Is this Why US Industrial Companies Don’t Invest?

Production lower than 2 years ago, with ugly capacity utilization.

Total industrial production in the US fell 1.0% in September compared to September 2015, according to the Fed’s Board of Governors today. The index, at 104.2, is now 2.3% off its all-time peak in November 2014, and also 1.3% below where it had been two years ago (105.6). So two years in a row of year-over-year declines.

The first time the industrial production index had reached this level was in March 2007!


Of the major market groups:

  • Consumer goods production rose 0.8% year-over-year. Since the index is not adjusted for inflation, this uptick is likely due to inflation.
  • Business equipment production fell 1.4%, as businesses are not eager to invest in productive activities. In a moment we’ll see why.
  • Construction rose 1.3%. Hallelujah for the apartment and office construction boom in many big cities, such as New York City, Boston, Houston, or those in the Bay Area – even if this boom is now adding to already worrisome oversupply. But hey, that’s a problem for another day.
  • Materials fell 2.2%, and that includes the beleaguered mining sector (including oil & gas), which plunged 9.4%.

Of the sub-groups, only a few of the big ones made it into positive territory.

Automotive products jumped 7.3% year-over-year. It’s big enough to move the needle: accounting for 3.2% of total industrial production, it propped up consumer goods production.

And this is interesting going forward: automakers are still cranking out vehicles as if the sales boom were still continuing. But new vehicle sales actually fell in September year-over-year and are nearly flat for the first nine months. Inventories are piling up on dealer lots. So automakers are dousing the market with costly incentives to move the iron. Something has to give: either a miraculous jump in sales or a cut in production.

The energy component of consumer goods (power, home heating, etc.), which accounts for 3.4% of total industrial production, inched up 0.8% year-over-year.

“Misc. durable goods,” which accounts 2.1% of total IP, rose 1.8%. Information processing, a subcategory of Business equipment and 2.5% of total IP, rose 3.2%. Construction supplies, at 5.1% of total IP, rose 1.3%.

But production in most other categories fell year-over-year, such as home electronics (-5.8%), clothing (-8.2%), food and tobacco (-0.1%), paper products (-4.3%), “transit” (part of business equipment (-4.2%), Industrial and other (-1.8%), defense and space equipment (-0.6%), business supplies (-0.2%), and of course the declines in the materials and energy sectors.

Over the decades, major declines in industrial production, such as we have seen since November 2014, have always been associated with recessions. Hence our “Recession Watch” chart of industrial production, with all major declines circled in red, going back to the 1950s. Every single one of these declines has been associated with a recession (shaded area), except for the current one – and that may be because we’re still in the early phases of these dynamics:


Industrial capacity utilization edged up 0.4 percentage points in September year-over-year to 75.4%. This rate of utilization is 4.6 percentage points below its long-run (1972–2015) average, the Fed points out. It’s now 3.5 percentage points below its post-Financial Crisis peak in November 2014. Over the last 50 years, there were only three periods when it was lower: the Financial Crisis, the end of the 2001 recession, and the 1982 recession. In the 1991 recession, it never got that low:


And this miserable capacity utilization explains in part why business investment is so low: Utilization isn’t maxed out, not anywhere near, with some sectors suffering from overcapacity.

These companies are facing stagnant or declining demand for their products. And even though money is dirt cheap and credit plentiful for larger enterprises, and even though they have levered up and borrowed and stuffed their balance sheets up to the gills with record amounts of debt, they have little incentive to invest in productive activities because they don’t see enough demand for their products.

So they do other things with this borrowed money, such as buying back their own shares and buying out each other. Lack of demand in the real economy, despite – or we might be tempted to say because of – years of central-bank free money policies, is tough for individual businesses to overcome.

And the one sector included in industrial production that has been truly booming and setting record after record amid a gold-rush-like mentality? Read… Layoffs Hit Craft Brewer, as Big Beer, Big Money, Overcapacity Rattle American Craft Beer Market

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  55 comments for “Is this Why US Industrial Companies Don’t Invest?

