August 9, 2012
The capacity utilization rate in Canada is on the mend (Part 2)
Chief Economist, CanaData
The capacity utilization rate is the proportion of potential output that is actually being used during a given time frame.
It’s a dynamic figure that can change due to a variety of circumstances, most notably production increases or decreases and/or additions or subtractions (e.g., plant closures) from full potential.
In Part 1 of this report, there was discussion about the various benchmark levels that govern when expansion plans become warranted. This is important for our industry because it usually leads to construction work.
Generally speaking, a usage rate for a sub-sector that rises above 85% has strong positive implications. That’s when owners and decision-makers begin to think more seriously about increasing their physical plant.
In the latest results, manufacturing (81.3%) provided more lift to the overall utilization rate (80.7%) than the several sub-sectors in non-manufacturing.
The leaders in non-manufacturing were forestry and logging (88.0%) and electric power generation, transmission and distribution (85.0%).
The laggards were mining and oil and gas extraction (79.3%) and construction (78.8%).
One has to delve deeper to discover where the real weakness lay. Within “mining and oil and gas extraction”, there are two further sub-sectors. Oil and gas extraction at 90.2% did more than okay in Q1.
Mining at 60.3%, on the other hand, was seriously in the doldrums. Mining’s usage rate in Q1 fell 3.9 percentage points from Q4 of last year and 8.8 percentage points versus Q1 of 2011.
As a result of the world economic slowdown, activity levels were slashed at a host of mining projects. Demand softened across a wide spectrum of metals and minerals. Potash, copper, nickel, lead and zinc were all caught in the downdraft.Â
Moving on to manufacturing, the usage rate in Q1 at 81.3% was +0.7 percentage points quarter over quarter and +2.6 year over year. But only four manufacturing sub-sectors recorded levels of capacity utilization that were above 85% – transportation equipment (89.5%), machinery manufacturing (88.5%), rubber products (86.7%) and computer and electronic products (86.1%).
Notice how prominently the auto sector appears in the paragraph above. It accounts for a major portion of work in both transportation equipment and the rubber products sector (e.g., tires).
On a more encouraging note, 13 of 21 manufacturing sub-sectors (i.e., more than half) did record an increase in plant usage quarter to quarter in Q1.
The largest percentage-point gainers were textile mills (+5.0), leather and allied products (+3.5) and wood products (+3.2).
The greatest decliners quarter to quarter were computer and electronic products (-5.5 percentage points), primary metal (-2.4) and paper (-2.3).
What about over a longer time frame? The leaders year over year in Q1 were machinery manufacturing (+14.5 percentage points), leather and allied products (+11.8), transportation equipment (+8.6) and plastic products (+6.0).
Similar to rubber products, plastics producers (e.g., dashboards and interior finishing) benefitted from the upsurge in motor vehicle and parts demand.
The largest declines in usage rates year over year in Q1 occurred in paper production (-9.1), electrical equipment and appliances (-4.0) and beverages (-3.7).
In the U.S., the Federal Reserve publishes industrial production and capacity utilization rate figures monthly rather than quarterly.
In June, U.S. total industry operated at 78.9% of capacity, which wasn’t much different from our performance (80.7%).
Contrary to Canada, however, manufacturing (77.7%) south of the border was a slight drag on the total industry figure.
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.
| Construction | Manufacturing | |
|
|
|
| Transportation Equipment | Machinery Manufacturing | |
|
|
|
| Includes motor vehicles and parts, aerospace products, railway rolling stock, ship and boat building. |
Includes motor vehicles and parts, aerospace products, railway rolling stock, ship and boat building. |
The thick red horizontal line in each of the charts shows the 85% level. This is the benchmark level of capacity utilization above which firms in an industry will look seriously at investing in an expansion. The benchmark 85% level has generally been raised somewhat by “just-in-time” inventory. However, in many instances, border crossing delays with the U.S. are making instant inventory adjustments harder to make. There is also concern across most industrial sectors about the volatility in value of the Canadian dollar relative to the U.S. dollar. Many companies have adopted a “wait and see” attitude towards investment in physical plant. Once one firm in an industry makes the decision to expand, often its competitors will also jump on the bandwagon (i.e. a copycat effect) in order to keep up. |
Industry classifications are as according to NAICS (North American Industry Classification System).
The capacity utilization rate is a leading indicator for construction in each of these industrial sectors.
