factory output rose in June. What does this tell us?

Well, nothing we didn't already know, I think. Take a look at Capacity Utilization. Looks like it's been falling, until a recent jump up. We don't know if there'll be a change in trend back upward, but I find it interesting how different indeces are tied together.

Look at capacity utilization over the past three years (you'll have to click on 'Charts' then '3-year'), and you'll see the rise in capacity utilization, before its downward descent. It shouldn't surprise you to hear that there's probably a negative relationship between capacity utilization and the unemployment rate (or, perhaps, a positive relationship between capacity utilization and the employment rate).

Capacity utilization measures the percentage of factories in use, but it takes people to work those factories. With constant technology (or, in the short term), a decrease in physical capital will likely lead to a decrease in human capital. For a given technology level, there's a particular ratio of physical-to-human capital, so a decrease in one form of capital will mean a decrease in the other form of capital, in order to keep the ratio constant. A rise in utilized physical capital--as the Bloomberg article reports--might portend a drop in the unemployment rate, or at least provides downward pressure on the unemployment rate.

"Downward pressure" just means that there will either be a drop in unemployment or less of a jump in unemployment, all other things equal.

On the other hand, the report may not be indicative of a trend. Capacity utilization has been dropping this year, and unemployment has been rising. Unemployment continued to rise in June, which suggests that capacity utilization will continue to drop.

Bottom line is this: if the report is actually the start of a trend, we'll see the unemployment rate start to drop. If no, the unemployment rate will continue to rise.

Side note: interesting 2002 article on the savings rate.

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