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UNITED STATES
GENERAL ACCOUNTING OFFIC E

Al Assessment Of Capacit y
Utilization Statistics Strengths And Weaknesse s
Differences in industrial capacity utilizatio n
rates reported by seven organizations fo r
1970 through 1975 ranged from 10 .2 to 2 2
percentage points . The variations in the rate s
are caused by differences in data collection ,
calculation methods, and definitions of capacity . All of the capacity utilization statistic s
reviewed have weaknesses .
GAO recommends that the Director of th e
Office of Management and Budget (1) develo p
a family of capacity definitions for use ii .
calculating the statistics and (2) assign to a
Federal organization or organizations th e
responsibility for developing a single reliabl e
set of rates for use by Government and non Government users .

CE D–77–3

CCT .28,?978

COMPTROLLER GENERAL OF THE UNITED STATES
WASHINGTON, D .C. 20548

B-16376 2
The Honorable John Y . McColliste r
House of Representative s
Dear Mr . McCollister :
You requested that the General Accounting Offic e
investigate the extent of unused industrial capacit y
and the adequacy of the figures provided by the Dep artment of Commerce and the Federal Reserve Board .
As agreed with your office, rather than surveyin g
industrial capacity utilization ourselves, we reviewe d
the adequacy of ca p acity utilization statistics p re p ared by Government and private organizations .
We determined how each preparer ' s ca p acity utilization series was constructed . This phase include d
reviewinc_< sources of data, assumptions used, and metho dologies employed . Based on discussions with user s
and p re p arers of the statistics and articles writte n
about the statistics, we identified characteristic s
which we used to determine the strengths and weaknesse s
of the different series .
All of the capacity utilization statistics re viewed have weaknesses . In addition, different definitions of capacity exist creating p roblems in obtainin g
consistent survey responses used in calculating severa l
series . We identified three Federal organization s
which calculate Statistical series on capacity utilization . We question the need for three Governmen t
series .
The fact that each series has weaknesses combine d
with the problems of differing definitions of capacit y
and a wide variation between capacity utilizatio n
statistics indicate that these statistics should b e
used in cc . .junction with other economic data and no t
as a sole indicator for evaluating economic conditions .
In addition, we believe that, in decisionmaking, th e
individual industry rates are more important than over all manufacturing rates . The com p osite rates tend t o
smooth extreme fluctuations and therefore may no t
point out problems in s p ecific industries . The individua l
industry rates will provide a better picture of capacit y
utilization for the different industries .

B-16376 2
We obtained comments from the Office of Managemen t
and Budget and the seven preparers of the statistica l
series, and we considered their comments in finalizin g
the report . The four private organizations generall y
agreed with our assessment of their series . The comment s
of the Office of Management and Budget, Department o f
Commerce, and Board of Governors of the Federal Reserv e
System are included as appendixes VI, VII, and VIII ,
respectively .
BACKGROUN D
We identified seven organizations which have pre pared or do prepare industrial capacity utilizatio n
statistics . They are :
--McGraw-Hill Publications Company ;
--The Federal Reserve Board ;
--Wharton Econometric Forecasting Associates, Inc . ;
--The Conference Board, Inc . (series discontinue d
1975) ;
--Bureau of Economic Analysis, Department o f
Commerce ;
- -Bureau of the Census, Department of Commerce ; an d
- -Rinfret-Boston Associates, Inc .
McGraw-Sill conducted its first annual survey o f
capacity utilization in the spring of 1956 . The Federal
Reserve Board and Wharton began preparing their serie s
in 1956 and 1957, respectively .
In May 1962 the Subcommittee on Economic Statistic s
of the Joint Economic Committee held hearings on th e
problem of measuring productive capacity and capacit y
utilization . The Subcommittee's report noted that (1) th e
hearings were directly related to congressional actio n
on economic policies--such as tax, monetary, debt, wage ,
and employment--and (2) any actions on such matter s
required an understanding of the relationship betwee n
the economy's output and its productive capacity .
Based on testimony from preparers and users ,
the Subcommittee determined tha t
- -interest in capacity statistics was widespread ;
2