  1. VK says:

    Yup, QE has just helped the elite 1% or less of society. They buy luxury goods and luxury apartments but they can only goose sales so much. How many apartments, handbags, washing machines and cars can the elite consume anyway? Mass market consumer items require a mass of consumers who have disposable income. The middle class is being wiped out with stagnant wages, soaring healthcare costs and jobs automation and will be gone in a decade or so unless some dramatic changes happen in the energy space and political space in the way we organize society.

    • Kam says:

      Fed (Central Bank) ZIRP and NIRP policy puts the thumb on the scale in favor of replacing labor with capital.

      Cheap debt means replacing workers is easier. And that is the underlying reason why automation is increasing.

  2. Joe says:

    Your article is interesting, factual, and indeed worrisome to those that are interested in economic issues. I have to say, though, that the article missed the more cogent point: why is industrial production lagging? The answer isn’t presented. The vast majority of consumers, most of whom compose the working class, have had their jobs cut through technological change and out sourcing to low wage countries. Furthermore, working people have seen their incomes fall since the 1970’s. The short-fall in incomes were, to some extent, mitigated by increased borrowing. However, the working class today is simply tapped out. They are under enormous debt pressure. The result is manifest in what you described in your article: a lack of demand for consumer goods. This leads to under utilization of industrial capacity. Well, that is the natural consequence of the decisions made by corporations. The idea that if you make money cheap enough (i.e. interest rates) that it will cause somebody to invest in good production is by in large a fantasy.

    • Chris H says:

      The annual rate of population growth was pretty stable for thousands of years somewhere between 0.2% to 0.5% annual global population growth. However, as the linked chart highlights, the 20th century was a complete anomaly. Population growth leapt up to a peak of 2.2% growth by 1970…but has since been heading right back toward it’s old trend growth of somewhere between 0.2% and 0.5%…and perhaps no growth soon after 2050. That hundred year anomaly was the basis of the greatest bubble in human history and now central banks and governments are simply masking the onset of the greatest crash.

    • Bing Wong says:

      Hi Joe,

      Do u have the link to the article “A lack of demand for consumer goods” you mentioned. I did a search on and can’t seem to locate it.


  3. robt says:

    From Fischer’s speech today:

    “Fischer explained interest rates are low because “the interest rate that equilibrates investment and saving when the economy is at full employment” is low.”

    Well, that would ‘splain it. Or maybe the opposite thing. Or something.
    Fischer for Chairman?

    • The most likely explication is that the FRB arbitrarily/ideologically wants the wants the interest rates low so that’s where they are set. Market forces/factors have minimal effect.

      • Tom Kauser says:

        4.4 trillion dollar balance sheet wags the dog and its potential to cause deflation in everything is the 600 pound gorilla in the room.
        The fed would love to stop rolling over maturities but when you can’t cause something your whole institution was built to avoid than bullshait a bunch about anything but deflation?

    • Chicken says:

      Fischer is employed by criminal enterprise thus he’s a huge double-speaking liar. Interest rates are low due to the FED has been doing their very best to steal everything they can from savers and give to their real employers.

      It’s a bank robbery from the inside.

      Sheesh, it’s amazing how short of memories people have they actually believe anything these FED heads say despite when it proves they were lying these guys simply plead insanity and are completely resolved?

      Nobody on the top ever goes to jail, it’s the little rogue trader who committed the crime all by himself! WOW!

    • Maximus Minimus says:

      It wouldn’t be the same Fischer who sed that savers are suffering, but if they invested in the stock market, they would be doing great. I searched my history book cause I remembered someone sayin something like that: A gal called Marie Antoinette sed that if people don’t have bread, they should eat cakes. /s

  4. The trend of capacity utilization has been southbound since 1998 with spasmodic runs along the way. More capacity added (China) + fewer customers with means to afford the products (QE) = a killer along with resource depletion … which is aggravated by adding capacity.

    We are prospering ourselves to death.

    Lowering the cost of loans does not compensate for the decline of factor productivity, factor income and top line revenue … money cost is marginal, taking negative won’t change the trend. Excess capacity is going to be wrung out … the next question is, ‘what is capacity?’

    With the oil industry being insolvent we are certain to find out.

  5. Justme says:

    WalMart is running TV ads saying that they are investing in US manufacturing. Strange.

