A slightly lower Capacity Utilization will further show lower inflation pressures but a long term topping action is sending scary signals
Alan Hershey
Oct. 15, 2006

On 17th around 8.30 AM a very interesting stat will be out – the capacity utilization. The market is expecting 82.1% from prior 82.4%. It will be bullish for stocks and bonds. The slightly lower number shows healthy economy with less inflation pressures. Stocks and bonds will get reassurance from the statistics that Fed should be no hurry to raise the rates.

Fed watches a capacity utilization rate of 85% or higher. That is the threshold used to find critical inflation pressures. The Fed always acts to contain the Capacity Utilization number below 85% with preemptive actions.

The number close to 82% is very healthy and is sending signs of relief for major economists and the Fed. But there are some very interesting signs in the chart for Capacity Utilization when plotted in a log scale. The analytic model used look to magnify or add amplitude to acceleration or deceleration in the movement of the index over time.

The model is consistently showing a parabolic topping action for the last one year. The model predicts a slightly lower Capacity Utilization in the coming months till middle of 2007 and then accelerated downward movement to 75 levels. Capacity Utilization always lags behind the economy. This time it will be no different. The parabolic nature of the curve shows when the 75 are reached, it may not hold and can break through that below confirming sever deflation in the economy. The results are scary if that really happens. A fall below 70 in Capacity Utilization rate will signify a major recession and with the current debt levels that can translate into a depression with very high under employment (not necessarily unemployment).

A slightly lower Capacity Utilization will further show lower inflation pressures but a long term topping action is sending scary signals
Alan Hershey
On 17th around 8.30 AM a very interesting stat will be out – the capacity utilization. The market is expecting 82.1% from prior 82.4%. It will be bullish for stocks and bonds. The slightly lower number shows healthy economy with less inflation pressures.
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