B-16376 2

--no generally accepted conventions, rules, o r
definitions for standardized measurement o f
capacity existed ; an d
--capacity statistics existing at that time wer e
inadequate in coverage, detail, reportin g
regularity, and standardization .
The Subcommittee recommended, among other things ,
that :
--The Bureau of the Budget, now the Office o f
Management and Budget, lead a cooperativ e
effort to develop (1) generally acceptabl e
standards for defining capacity and (2) guide lines to be followed in preparing measurement s
of capacity and its utilization .
--The Federal Government test the feasibility o f
using regular Census surveys to gather additiona l
capacity data .
Four organizations (the Conference Board, Burea u
of Economic Analysis, Bureau of the Census, and Rinfret Boston) initiated their statistical series on industria l
capacity utilization after the 1962 hearings . One o f
these organizations, Rinfret-Boston, performed its firs t
survey in the fall of 1974 after concluding that Government statistics on capacity utilization were inaccurat e
and misleading .
The graph on page 4 shows the utilization statistic s
for manufacturing industries calculated by these organizations for the years 1970-75 . As the graph shows ,
the differences in the rates ranged from 10 .2 to 2 2
percentage points for the period .
Concept of capacat z
The major problem in measuring capacity utilizatio n
results from problems in measuring capacity . Capacit y
is an economic concept that generally refers to th e
maximum quantity of output per unit of time using existing plant and equipment . Different approaches may b e
used in measuring capacity and can result in differen t
estimates of total available capacity and of capacit y
being used . For example, the Bureau of Economic Analysi s
describes three different approaches--engineering ,
3

CAPACITY UTILIZATION STATISTIC S
FO R
MANUFACTURING INDUSTRIE S
1970 THROUGH 197 5
95

90 %

80%
BUREAU O F
ECONOMI C
ANALYSI S
75

G5 r-r---r
1
2
197 ;::

--n--3T,
127 1

1972
C

kt .E N,

j2
3
1973

DAR YEAR AND QUARTER

1i2
197 4

E-16376 2

maximum practical, and preferred--for measuring capacity .
In each case it is assumed that the supplies of labo r
and other inputs are unlimited .
Each approach results in a different measur e
of capacity . According to the engineering approach ,
capacity is the output, based on machine ratings, whic h
can be produced when plant and equipment operat e
continuously, 24 hours a day, 7 days a week . Unde r
the maximum practical approach, capacity is the outpu t
which can be produced using normal operating schedule s
and all facilities including those which are expensive
and inefficient .
Finally, under the preferred capacit y
approach, capacity is the output which can be produce d
by adjusting o p erating schedules to maximize profits .
(Several articles suggest that preferred ca p acity i s
90 to 95 percent of maximum practical capacity . )
Different estimates of total available capacit y
and capacity utilization will result de p ending upo n
the approach used . In addition, industry and compan y
operating practices differ in areas such as number o f
shifts, days worked per week, and product mixes .
These practices also cause variations in capacity an d
capacity utilization estimates .
Uses of ca p acit y
utilization statistic s
Capacity utilization statistics are being used fo r
a variety of p urposes, mostly in decisionmaking . I n
some cases the trend shown by the statistical series i s
the basis for decisions .
In other cases, the level o f
the reported utilization rates serves as the basis fo r
decisions .
Varying interpretations may be made of a reporte d
capacity utilization rate . For example, under th e
engineering approach an 88-percent utilization rate ma y
indicate that 12-percent excess capacity is availabl e
leaving ample room for increases in production . However ,
it may also indicate there is limited excess ca pacity i f
industry does not wish to push utilization above th e
preferred rate—the rate at which production results i n
maximum profits .
Also, manufac°urers who report excess c a pacity ma y
actually be operating at their maximum production leve l
5

B-16376 2

because of the unavailability of labor, materials, o r
other inputs required in the production process .
The preparers and users do not agree on the adequac y
of the existing capacity utilization series . In spit e
of these problems, preparers and users of the statistic s
believe they are useful if their limitations ar e
recognized .
EVALUATION OF THE STATISTIC S
Variations in capacity utilization statistics als o
result from differences in collection and accumulatio n
methods . Two of the series reviewed are calculated fro m
secondary information, four from direct survey information ,
and one from both secondary information and direc t
survey information . The series calculated from direc t
survey information a'so vary as a result of difference s
in sampling method, sample coverage, sample size, surve y
level, and response rate .
We identified several characteristics which can b e
used to-evaluate capacity utilization statistics . W e
divided the characteristics into two categories—thos e
applicable to all series and those applicable to serie s
involving direct surveys of businesses .
The characteristics applicable to all of th e
capacity utilization series relate to definition o f
terms used in publications, calculation frequency ,
adjustments for seasonal changes, data accuracy, an d
publication timeliness . Characteristics applicable t o
series based on direct surveys relate to sampling method ,
sample coverage, sample size, survey level, definitio n
of questionnaire terms, and response rate . (See app . IV . )
Using these characteristics, we found that each o f
the reviewed series have both strengths and weaknesses .
(See apps . III and V . )
NEED FOR STANDARD CAPACITY DEFINITION S
The most frequently raised complaint about capacit y
utilization statistics was the lack of a standar d
definition of capacity .
Only the Bureau of the Census has provided specifi c
definitions for all of its respondents to use . Accordin g

