Industrial Production and Capacity Utilization

The Philadelphia Branch of the Federal Reserve Bank released its September 2010 Industrial Production and Capacity Utilization report this morning. It is an interesting economic indicator, due to its frequency (monthly), timeliness (within a fortnight of the prior month-end), and long history of well-documented tracking, readily available from 1972 through the present.

The salient number, based on my review and recall from past days of buy-side proprietary trading of fixed-income securities, is the capacity utilization percentage. This is why:

• Rising industrial production levels, in absolute terms, were driven by technological progress in manufacturing methods, more than increased economic activity.
• The same can be said for capacity, although the Fed does provide helpful indexing as a percentage of the historical peak level in 2007.
• Utilization is the percentage of actual capacity used for production, which indicates to me the level of demand  required for actual goods (not services!) and thus the demand for U.S.-manufactured industrial products, as a percentage of the maximum possible supply that could be produced.

The preliminary annualized utilization for September 2010 is 74.7% of capacity. This is well below the yearly average of 80.6% from 1972 through 2009. However, utilization of capacity has increased from the 2008-2009 low of 68.2%, as well as the September 2009 value of 70.5%. While I feel some concern about the economic situation in the immediate months ahead, it is encouraging to note the breakdown by process stage:

• For crude production, the operating rate increased 0.7% points to 86.9%, almost half a point higher than the 1972 to 2009 average
• For primary and semi-finished stages, utilization declined 0.6% points, to 71.5%, about 10.1% points below the long-run average
• For the finished stage, utilization decreased 0.1% points to 73.8%, about 3.7% points below the long-run average

If crude production rates drive primary, semi-finished and finished stages, then the more historically comparable rates of crude manufacturing will perhaps carry through into the later stages of production in the next three manufacturing reports of the fourth quarter of 2010.

*Note that for the purposes of this Federal Reserve Statistical Release, the industrial sector is comprised of manufacturing, mining, electric and gas utilities, as well as the logging, newspaper, periodical, book, and directory publishing industries.

High-speed rail from China to California

Earlier this morning I was reading a surprisingly, pleasingly blunt BBC article, about California’s trade mission.  The actual title is Arnold Schwarzenegger sells California to East Asia! While visiting, Governor Schwarzenegger wanted to have a look at the latest high-speed passenger rail transportation technology.

The State of California, with its $19 billion deficit, is investigating public transportation alternatives used in other parts of the world. Japan is interested in contracting to build the trains and loaning California the money to pay for the work. China is too.

How high-speed rail came to China

China has the world’s longest high-speed rail line. However, the expertise to develop and build it was largely contributed by European and Asian countries with advanced technological skills in everything from control systems to laying tracks.

When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they’d be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history.  What they didn’t count on was having to compete with Chinese firms who adapted their technology and turned it against them just a few years later.
—Train Makers Rail Against China’s High-Speed Designs

There will be some fascinating intellectual property issues should China decide to enter the high-speed rail market as a producer and exporter, given the origins of the technology.

China will also experience market-based challenges in the form of competition from countries such as South Korea, who has worked in a contractual arrangement with the EU’s high-speed TGV passenger rail. Both South Korea and Japan would be eager to work with U.S. government or government-funded entities, whether state of federal, in upgrading our nation’s passenger rail service.

California’s fascination with rail transit

California’s history with high-speed rail goes back to 1982, during the days of Governor Jerry Brown. With just a single law, Brown created a California High Speed Rail project and exempted it from California Environmental Quality Act rules. In 1996, the state legislature created a High-Speed Rail Authority. Last year, the California State Auditor expressed some concerns about the state’s High-Speed Rail Authority: “It Risks Delays or an Incomplete System Because of Inadequate Planning, Weak Oversight, and Lax Contract Management”.

Re-patriation initiative

Demanding transfer of advanced technology from foreign companies, in exchange for access to China’s vast domestic market, has become something of a Chinese national economic strategy.  Despite being forward-looking, China is already encountering challenges that come with a global race to the bottom.

Shanghai authorities have revealed that they are using a database of Chinese students studying abroad in a bid to attract top talent back to the city. The database is populated with information corresponding to Chinese students attending the world’s top 100 universities…
—Student database used in Chinese “re-patriation” effort