Board of Governors of the Federal Reserve System

History of the Capacity and Capacity Utilization Index[1]

The capacity and utilization estimates evolved somewhat independently from IP. The Board of Governors began to study data on capacity and capacity utilization data in conjunction with the indexes of production in order to analyze both the demand for capital goods and inflationary pressures. In the absence of monthly surveys of industrial capacity or capacity utilization, the Federal Reserve Board derived estimates of monthly utilization by dividing a monthly industrial production index by a related capacity index. This approach of providing an integrated system of output, capacity, and utilization measures has three advantages over surveys of utilization alone: (1) It provides a more complete picture of industrial developments and allows the user to see which industries are growing and which are declining, and at what rates. (2) It provides more current estimates of utilization rates because the production indexes for a given month are available about fifteen days after the end of the month. (3) It provides estimates of utilization that appear to reflect the cyclical movements in production more accurately than the rates based solely on the judgments of respondents to surveys.

The beginnings of the development of capacity and utilization measures date back to the 1950s. During the economic expansion in the middle of that decade, the Board's staff developed indexes showing output and capacity levels for several major manufactured materials. These estimates, based on measures of physical volume from government and trade sources, were used internally as part of an effort to analyze current business conditions, primarily inflationary pressures and the demand for capital goods. Charts of capacity and output for major materials were included in articles on price and production developments in the Federal Reserve Bulletin (the November 1956 and May 1957 issues, respectively). Frank de Leeuw described the major manufactured materials capacity index in an internal Federal Reserve Board memorandum from August 1957.

Interest in capacity constraints was great in the booming 1960s, and the Federal Reserve maintained estimates of output, capacity, and utilization for manufacturing and for selected industrial materials. The estimates of manufacturing capacity and utilization appeared in articles published in Econometrica and in publications of the American Statistical Association in the 1960s; in 1966, the U.S. Council of Economic Advisers published the manufacturing estimates in the statistical appendix to its annual report. An article in the November 1966 issue of the Bulletin described the methods used to calculate the capacity and utilization series. The Board began to publish quarterly series for two subgroups of manufacturing—primary-processing industries and advanced-processing industries—and for total manufacturing in the quarterly statistical release, E.5; total manufacturing operating rates were included in the Bulletin's Selected Business Indexes beginning in 1968 (through 2008). Unlike the unpublished major materials index, the estimates for manufacturing industries were not constructed from physical volume data.

The quarterly capacity indexes were produced in three general steps: (1) End-of-year utilization rates from the McGraw-Hill survey of capacity utilization were divided into December values of Federal Reserve indexes of production. (2) These "implied" capacity indexes were then smoothed and extrapolated based on regressions involving alternative indicators of capacity expansion, a McGraw-Hill index of capacity and a perpetual inventory measure of gross capital stocks. (3) The resulting estimates were linearly interpolated to the quarterly frequency.

Pressures on capacity again became a concern in the early 1970s, when many industrial materials were reported in short supply and prices were soaring. During this period, the Federal Reserve reconstructed its (formerly internal) measure of capacity utilization for major materials industries (a subset of the broader "materials" group of industrial production). The major materials utilization measure, detailed in the August 1973 Bulletin, was based on twelve component materials industries. In the April 1974 Bulletin, the major materials index was revised and its component industries were expanded to eighteen in number; in addition to the aggregate, six industry groups of materials series were published. Quarterly indexes of materials capacity and output and quarterly utilization rates were included in the G.12.3 "Industrial Production" statistical release from 1974 through August 1977; from July 1976 through August 1977, the G.12.3 release also contained utilization rates at the monthly frequency.

The November 1976 Federal Reserve Bulletin article "New Estimates of Capacity Utilization: Manufacturing and Materials" marked the completion of a major expansion of the measures and a substantial revision of previous estimates for manufacturing. The manufacturing series were reestimated in greater detail—fifteen components instead of two—to conform to the industry detail in the McGraw-Hill survey. The manufacturing series were substantially revised back to 1948. The materials index was greatly expanded in scope to cover the entire materials grouping of industrial production (ninety-six materials series in total, split among eight materials subgroups, in addition to the total materials index), whereas the former "major" materials index covered less than one-quarter of the materials group. The new materials capacity series were derived from data on capacity or utilization rates from an expanded range of sources, primarily the new Survey of Plant Capacity (SPC)[2] from the Bureau of the Census, in addition to measures of physical volume from government and trade sources. Data on investment expenditures and industrial equipment production were used to refine the cyclical movements of the estimated materials capacity series.