B-16376 2

to the Census definitions, practical capacity is th e
greatest level of output a plant cah achieve withi n
the framework of a realistic work pattern and the preferred level of operations is the level of operation s
wh ye h the plant would prefer not to exceed because o f
costs or other considerations . Other preparers o f
statistics using surveys to collect information do no t
provide a definition to all of their responde .its becaus e
they believe a single definition for all indnstries can not be established .
Becauee of different concepts of capacity an d
different industry practices regarding the use o f
capacity, developing a standard definition is difficult .
Census, for example, when reporting the results of it s
capacity utilization survey, noted that it was extremel y
difficult to translate the concept of plant capacity int o
a working definition applicable to all industries .
Conclusio n
The need for generally accepted seendards fo r
defining capacity was noted in 1962 hearings by the Sub committee on Economic Statistics of the Joint Economi c
Committee . This need still exists . However, we recogniz e
there are practical limitations to develo p ing a singl e
capacity definition tor all industries .
Agency comments and our evaluatio n
The Department of Commerce noted that the curren t
Census definitions seem appropriate for the majority o f
U .S . industries but the fact that certain industries hav e
difficulties applying the definitions may distort th e
estimates for these industries and the higher level total s
which include these industries . The Department said tha t
"If a series of definitions were constructe d
which could be applied to particular industries ,
it would establish a firmer base tor the develo p ment of capacity estimates . "
The Federal Reserve Board noted tha t
"The underlying conceptual and statistica l
difficulties are of such a magnitude, that a
fully acceptable standard definition of capacit y
and utilization cannot be promulgated yet . "

6-16376 2

The Office of Management and Budget noted that additiona l
research should be done in the area of the level o f
capacity--the engineering, maximum practical, and preferre d
approaches to measuring capacity . The Office also note d
its leadership role in developing the only specifi c
definitions of capacity currently in use .
In our discussions with users and preparers of c a p acit y
utilization statistics, we were informed that a singl e
definition could not be developed that would be appropriat e
for all industries . We therefore believe a family o f
capacity definitions should be developed for use i n
preparing the Government's capacity utilization statistics .
Such a variety of definitions would permit the selectio n
of the most applicable definition for each industry .
Because only certain industries have difficulties wit h
Census' current definitions, we believe efforts can b e
concentrated to develop appropriate capacity definition s
for the few remaining industries . This would allo w
for more consistent responses within individual industries .
Recommendatio n
We recommend that the Director of the Office o f
Management and Budget continue the Office's leadershi p
role by developing, with interested organizations, a
family of capacity definitions for use in calculatin g
capacity utilization statistics .
QUESTIONABLE NEED FO R
THREE GOVERNMENT SERIE S
The Bureau of the Census, the Bureau of Economi c
Analysis, and the Federal Reserve 3oard each prepar e
composite manufacturing rates, certain aggregated rates ,
and individual industry rates . There are variations in th e
level of detail and the methodology used to calculat e
the rates . However, we question the need for thre e
Federal Government organizations to prepare capacit y
utilization statistics .
Un g er section 103 (31 U .S .C . 18b) of the Budget an d
Accounting Procedures Act of 1950, as amended, the Office o f
Management and Budget has been given broad authority ove r
statistical activities of agencies in the executive branch .
Also, under the Federal Reports Act (44 U .S .C . 3501 et . sea . )

