December 11, 2023

Statistics Canada released capacity utilization rate data Friday. Most news organizations do not report this figure as there is little understanding about how it relates to the economy as a whole.

For classical economics, capacity utilization along with unemployment intensity and demand is an important measure of inflation expectation.

Currently, the demand curve is rather flat because increase in interest rates and continued borrowing by the Canadian consumer.

Canadians are spending more of their income on debt, but down from the peak of 2021. Part of this decline in debt service ratio is the collapse of "excess money" (i.e., any money that capital thinks you have too much of) and partly because Canadians paid off their debts then faced massive increases in prices for basic goods in 2022/2023 that consumers do not usually use credit to pay for.

Capacity utilization is essentially flat compared to earlier this year. This is likely an indication, given the other metrics available, that capital is waiting for the other shoe to drop on recession. There is no increase in investment (fixed capital formation) and no increase in output.

Generally this is a bad position to be in. All other things being equal, static and/or slightly decreasing investment with continued capacity utilization means machines are getting worn down, but not replaced. This means that capacity utilization would have to start to rise as some capacity is taken out of production.

However, we do not see this.

We see declining year over year GDP. Which means out production continues, but the output is falling (GDP down 2.1% in the goods producing sectors).

Such a situation has been a long-standing problem in Canada. At the level of the economy, it means that productivity gains are also flat.

However, it does mean that the central banks are getting their way in passing along the costs of inflation to workers. Central banks pushing up interest rates are having an effect of declining production and workers are feeling the pinch in their wallets and consuming less (i.e., they are poorer).

The result has been many more strike this year. While wages are not as high as inflation, workers have been able to match their demands with some militancy when capital refuses to budge.

Wage growth is hovering around 4.8% for the later part of the year in Canada, but employment rates are falling. So, while employed workers are pushing-up their wage, capital is reducing employment through reduction of output (that continued capacity utilization, but declining output above) and automation. Though less automation that is generally acknowledged.

In the (much) longer-term, capacity utilization is down in everything except construction and without the oil and gas sector and auto, the economy would be in bad shape. It is unclear to me what this means right now, but it does not seem good. Mothballed production since 2018 has not been replaced and not been started back-up. Outside of debates over "technical recession", that sounds recession-y to me.

The second largest (and completely non-partisan) Chips Acts has had its first investment. Just in case anyone thought that the investment in supply of semiconductors was not a security investment:

The US announced the first semiconductor grant under the 2022 Chips Act, awarding $35 million to the US subsidiary of British aerospace firm BAE Systems Plc to ramp up manufacturing of military chips.

The push around security supply chains for semiconductor manufacturing is all about producing defense and other digital hardware without China. Canada is in the middle of this around securing supply of critical minerals, but the government seems to be unable to conceive of investment in production of actual chips here.

The lack of vision in Canada's political class when it comes to developing domestic supply of chips is shocking. One does not need to produce the most advanced chips at the leading edge of the industry. Most semiconductors used in manufacturing are old designs, slow, tried and tested products that are rather easy to make. In fact, NRC can and does make some specialized semiconductors already. Some tiny amount of investment was made during the supply chain crunch of 2022, but more could be done to support the NRC's industrial production side.

Scaling-up value-added production should be a goal of the left or we will be shifting our extraction industries to a different kind of mining, but staying a resource extraction economy.