The chart below shows an estimate of capacity utilization in the manufacturing sector and in one industry group within that sector, the manufacturing of motor vehicles and parts. These estimates, which are constructed by the Federal Reserve, are designed to measure output (seasonally adjusted) as a percent of capacity. Capacity, in turn, is an estimate of the greatest level of output a plant can maintain within the framework of a realistic work schedule, after allowing for such factors as normal downtime.

(Click on Chart to Enlarge)

As can be seen, the rate of capacity utilization for the overall manufacturing sector is clearly cyclical – it rises and falls in conjunction with the business cycle. In the current recession, which began in December 2007, the rate has declined sharply. As of April, the manufacturing sector was operating at 65 percent of capacity – the lowest rate since at least 1948, when the data begin.

The downturn in the motor vehicle and parts industry is even more striking. When the recession began, the capacity utilization rate was 70 percent. By this past January, it had plummeted to 38 percent. It has rebounded slightly since then, and by April it was 42 percent. Here, too, these are the lowest levels on record.

Another way of looking at this is that idle capacity in the motor vehicle industry, and the manufacturing sector as a whole, is at a record high.

The good news is that capacity utilization rates will rebound when business conditions improve. Coming out of recessions, these rates are a coincident indicator – they usually start to rise just as the recession ends. The bad news, for the automotive industry, is that capacity rates are unlikely to return to their earlier cyclical peaks.

In the late 1940s and early 1950s, when the manufacturing sectors of Europe and Japan were still recovering from the devastation of World War II, the U.S. manufacturing industry reigned supreme. Capacity utilization in the U.S. auto industry sometimes exceeded 100 percent (meaning that auto factories were working at above-normal overtime rates until more factories could be built and thereby expand capacity.)

But in the business expansion of 2001-2007, auto capacity utilization topped out at a much lower 80 percent – the lowest cyclical peak of any postwar recession.

It remains to be seen how the numbers will be affected by the current, historic downsizing of the auto industry. Maximum capacity will likely shrink as factories are permanently shuttered. Eventually the output from that shrunken base will rebound from its current cyclical low. Right now, the best that can be said is that capacity utilization is no longer falling.

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