The new monthly Federal Reserve statistical release (G.3), "Capacity Utilization," began in January 1977. The release included monthly utilization rates, as well as quarterly data on output, capacity, and utilization, for manufacturing and industrial materials (and their major component series). In 1979, estimates of net capital stocks from the Bureau of Labor Statistics were incorporated in the methodology used to refine the year-to-year movements in capacity for many of the 96 individual series in the total materials group. As a result, the methods used to estimate materials capacity became more akin to the techniques used to estimate capacity for manufacturing.

In 1983, the scope of the capacity system was increased to cover mining and utilities. Estimates for these new series plus total industry (the aggregate of manufacturing, mining, and utilities were) were added for the period back to 1967. In 1985 the number of manufacturing components was increased to 24 from 15, largely at the level of two-digit Standard Industrial Classification (SIC) groups. In April 1990, the G.3 "Capacity Utilization" and the G.12.3 "Industrial Production" releases were combined; since then, the monthly G.17 release "Industrial Production and Capacity Utilization" has been published on or around the fifteenth of the month and contains data on industrial production, capacity, and utilization rates up to the month just ended.

The aim of the 1990 capacity revision, described in the June 1990 Federal Reserve Bulletin, was to create an integrated, more detailed system of output, capacity, and utilization measures for total industry and a variety of market and industry sub-aggregates. This entailed several changes to the overall capacity system. Most importantly: (1) The materials system was discontinued as a separate entity, and those components of the materials system that were based on physical unit counts were included in the expanded system of capacity measures for manufacturing, mining, and utilities; (2) The primary source of utilization rates for manufacturing industries became the Bureau of the Census's SPC. The SPC-based capacity and utilization estimates were adjusted to maintain historical continuity with those from the defunct McGraw-Hill survey;[3] (3) The manufacturing capacity measures, previously comprising 24 individual series, were expanded to 54 individual series. (The Census survey provided more detailed data on industry utilization rates than had been available previously.)

The revisions in the early 1990s essentially continued the structure that was introduced in the 1990 revision; the elimination or addition of some individual series reflected changes in related production indexes. From 1990 to 2002, manufacturing comprised 55 individual series; mining comprised 19 series and utilities, two series. Since 1993, capacity indexes have been revised annually and are published in conjunction with the revisions to industrial production. The revised capacity indexes arise from new and revised industrial production indexes (the numerator for the implied capacity indexes); new utilization rate data (the denominator for the implied capacity indexes) from the SPC or in physical units; and updated estimates of industry capital spending. The general structure and methods for the construction of capacity and capacity utilization were relatively unchanged in the 1990s, although several important refinements to the methods were introduced.

The 1993 annual revision introduced new measures of industry-level capital stocks. The new estimates better reflected the incremental loss of economic efficiency that results from the aging of investments, and they better captured the asset composition of detailed industry-level stocks. The new estimates of net stocks were derived using a perpetual inventory method from (1) time series of new investments in plant and equipment by three- and four-digit SIC manufacturing industries; (2) decompositions of industry investment into 28 (currently 35) asset categories; (3) deflators and service lives for each type of asset; and (4) estimates of losses of capital efficiency as assets age due to discards and economic decay[4].

For the 1995 annual revision, the capital measures were further refined to reflect the flow of services derived from the net stocks of productive assets. The estimates are obtained using a method similar to the one used by the BLS to calculate multi-factor productivity. The capital input measures are rental-price, or user-cost, weighted Tornqvist indexes of the asset-level net stocks; that is, the indexes weight rates of change in the net stock of an individual asset by an estimate of that asset's share of the aggregate marginal product of the industry's capital.

In addition to incorporating the Fisher-ideal index methodology in the 1996 revision, the procedures for estimating capacity were enhanced further. The regression models that relate SPC-based implied capacities to alternative indicators of capacity expansion were made more flexible. Previously, the logarithm of the ratio of an industry's implied capacity to its capital stock or input—a capital productivity measure—was regressed on a series of deterministic trends and dummy variables. In this revision, the implicit restriction of a unit elasticity on the capital measure was relaxed so that the determinants of capital productivity could be studied and modeled more directly.

