There’s Something Happening Here

You might want to take a look at the intriguing post from Garrett Jones on the breakdown of the historic relationship between capacity utilization and GDP growth:

It’s not just that the relationship between capacity utilization and growth is noisier than it used to be before the crisis: It’s that growth has consistently been less than you would’ve expected based on how many unused machines got turned back on in 2009 and 2010.

I think this is actually pretty easy to understand. Capacity utilization has a drastically different meaning in a service economy with rapid technological change. After a year or so the old “capacity”, whether human or machine, just isn’t as productive as it used to be.

This will be really terrible news for the “aggregate demand” crowd.

2 comments… add one

  • Icepick

    This will be really terrible news for the “aggregate demand” crowd.

    Only if they start losing THEIR jobs, which isn’t likely.

  • Drew

    Greetings from Bah-ston. Hope you all are well.

    Boy-oh-boy. This is provacative: “Capacity utilization has a drastically different meaning in a service economy with rapid technological change. After a year or so the old “capacity”, whether human or machine, just isn’t as productive as it used to be.”

    The second sentence is probably true by definition. And yet, we have businesses that operate 30 year old equipment quite finely. Could the real issue be the one I have harped on (to no avail) for several years now? Employment costs, the cost of growth, the risk of growth investment, and the headwinds to growth – like taxes – are inordinantly high under the current political regime?

    Nah. Better to blame Bush and aggregate demand.

    In perspective, already in place capital assets should be put into place in a heartbeat. Let’s see…..capital/labor……capital/labor…….capital assets cheap/labor assets…..ooops, expensive.

    It ain’t that hard, people. The current political/regulatory/return environment has made it difficult to hire.

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