B-16376 2

which provides for coordination of Federal reportin g
requirements, the Office can designate a single agency 1/ t o
collect certain information in cases where the Offic e
believes the needs of two or more executive branc h
agencies will be served by a single agency . The Offic e
of Management and Budget took steps along this lin e
when it issued, on December 22, 1975, an amendment t o
its Circular A-46 pertaining to statistical information .
The amendment designates the Bureau of Labor Statistics an d
the Bureau of the Census to collect State and local labo r
force and unemployment data . No other executive branc h
agency is to collect such data without the Office's writte n
approval . We think it is appropriate to take simila r
ste p s with the Government's capacity utilizatio n
statistics .
All three Federal utilization series have weaknesses .
--Census conducts an annual survey, which is no t
frequent enough to show short-run fluctuation s
in capacity utilization . However, Censu s
conducts a plant-level survey, which is necessar y
for the detail published in the Census series .
--The Bureau of Economic Analysis conducts a
quarterly survey which shows short-run fluctuation s
in capacity utilization but the survey is a t
company level which may result in misclassification of prominent secondary activities .
A
company response generally would cover a company' s
plants and lines of activity . The respons e
is classified by industry according to it s
primary activity . Consequently, for diversifie d
companies whose activities cross industry classifications, the major secondary lines of activity ar e
misclassified distorting the rates calculate d
for the individual industries .

1/The designation authority a p plies to those agencie s
over which the Office of Management and Budge t
has jurisdiction . Certain executive branch agencies ,
such as the Internal Revenue Service, and the independent regulatory agencies are excluded from Offic e
of Management and Budget control .

B-16376 2

--The Federal Reserve Board publishes individua l
industry rates for certain materials industrie s
but only publishes composite utilization rate s
in its manufacturing series . 2he composite rate s
do not provide industry detail and tend to smoot h
extreme fluctuations . As a result, the statistic s
may fail to point out potensial problems relatin g
to production capacity in specific industries .
In addition, the Bureau of Economic Analysis' and Census '
utilization series, in our opinion, are not published withi n
sufficient time for use as current e
e nomic indicators .
The Federal Reserve Board's ma : acturing series generall y
has been published in a timely 1u1ner but, as previousl y
stated, provides only limited information . The Board' s
new total materials series is published monthly .
Conclusion s
Because of important uses of the capacity utilizatio n
series in economic policy decision :making and the weaknesse s
in the Federal series which we have noted, use believe th e
Federal Government should Fork toward preparing a highl y
reliable capacity utilization series . To this end, w e
proposed in a draft report to the Office of Managemen t
and Budget and the Federal organizations which prepare th e
capacity utilization statistics, that the Office designat e
a single Federal collecting organization to calculate a
capacity utilization statistical series . We also propose d
that the Office oversee the designated organization's implementation of the series .
A3ency comments and our evaluatio n
The Department of Commerce, the Federal Reserve Board ,
and the Office of Management and Budget disagreed wit h
our proposals and suggested that all currently prepare d
Government series be continued .
Both the Office and the Federal Reserve Board agre e
that there has been some confusion on the part of user s
because of the number of capacity utilization rates published . The Federal Reserve Board stated that reducin g
the number of Government series will not eliminate th e
problem of differences in the utilization rates becaus e
of the existence of rates published by the private organizations . The Office stated that the public confusio n
from the three Government series will be reduce d

B-16376 2

significantly after the Federal Reserve Board improves it s
methodology .
Although there would continue to be differences betwee n
a single series prepared by the Federal Government and th e
privately-prepared series, we believe that simply becaus e
these differences will continue to exist is not a vali d
reason to delay the development of a single reliabl e
utilization series by the Federal Government . We also d o
not believe that simply improving the methodology used i n
the Federal Reserve Board's series will be sufficient to en d
the confusion surrounding this complex economic indicator .
The Office said that there are important interrelation ships between the existing series and other statistic s
published by the Federal agencies . To centralize the dat a
series, such as with a quarterly establishment-base d
survey at Census, would sever the relationships the Burea u
of Economic Analysis com p any-based series maintains wit h
other company-level data, and the Federal Reserve Board' s
series from the industrial p roduction index .
The Department of Commerce stated that there wer e
two primary uses of capacity utilization statistics--t o
assess potential bottleneck situations and to asses s
the profits outlook and potential investment decisions .
Census' capacity utilization statistics relate to th e
establishment or product level and are useful for assessin g
bottlenecks . The Bureau of Economic Analysis' capacit y
utilization statistics focus on the company level wher e
profits are generated and investment decisions are made .
The Department believes the two series are largely comp lementary and serve specific users .
In our review, we developed a list of characteristic s
for analyzing this economic indicator . Based on th e
characteristics, our evaluation of capacity -tilizatio n
statistics indicates that the overall c a p acity utilizatio n
rate is misleading and not a useful economic tool, bu t
that rates by industry are useful . We noted that company level data will result in misclassification of data i f
diversified companies are included in company-leve l
capacity utilization surveys . For example, a compan y
classified by major activity as part of the rubbe r
industry may report it is adding 10 percent to its capacit y
when, in reality, the addition may be completely in a
secondary line, such as chemicals . The statistic prepare d