The March 2000 Bulletin described two refinements to the construction of capacity introduced in 1999. First, a new interpolation procedure was introduced for estimating monthly time series of capacity based on the fourth-quarter baseline capacity estimates produced by the regression models. The new procedure allowed capacity rates of change to evolve smoothly over time. Second, for the capacity estimates derived from the SPC, the models relating implied capacity to alternative indicators of capacity were expanded to include variables that capture the age profile of the capital stock. In several studies, age variables have been used to capture the effect of embodied technological change—that productivity augmenting technological change is vintage specific, that is, it is embodied in the design of new equipment and structures, rather than affecting all existing inputs in the production process.

New capacity measures for semiconductors, light motor vehicles, and natural gas extraction were developed in the 1999–2001 period. In the November 1999 revision, improved methods for estimating capacity for light motor vehicles were introduced. Capacity indexes for autos and light trucks are constructed from plant-level data (estimates of the peak historical line speed and the number of hours that can be worked at each plant in the United States; an annual capacity count for a plant is calculated by multiplying the peak line speed by the hours per year that the plant could run.) With the 1999 revision, the plant-level data were aggregated using estimates of plant-level prices.[5] The new approach indicates a shift over time toward capacity for the more expensive light trucks.

The method for estimating the capacity index for semiconductors was improved with the 1999 revision. The semiconductor capacity model is based on an implied capacity index constructed by dividing the number of chips produced (based on data from the Semiconductor Industry Association and the Bureau of the Census) by the utilization rate for the industry from the SPC. This implied capacity index, not the standard one computed using the IP index, is then fitted using the alternative capacity indicators, such as capital input; the fitted values from the regression are then multiplied by the ratio of semiconductor IP to the chip count to obtain a capacity index comparable to the IP index.

In the November 2001 revision, newly available estimates from the Energy Information Administration (EIA) were used to derive the capacity index for the extraction of natural gas; the new data substantially lowered the estimate of the industry's capacity for the 1995–99 period. The new EIA figures better reflect the ability of producing wells to deliver gas into the gathering and pipeline system; the previous EIA figures measured capacity at the wellhead only.

In 2007, the Federal Reserve worked with the Census Bureau to implement a Quarterly Survey of Plant Capacity (QSPC) with the plan to incorporate information from the survey into its estimation of production indexes for capital-intensive industries and to use them in the estimation of capacity utilization.[6]

The QSPC collects data on the factory workweek; like electric power use, the workweek is an indicator of the level of operations in capital-intensive industries. From 1974 to 2006, utilization rate data at the most detailed industry level for the fourth quarter of the year were collected by the annual SPC, but the lack of coverage for other quarters rendered them insufficient for use as high-frequency indicators. Studies using these data suggested they do nearly as well as electric power use as a proxy for capital services delivered.

[1] The historical portion of this section is based on the "History of the Index," a chapter in Industrial Production–1986 Edition, with a Description of the Methodology (Board of Governors of the Federal Reserve System, 1986).
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[2] The Survey of Plant Capacity asked questions related to fourth-quarter plant operations. It was an annual survey from 1974 through 1988, biannual 1990 through 1996, and annual from 1997 to 2006. Prior to the 1995/1996 survey, the survey forms were sent to about 9,000 establishments; from the 1995/1996 survey to 2006, the survey forms were sent to 16,000 to 17,000 plants. In 2007, the sample was reduced to about 5,500 establishments in conjunction with the move to a quarterly survey.
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[3] The McGraw-Hill utilization survey was discontinued in 1988.
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[4] The detailed methodology is explained in "Capital Stock Estimates for Manufacturing Industries: Methods and Data" by Mike Mohr and Charles Gilbert (1996).
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[5] If a plant produces multiple models on one assembly line, the model price attributed to the plant is computed as a weighted average of model prices according to estimated production levels at the plant.
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[6] Although the Federal Reserve and the Department of Defense jointly pay for the collection of these data and collaborate with the Census Bureau on the survey questions, the Census Bureau clears this survey under the Paperwork Reduction Act (OMB No. 0607-0175).
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