Microeconomic Indicator in FOREX:
What is Capacity Utilization?
Capacity Utilization talks about the production and manufacturing capabilities that are being utilised by the nation in a certain period of time. It determines the output that is produced with the current resources and the output that can be generated if all the resources present in the country were fully employed. Capacity Utilization rate is represented as a percentage, and it provides deep insights with respect to the total utilisation of resources in the country. Economists consider this data very important as it gives insights on how a country can boost its output without raising the costs associated with production.
The Capacity Utilization of any country is determined by dividing the actual level of output by the maximum productive level. The result is then multiplied by one hundred, since it is a percentage. If the demand for the products that are being produced in the country increases, there will be a rise in the capacity utilisation rate. Likewise, if the demand decreases the rate will fall. Capacity Utilization is employed as an indicator of inflation pressures. If there are excess resources in the country compared to the demand for the products which are being produced using these resources, the inflation rate lowers. Hence low capacity utilization rates for prolonged periods will have an impact on the country’s economy. In an ideal situation, manufacturing plants tend to use around 80% of their country’s available resources.
What does the Capacity Utilization measure?
Capacity Utilization, AKA Operating Rate, measures the percentage of available resources in the country that is being employed by manufacturers, mines, builders, oil extractors and utilities. It is also a metric used by economists to measure the rate at which the potential levels of a nation’s output are being used. Capacity Utilization and Unemployment rate are inversely proportional. If the rate of capacity utilization falls, the rate of unemployment increases as there are enough or excess resources but the production is at the halt. This creates a slack in the economy. And if there is excess capacity, governments do not have to invest more capital to increase the production of goods.
Reliable sources of information on ‘Capacity Utilization’ for Major currencies:
A great deal of Information to Capacity Utilization is presented in the sources provided below. You can familiarise yourself with the Capacity Utilization of the respective country along with the historical data related to that. You can also compare the Capacity Utilization of one country to the other using this web portal. The graphical representation of the historical data will give you a clear understanding of how this data evolved over time. You also get to modify the graphical illustrations according to your preference. A ton of more data related to the latest news in that regard is presented to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/capacity-utilization
What do traders care about Capacity Utilization and its impact on the currency?
Capacity Utilization is a leading indicator of consumer inflation. If the manufacturing plants are working at full capacity, it indicates a high demand for the goods that are being produced in the country. High demand eventually leads to an increase in prices and these higher costs are eventually passed on to the end consumer. At the same time Capacity Utilization also carries important information on the current and forecasted strength of an economy and its currency. If the rate of Capacity Utilization reduces compared to the previous month or quarter, it indicates an economic slowdown and an increase in Capacity Utilization rate signifies economic growth. And we all know that the value of the currency strengthens if there is a significant growth in the economy. So traders should consider looking at the Capacity Utilization numbers of the country before investing in its currency.
Frequency of the release
Capacity Utilization numbers of the U.S. are released by the Federal Reserve. Different countries have different boards. For instance, in Canada, this data is published by ‘Statistics Canada’. Generally, this data is issued on a monthly basis with some exceptions. Major economies like the United States, Australia, etc. release their Capacity Utilization numbers month-on-month. But some countries like Canada and New Zealand release their numbers on a quarterly basis. The publish dates also differ from country to country. The U.S. published the CU Report 16 days after the month ends while Canada publishes its report 75 days after the quarter ends.
The Bottom Line
The Capacity Utilization rate is very useful for the economists of a country as it provides an insight into the value of production and the resources that are being used at any given time. It determines the country’s ability to handle the rise in production of the output. This rate also indicates how well the different factors of production are being employed. Economies with lesser Capacity Utilization can significantly boost their production without affecting the costs associated with it. However, Countries can never function on 100% Capacity Utilization as inefficiencies in the allocation of resources will always exist.