B-16376 2

at the company level, however, would show an investmen t
was being made in rubber .
We noted that the private companies, which also use d
company-level surveys, considered the company-leve l
survey to be a weakness in their own series .
The Federal Reserve Board stated that, while variou s
capacity utilization surveys indicate approximate utilizatio n
rate levels, the utilization rates derived from detaile d
production series show greater cyclical movements than d o
the survey-based series . The Board concluded that bot h
sources should be used to estimate capacity utilizatio n
rates, stating a mi- .imum requirement for a series base d
on detailed production data and one based on an establishment level survey .
We note that the Board's production-based serie s
can be estimated more frequently than a survey-based series .
If the production series shows cyclical movements whic h
reflect actual changes in capacity utilization, we believ e
the Board's proposal to have both a production-base d
series and a less frequent establishment-based survey ha s
merit . Accordingly, we haN'e revised our initial proposal .
In view of the problems with the present Governmen t
series, the Office of Managment and Budget, with intereste d
organizations, should determine which organization o r
organizations have the best capability to prepare a singl e
capacity utilization statistical series for the Government .
The best possible methcdology should be used to insure th e
preparation of a highly reliable series . The Government' s
position would then be represented by a single set o f
rates for use by Government and non-Government users .
The series should be designed to provide the necessar y
detail to meet the needs of the different Government an d
non-Government users for policymaking and other purposes .
Recommendation s
We recommend that the Director of the Office o f
Management and Budget :
--Determine, in consultation with interested organiza tions, the Federal organization or organization s
which can most efficiently calculate a reliabl e
capacity utilization statistical series .

B-16376 2

--Work with the organization or organization s
to develop and implement this Rapacity utili zation series, taking into corsideration othe r
Federal organizations' and private companies '
needs and correcting the weaknesses existin g
in the current capacity utilization series .

As you know, section 236 of the Legislative Reorganization Act of 1970 requires the head of a Federal agenc y
to submit a written statement on actions taken on ou r
recommendations to the House and Senate Committees o n
Government Operations not later than 60 days after th e
date of the report and to the House and Senate Committee s
on Ap ropriations with the agency's first request fo r
appropriations made more than 60 days after the dat e
of the report .

We will contact your office in the near future t o
arrange for the release of the report so that the requirements of section 236 can be set in motion .
ly your s

/0,
Comptroller Genera l
of the United State s

C o n t e n ts
Pag e

- APPENDIX
Letter dated January 27, 1975 ,
from Congressman John Y . McCollister ,
House of Representatives, io th e
General Accounting Office
II

III

PREPARERS AND THEIR cMETHODOLOGIES
McGraw-Hill Publications Company
McGraw-Hill's methodology
Federal Reserve Board
'Ihe Board's methodologies
Wharton Econometric Forecastin g
Associates, Inc .
Wharton's methodology
The Conference Board, Inc .
The Conference Board's methodology
Bureau of Economic Analysis
BEA's methodology
Bureau of the Census
Census' methodology
Rinfret-Boston Associates, Inc .
Rinfret-Boston's methodology
AN EVALUATION OF CAPACITY UTILIZATIO N
STATISTICS
Strengths and weaknesses of the series
The McGraw-Hill series
The Federal Reserve Board series
The Wharton series
The Conference Board series
The Bureau of Economic Analysi s
series
The Census series
The Rinfret-Boston series
CHARACTERISTICS USED TO EVALUATE THE CAPACIT Y
UTILIZATION STATISTICAL SERIES
Applicable to all series
Definition of terms used in publica tions
Calculation frequency
Adjustments for seasonal changes
Data accuracy
Publication timeliness

1
2
2
3
5
6
7
7
8
9
9
10
11

12
13
14

15
15
15
17
18
19
21
23
24

27
27
27
27
28
28
28

APPENDIX

VII

VIII

Pag e
Applicable to direct survey series
Sampling method
Sample coverage
Sample size
Survey level
Definition of questionnaire terms
Response rate

