About "the new normal" and "excess capacity"

Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.

The chart below shows that capacity utilization in the US is at an all-time low -- around 68%. That means that with the equipment we already have in place, we could produce almost 50% more goods than we’re now producing. However, most analysts think that 80% capacity utilization is a very good number.

If you look very closely at the bottom-right-hand detail, you can see that there’s a small uptick in last month’s data. Whether or not this is the “bottom” remains to be seen. But if it’s not the bottom, it’s close. You can only shut down so much production before inventories fall to levels that require restocking. And we’re getting close to that level in many industries.

As I’ve repeatedly said, the world is awash in excess capacity. We simply built too much productive capacity to be utilized in the New Normal. One way of dealing with too much capacity is to simply close the plants. That’s what’s happening in the paper and memory-chip industries. Other industries are engaging in mergers to reduce or “rationalize” capacity. While that process is a good thing, it does mean that unemployment rises or stays higher longer

The country (and the world) is adjusting to the New Normal. It’s some level of overall economic activity that’s different from what we’ve enjoyed during the reigning paradigm of the last 30 years.