Little about the current economic cycle has conformed to historical norms. The employment recovery proved to be sluggish compared to past cycles. Interest rates have been held at low levels for most of a decade. And many historical economic relationships have changed or deviated from their traditional relationships.
One of the key economic relationships that has not followed the historical path is the recent divergence between employment data and the capacity utilization rate. Official employment statistics show that the total level of employment has increased with the un-employment rate declining. This is normally confirmed by an increase in capacity utilization, which is a measure of the economy’s actual output as a percentage of its potential output based on the land, labor, and capital available. However, in the past few years the rate of capacity utilization has fallen while employment data continued to improve. This divergence has caused some economists to question why the two indicators are moving in opposite directions.
One reason that capacity utilization has not confirmed the improvement reported by the employment indicator is that many workers may have dropped out of the labor force and have been slow to return. Another factor may be the lack of investment by corporations that have elected to pay dividends and fund buybacks rather than invest for growth. It could also be that employment growth has been in low-wage, low-productivity jobs which have reduced the unemployment rate but have not helped the economy move closer to its potential economic output. Or, it may be that capacity utilization is signaling an economic slowdown that is not yet reflected in employment data.