29
29
29
31
31
31
32

COMPARISON OF INDUSTRIAL CAPACITY UTILIZATIO N
STATISTICAL SERIES

Letter dated September 30, 1976, from th e
Office of Management and Budget to th e
General Accounting Offic e

Letter dated September 23, 1976, from th e
Department of Commerce to the Genera l
Accounting Offic e

Letter dated September 13, 1976, from th e
Board of Governors of the Federa l
Reserve System to the General Accountin g
Office

APPENDIX

APPENDIX I

JOHN Y . MCCOLLISTER

COMMITTEE 01

INTERSTATE
FOREIGN COMM

SECOND DISTRICT. NEMIA

WASHINGTON OFFICE:
21/ CANNON OFFICE BUILDIN G
202-225-4155
DISTRICT OFFICE :
FEDERAL BUILDING
215 NORTH 17TH STREET

CongreO g of tie niteb tate g
3ouoe of 1 epreoentatibeg

OMAHA . NEBRASKA 68102
402-221-3251

ascbington, 1 :■ .I. 2051 5

SOXOMMITTEE O M
COMMERCE AND FINANCE

TI E 'SECErF tOMMITTEE
ON SMALL BUSINES S

January 27, 1975

Elmer B . Staats, Comptroller Genera l
General Accounting Office
Washington, D . C .

Dear Mr . Staats :
The Congress will soon be considering legislatio n
to stimulate industrial production and increas e
the number of jobs for American workers . To tha t
end, it is indispensible that the Congress hav e
available the best information possible about the presen t
,w
condition of the economy .
In the enclosed article, from Dun's Review, by economis t
Pierre A . Rinfret, the question is raised that our dat a
on unused industrial capacity is erroneous . I shoul d
like the General Accounting Office to investigate th e
extent of unused industrial capacity and the adequacy o f
the figures provided by the Department of Commerce an d
the Federal Reserve Board .
Your early attention to this request is most respectfull y
requested .

JYM/rh g

APPENDIX II

APPENDIX I I
PREPARERS AND THEIR METHODOLOGIE S

The seven organizations included in our review us e
information obtained through direct surveys of businesse s
or secondary information to calculate their capacity utilization statistics . The following table shows the yea r
each preparer introduced its statistical series, the duration of the series, and the type of information used b y
the organizations to calculate their series .

Serie s
introduce d
in (year)

Serie s
duratio n
(note a)

Type o f
informatio n
used t o
calculate_ serie s

McGraw-Hil l

1956

1955 to present

Secondary informa tion and direc t
surve y

Federal Re serve Board

1956

1948 to present

Secondary

informatio n

Wharto n

1957

1947

Secondary

informatio n

Conference
Boar d

1970

1970 to 1975

Direct surve y

Bureau o f
Economic
Analysis

1974

1965 to present

Direct surve y

Census

1974

1973

to present

Direct surve y

Rinfret Boston

1974

1974 to present

Direct survey

to present

a/Three organizations have made data available for year s
prior to the series introduction .
MCGRAW-HILL PUBLICATIONS COMPAN Y
McGraw-Hill Publications Company conducts an annua l
survey and obtains secondary information to calculate monthly
statistics showing a composite capacity utilization rat e
for manufacturing industries, separate rates for mining industries and electric and gas utilities, and rates fo r
individual manufacturing industries . The composite monthl y
rate for manufacturing industries is published in "Busines s
Week " magazine and data on specific industries is sold b y
subscription . The results of the annual survey are publishe d

APPENDIX II

APPENDIX I I

as part of an annual survey report on businesses' plans fo r
investing in new plants ana equipment .
Utilization rates are prepared by McGraw-Hill' s
Economics Department which compiles and publishes data o n
various economic topics . The Department conducted it s
first annual survey on capacity utilization in the sprin g
of 1956 and reported data for the end of the previous year .
Since then it has calculated end-of-year rates for ever y
year . McGraw-Hill started to compute monthly capacit y
utilization rates in October 1964 .
Survey questionnaires are currently sent to abou t
1,800 companies in 21 manufacturing, utility, and minin g
industries . McGraw-Hill claims a response rate of 56 per cent .
McGraw-Hill does not define capacity for it s
respondents nor does it ask respondents to indicate thei r
meaning of capacity when responding to its q uestionnaire s
because it believes the definition of capacity varies fro m
industry to industry and company to company, and eve n
within companies .
McGraw-Hill's_methodolog y
McGraw-Hill obtains the monthly changes in productio n
from the preliminary Federal Reserve Board's Index of Indus trial Production and calculates the percentage change in th e
production index for each industry . Changes in capacit y
are obtained from the McGraw-Hill annual industry surve y
which includes a question on planned investment in plan t
and equipment for the next calendar year . Monthly change s
in capacity are obtained by dividing the annual planned in vestment (expressed as a percentage of existing capacity )
into 12 equal monthly amounts .
Preliminary monthly capacity utilization rates fo r
each industry are determined through the following procedure .
1 . The previous month's production index (considere d
to be 100 percent) is adjusted by the percentag e
change in the index . For example, if the production index was 110 for the previous month and 11 5
for the current month, the percentage change in th e
production index would be 4 .55 percent and the adjusted production index would be 104 .55 .

