The Fed’s watching closely for signs of inflation. To the Fed, higher wages bring higher inflation. But the Fed’s own data shows there is room for higher wages without inflation.
Capacity utilization measures how much existing infrastructure manufacturers, miners and utility companies are using. The chart of this indicator is below. As you see, it’s in a long-term downtrend. The current value is also relatively low.
In the 20th century, economists argued capacity utilization above 85% sparked inflation. But, as the chart shows, the U.S. economy changed in the past 50 years.
Capacity Utilization and Inflation
Some changes are easy to spot. The North American Free Trade Agreement (NAFTA) took effect in 1994. Jobs went to Mexico, where wages were lower. Capacity utilization never reached 85% after that.
Outsourcing accelerated as China became a destination for manufacturing jobs. Utilization topped out near 80% as this trend took hold.
The current uptrend began in November 2016. The index stands at 77.9%. There’s ample room for noninflationary economic growth. That’s good news for stocks.
As companies put capacity to use, earnings will grow. Higher earnings boost stock prices. Until inflation actually appears, now is the time to buy stocks.
Michael Carr, CMT
Editor, Peak Velocity Trader