    “By 2023, Walmart has pledged to purchase approximately $250 billion in products that support the creation of American jobs. ”

    Oh, I see, 7 years, about $36B each year. Not all that much.

    • Robert says:

      If you ask 100 people “which company is known as “Chinamart?” the majority will say “Walmart.” They didn’t get this reputation by hiring domestic manufacturers. More power to them (and us) if they change their ways, but it does mean paing more. On the other hand, the trend has always been to outsource to make a nickel’s worth of extra profit (Donald Trump, for all his blathering about “bringing jobs back from China” calls this good business, and does it himself. I wear New Balance track shoes made in the U.S., and they are high quality- I’d like to buy a domestically made suit as well, but the price differential is really extreme, on the order of three-fold, which is not accountable by labor costs alone.

      • Edward E says:

        It’s known around here, away from Arkiefornia, as Jew~Mart.
        The auto dealerships sure are trying to move the iron. I have an appointment Wednesday morning for a free oil change and lube on my supersize van and a recall on the trailer tow lighting control module. So this lady calls to remind about the appointment and then goes on a BIG sales pitch, ‘you should upgrade’. “Lady, this van doesn’t even have 4,000 miles on it yet, it’s paid for. I’m just waiting for the Menards grand opening any day now in Hollister, Mizzourah to get started on installing insulation, PVC panels and planned RV package. Why would I want to upgrade?”

        I was after the new Sprinter factory 4×4 until test driving one. Full time 4×4, why in the world would they put that in? Maintenance and wear, only gets 15mpg diesel fuel, $60k. So I went and fell in love with a Promaster, front wheel drive with winch hookups and I have winches. You can almost get two of them for the price of the Mercedes-Benz Sprinter and if you baby it you can get 29mpg diesel. It was a no brainier, perfect for my noggin.

      • Tom Kauser says:

        Its probs the mart more than the China part! But name recognition is important and being number one in cheap goods is still number one.
        How many yo-yo frisbees or lite beers have you produced?

    • Tom Kauser says:

      Its a PR firm

  6. Sound of the Suburbs says:

    Adam Smith observed small state, raw capitalism first time round (hardly a new idea, it’s how it started).

    “But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”

    Exactly the opposite of today’s thinking, what does he mean?

    When rates of profit are high, capitalism is cannibalising itself by:

    1) Not engaging in long term investment for the future
    2) Paying insufficient wages to maintain demand for its products and services

    In the 18th Century they would have understood today’s problems with growth and demand.

    • Sound of the Suburbs says:

      Henry Ford understood and paid high wages so employees could buy his cars.

      • Mary says:

        How about Boeing? Does every Boeing employee buy an aircraft? And does every Facebook employee make just enough to afford a game profile?

        • walter map says:

          “Does every Boeing employee buy an aircraft?”

          No, but every Boeing employee can afford an airline ticket, which helps drive aircraft sales.

          And which is more than can be said of ChinaMart drones and Uberrische day-laborers, who can’t.

          And now you know why there is no Nieman Marcus in Mississippi or Haiti.

      • Mike G says:

        Apocryphal story — the CEO of GM and the head of the UAW are inspecting new robots installed on an assembly line.
        CEO: So, are you wondering how to get them to join the union?
        UAW head: No, I’m wondering how you’re going to get them to buy cars.

        • Taxes are the future or we starve says:

          No the Union rep said he asked Congress TO TAX every single robot as an ’employee’ so Social Security and Medicare etc stay solvent and roads are fixed etc etc. TAX ALL ROBOTS no matter the function and that includes ATM and other automated bank machines. TAX THEM ALL!

        • chris Hauser says:

          true story.

          as to the article, people have a lot of stuff, or not a lot of money.

          or both.

          need to wear some stuff out. but then more of it gets made.


      • EVENT HORIZON says:

        Not True.

        The turnover rate for assembly line employees was SO HIGH, that one of Ford’s assistants got the idea to pay more since re-training new workers every 3 months was actually a higher cost.

        $5 a day was CHEAPER that what was going on. Add to this the fantastic publicity he got.

        They didn’t raise wages so the workers could buy a car since at this time the work force lived “across the street”, as did Steel Workers, etc. or could use the city-wide Transit Systems until they were bought by a “front” company owned by the Auto companies and eliminated.

