The Capacity Glut Keeps Winding Down

What next? The numbers say we're about to find out.
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(Ghost) Riders in the Sky

JACKSON HOLE, Wyo. -- Wow!!

I trust you can guess how this one's gonna go.

The November

industrial production

numbers released this morning, alongside a notable upward revision to October data, confirm that factory-sector output is on a tear. It's now put together a string of 11 straight increases -- this following five decreases in 10 months last year -- and will post a beefy 4.9% fourth-quarter increase even if it falls a tenth this month (my current assumption). All told, the industrial sector will end up contributing more to overall growth during the current quarter than it has during any quarter in two years.

Capacity growth, meanwhile, will show a 1999 deceleration of roughly 2 points following a seven-year period that vaulted it to 6.3% from 1.7%.

Lots of folks will find comfort in the fact that utilization (the ratio of production to capacity) held steady at 81% between October and November -- nowhere near 1994 readings ... still no bottleneck pressure!! -- and they're free to concentrate on levels if they like.

Yet direction seems the more constructive focus (especially because how we got to where we are probably has much to say about where we're going), and that's what we'll concentrate on here. Two notes on that score.

(a) Mind the gap.

Capacity began to grow faster than production (most recently) during the first quarter of 1998, and it continued to do so through the end of the year, when the gap between the two peaked at 3.8% in December. As a result, utilization dropped to 81% from 83.7% between the fourth quarter of 1997 and the fourth quarter of 1998.

This year's speedier production/slower capacity combo has been narrowing the gap since, and last month, for the first time since January 1998, production was growing at a faster rate than capacity (4.3% against 4.2%). Utilization, which troughed at 80.4% during the first quarter of the year, is creeping up as a consequence (see our indicators

page for a chart).

(b) Get global.

You can safely rule out any material and permanent near-term American slowing; it's far from clear we've even finished accelerating. Growth in both Japan and Europe, meantime, is most likely to ramp up between this year and next.

And even if it merely levels out, don't lose sight of the bigger picture here: The things that put us where we are today simply aren't happening anymore.

The economies of the East Asian crisis countries went from growing at a 4.5% rate in 1997 to contracting at an 8% rate in 1998.

That isn't happening anymore.

The Japanese economy went from growing at a 1.4% rate in 1997 to contracting at a 2.8% rate in 1998.

That isn't happening anymore.

World growth decelerated to 1.8% in 1998 from 3.2% in 1997.

And that just ain't happening anymore. Matter of fact, it's already rebounding.

We know all about the very nice things that happen when a stagnation in worldwide demand produces a global capacity glut.

We know because we just lived them.

What happens, though, when the glut winds down?

That's what we're beginning to find out now.

Side Dish

Wait wait wait wait wait. What's with the "

back in" thing?

I don't recall ever reading about the selling that (apparently) followed the last

round of buying.

Maybe it's just me, but these bond-trade beginnings always seem to lack endings.

They're doubtless all happy ones -- there's no such thing as a stock guy who can't turn a quick couple-tick profit on the bond whenever the mood strikes -- but still.

A kid does like to see the last page of the book regardless.