        When the Demographics of Detroit, Highland Park and Dearborn changed, then the auto workers bought cars to move OUT of the area.

      • Tom Kauser says:

        Henry ford gave a rebate of 500 dollars in 1912 for anyone who bought a car!
        Which substantially endeared himself to autophiles the world over?

    • Justme says:

      Yup, not because of some fake Noblesse Oblige, but because it was Good For Business (TM). I enjoyed the Adam Smith quote. Quite revealing.

    • Robert says:

      ” what does Adam Smith mean?”
      “When rates of profit are high, capitalism is cannibalising itself by
      not paying sufficient wages to maintain demand for its products and services…”
      That’s not what he meant. He pointed out in the quote you cited that wages were rising with the general prosperity. What he meant is that where there are no barriers to competition, prices are driven toward the cost of production, and therefore margins become thin. In Banana republics and monarchies, general graft and nepotism restrict the number of competitors, and the profit margins for the select few stay high.(and that is why their economies tend toward rot.) This is the real reason drug prices have been skyrocketing in the U.S., and is also why, when there are many suppliers, grocery stores operate on very low margins.

    • George McDuffee says:

      Karl Marx observed the same thing.

  7. gsinbe says:

    Something I’ve always wondered about the metric “Industrial Capacity Utilization”. What happens when a factory closes, as so many US factories have? Does it vanish from the utilization rate calculation? If so, most of a country’s factories could be shuttered, but the ICU could still remain quite high, if those few survivors were still pumping out their now much more limited amount of goods.

    • Wolf Richter says:

      Yes, it vanishes from the stats. As does the production that once came out of them. And you’re correct: if you shut down and give up on 90 of your 100 factories, but the remaining factories run at 80% capacity, the overall utilization will be 80%, despite the 90 dead plants.

      • Joe says:

        It is worse than that. According to an article written by Shao Chandra and Jordan Yadoo for Bloomberg published on October 6 the age of the capital stock (the fixed assets like equipment inside those private factories) in the United States is averaging 22.4 years (lowest since 1955). The writers note that, quote, “..That’s bad news for the economy and for Americans’ living standards. It means workers are toiling away at less-efficient factories and using computers that are not as powerful as they could be. Doctors are working at hospitals that are crumbling with wear. And commuters are having to put up with more frequent train delays and breakdowns..”. This will have a compounding effect. Why invest in old, outdated installations when companies have newer more efficient ones inside other countries? Bad, bad.

  8. kitten lopez says:

    i love this site. i love it i love it. thank you for existing Wolf and those of you who take the time to write out such amazing conversations.

    • I was thinking exactly the same thing, Kitten.

      The comments are all so erudite and succinct, I get a lot out of participating simply by reading – – – and no need to add my pitiful two cents.

      This is absolutely a TOP TEN site, perhaps TOP THREE !


  9. walter map says:

    So investment is ultimately driven by demand. No demand, no investment.

    Monetary policy can only take you so far. If workers, who are also consumers, aren’t paid enough to drive demand, then investment will lag no matter how low interest rates go, even if those rates go to zero and beyond. It’s a simple fact of economics which strangely escapes every central bankster in the world, who have lately believed that screwing the general population even more would solve the problem, as if promising to stop the flogging when consumer spending improved.

    Notice that NIRP/ZIRP has utterly failed to drive investment, for the simple reason that investment isn’t driven by interest rates. It’s driven by demand. All NIRP/ZIRP has done is enable highly-leveraged market speculation.

    Same goes for ‘tax cuts for the rich’, which is still promoted as a way to increase business investment after thirty years and has always been shown to be phony. Everybody seems to have finally figured it out, with the possible exceptions of Grover Norquist and Arthur Laffer, who can’t be expected to know better anyway.

    David Stockman has admitted that ‘supplys-side economics’ was largely a ruse designed to enrich the wealthy. It worked too. And it still works.

    What goes around, comes around. Or not, as the case may be: what doesn’t go around, doesn’t come around, as reality clearly demonstrates.

    • c smith says:

      “It’s driven by demand. All NIRP/ZIRP has done is enable highly-leveraged market speculation.” Agreed. BUT the solution is not to artificially stimulate demand by piling on more government spending and debt. The solution is to allow PRICES to FALL to where demand is naturally stimulated and markets clear. THIS is the avenue which raises real wages and benefits the working and middle classes. TPTB will not permit it, however, because it threatens the banks and bureaucrats. Deflation devalues the assets securing bank loans, so the bankers fight it at every turn. It also reduces tax revenues, so the government does the same.

      • Joe says:

        Your cure (general deflation) is worse than the disease (too much private debt / insufficient jobs & wages). Instead of NIRP/ZIRP which, as you say, inflate asset prices, and benefit the wealthy, three things need to occur. First, unearned income (income derived by speculation, inheritance, asset price inflation, spurious financial charges, rents, etc.) needs to be taxed away. Second, direct government fiscal stimulation is needed. An ambitious jobs program is desperately needed. The United States needs to create at least 15 million jobs immediately rebuilding crumbing infrastructure, and restoring staffing in areas like education, etc. Third, there needs to be debt forgiveness. In other words, QE for the public. All taxpayers should be given an immediate cash infusion of say $100,000 with one overriding proviso: debt must be paid first. If you are not in debt, you get a cash windfall (credit to economics professor Steve Keen). The lending banks are saved because the massive debts will be paid down filling their balance sheets. The economy benefits because nothing will cause economic demand better than giving poor and middle class people money. Why? Because they are going to spend it buying stuff and sending their kids to college etc. Allowing deflation to occur simultaneously with economic austerity will cause a “Greek-like” depression that in previous eras led to terrible wars and social depravity.

  10. Ptb says:

    I guess when the consumer maxes out their credit, there’s not much left with which to consume. The auto business has even revived the subprime loan and they’re now running out of customers as well. Even as cheap as money is right now, theres still a limit at which the lender will stop lending…..unless…….the cost of money gets even cheaper……wait for it….it’s headed our way.

  11. T.L. says:

    If you look at the OECD figures for labour’s share in National Income (NI):, You can spot the problem immediately in the accompanying graphs: the wage share has been falling for some time (since 1991). There you can also see the widening gap between the productivity of labour and the wage index over 44 years.

    Two decades ago some Canadian studies showed that the see-saw between labour and capital observable in the changing NI shares tends to coincide with the “business cycle”. That means that when labour’s share falls/profits rise, first there is an economic upswing, but then the falling wage share slows everything down. That’s usually called a recession.

    Consider yourself forewarned.

  12. George McDuffee says:

    Are the nominally American corporations cutting back on “real” investment everywhere, or just in the US? Ford seems to be ramping up in Mexico, GMC in China. etc.

  13. Chicken says:

    Can’t lay a robot off to cut costs! How’s that for some artificial intelligence?

    • JerryBear says:

      A good point which Marx pointed out a long time ago. You cannot increase profits by exploiting machinery but you can increase profits by exploiting your regular workers. When you replace workers with machines or with sweatshop 3rd world workers who cannot be exploited anymore without starving them to death, then the big time capitalists have no real means to increase their ever falling profits and the economic system begins to collapse.

    • chris Hauser says:

      actually you can. it’s called putting the tool down.

      no upkeep, no inputs. presto.

      especially if it’s paid for.

      and it doesn’t vote.

  14. JerryBear says:

    I think more attention should be paid to the circulation of money in an economic system as am indicator of wealth. Businesses hire workers to produce good which are then purchased by consumers using the wages they are paid and so forth. Profits enable a business invest in more production or in developing natural resources. The point is that money flows round and round in much the same way that blood flows in our blood vessels. An economy’s life and health depends on that circulation just as our life depends on the circulation of blood. What we have seen is the withdrawal of a large amount of the real money in our economy from circulation into the coffers of the ultra rich. The system is starved for cash and the circulation of what is in the system gets inhibited. Milton Friedman noted that the amount of cash in circulation in the Great Depression was reduced by a third from normal times and he believed this was a major factor in the Great Depression being so severe and lasting so long. If anything impairs or blocks the circulation of blood in our bodies we experience serious problems and I think it works in our economy too. We have to find some way of freeing up the great oceans of money being horded by the ultra rich at the top and getting it into circulation again if we are to have any chance of saving our economy….. and i sincerely hope it won’t require another world war to accomplish this!

    • Petunia says:

      I saw some of this on my last trip to the movie theater. The theater had been upgraded with leather seats that recline and food was served at your seat, airline style, in an attempt to draw the upscale customer. The theater was mostly empty, just like the cheap theater. All that investment was not attracting more customers, it was attracting the upscale customer, who could spend those incremental dollars. All over town the upscale places are doing much better than the cheaper places. It is easy to see the economic divide.

    • James McFadden says:

      Tax and spend will accomplish this much better than war. The rich don’t need the money and we need infrastructure repairs.

    • Jon Sellers says:

      Isn’t that what an economy is? The exchange of goods between people? The more exchange, the bigger the economy. In economic terms, the higher the velocity of money, the better the economy.

      And we are living in a period of an unprecedented low velocity of money.

    • Tom Kauser says:

      Pull the charter!
      That’s the federal reserve charter. And it holds 4.4 trillion dollars in an account FROM the future?
      You will be living on borrowed time deposits until you expire?

  15. Humpty Dumpty says:

    All of the comments directed to the idiocy and perfidy of the corporations have as their backstop that the government is the answer. In fact, the corporations when they are not trying to buy the government are reacting to its policies. The reason you see jobs and production offshore and demand dwindling in the US is a function pure and simple of government policies – anyone who thinks otherwise has spent too much time in college re-education camps or reading The Nation. Taxing corporations to get what you want will only get you more government. How does that help? Oh, right, redistribution of the wealth by fiat – that works. Never. Nowhere.

    • T.L. says:

      If you mean the US government with its gridlocked Congress, blocked Supreme Court and lame duck President, I agree. But if you are suggesting that only those who pursue their own private interest can benefit the country whereas any collective action is bound to fail then I find your argument school boyishly naive. Even Trump speaks of collective solutions . How else can you tackle projects of the moon-landing magnitude or projects which cannot be monetized (beneficial externalities such as piblic health vaccination or education)?

    • Jon Sellers says:

      Of course it is government policies. Corporations are government created entities. Property is a government created entity. If you consider the 1960s to be a good economy, adopt the government policies of the 1960s.

  16. EVENT HORIZON says:

    Want to bring jobs back to America? Simple

    If a company wants to sell something here, they have to make it here.

    Other than needed basic raw materials, everything needs be refined and manufactured here if they want to sell it here.

    And, no more immigration. None. Nobody.

    Then, lower or eliminate all corporate taxes since it just comes out of the price of the goods anyway, paid for by the public.

    Finally, change the Income Tax code (which in my mind should be eliminated), but if the public wants to tax themselves, then Tax according to the real value of the job. Doctors? No Tax. Sports figures? They should have a tax rate of 75%. Teachers? No Tax. Movie actors? 75% tax rate. Police and EMT? No Tax. Artists, Authors, etc? 75% rate.

    • kitten lopez says:

      i cannot for the life of me believe i’m agreeing with anything that you’re saying, EH, but yeah:

      “If a company wants to sell something here, they have to make it here.”

      in order to understand why and what i was thinking of doing on a micro scale, i was researching the history of textile trade going back to what is ancient times for me—1500s-1700s—i learned that after much open trade, some countries DID stop textile imports or outlawed certain kinds of textiles (like printed calico for unprinted calico) in order to fluff up or support their own local/native industries. so it IS possible to go backwards/more local from a globalized system.

      i don’t see that happening here, though.

    • kitten lopez says:

      and artists and authors get taxed at 75%??? you’re completely mad there. only a percent of a percent make any scrap at all, and those are usually already wealthy people with a few leaky emotions and trust funds. especially now that everyone writes on the internet for free.

  17. c smith says:

    “Every single one of these declines has been associated with a recession (shaded area), except for the current one…”

    Perhaps that can be reconciled by admitting that we’ve never really emerged from the great recession? Or maybe domestic industrial production is no longer a proper measure of recession, given that so much of it has moved overseas?

Comments are closed.