APPENDIX I I

APPENDIX II

The previous month's capacity (also considered t o
be 100 percent) is adjusted by the calculated percentage change in capacity . For example, if th e
capacity was 102 .5 in the previous month and wa s
105 for the current month, the percentage chang e
would be 2 .4 percent and the adjusted capacit y
figure would be 102 .4 ,

The adjusted production index figure (derived i n
1) is divided by the adjusted capacity figur e
(derived in 2) and the resulting percentage is compared to 100 percent to determine the change in th e
utilization rate .

The previous month's utilization rate is adjusted b y
the calculated change in the rate to determine th e
current month ' s capacity utilization rate for th e
industry .

To obtain a composite monthly capacity utilization rate fo r
the manufacturing, utility, and mining industries, the Federal Reserve Board's value-added weights 1/ of industria l
production are applied to each industry ' s capacity utilization rate .
The monthly preliminary rates are subject to two type s
of changes . The first change accounts for changes in th e
Federal Reserve Board's preliminary Index of Industria l
Production .
The second change occurs when McGraw-Hill obtain s
information on actual company investments for the calenda r
year as opposed to the planned investment along with company reported capacity utilization information . Thi s
information is obtained by McGraw-Hill in its annual survey .
McGraw-Hill annually publishes capacity utilization rate s

1/The value-added weights are used as a means to classif y
industries according to their relative importance . Th e
value added by each industry represents the value adde d
to purchased materials in the process of fabricating the m
into finished or more nearly finished goods . The value added figures are developed by subtracting the cost o f
inputs (such as materials and supplies) from the gros s
value of produced products .

APPENDIX

based on reported end-of-year capacity utilization of th e
industries surveyed . The preliminary monthly capacit y
utilization series is revised based on actual reporte d
capacity utilization and actual reported investment o f
the surveyed industries .
FEDERAL RESERVE BOAR D
The Federal Reserve Board publishes two capacit y
utilization series--one for manufacturing and one for materials industries . In the manufacturing series, composit e
capacity utilization rates for primary-processing industries ,
advanced-processing industries, and total manufacturing ar e
published quarterly in the Federal Reserve Board statistica l
Th e
release, " E .5 Capacity Utilization in Manufacturing . "
total composite manufacturing rate is also published i n
the " Federal Reserve Bulletin ." In the materials series ,
the Board calculated rates up to July 1976 for 15 majo r
materials industries and published quarterly rates in th e
Federal Reserve Board statistical release "G .12 .3 Indus The rates for both series have beer ,
trial Production . "
calculated back to 1948 .
In mid-July 1976 the Boara began publishing monthly a
total materials capacity utilization series . The ne w
series expands the major materials series from 15 to 9 6
materials industries included in the Index of Industria l
Production . Composite utilization rates are published fo r
total materials, durable goods materials, nondurable good s
materials, energy materials, and textile, paper, and chemical materials .
A separate rate is provided for basic meta l
materials within the durable goods group, and separate rate s
are provided for chemical, paper, and textile materials withi n
the nondurable goods group . The revised series, introduce d
in the July 16, 1976, "Industrial Production" re,eese contain s
both monthly and quarterly rates . Quarterly data will als o
be published in the "Federal Reserve Bulletin . "
The Federal Reserve Board's Boara of Governors deter mines general monetary, credit, and operating policies fo r
the Federal Reserve System and prepares rules and regulations necessary to carry out the purposes of the Federa l
Reserve Act of 1913, as amended . Its principal duties consist of exerting an influence over credit conditions an d
supervising the Federal Reserve and member banks .
In an effort to improve its manufacturing series, th e
Federal Reserve Board contracted with the Bureau of th e
Census to perform a capacity utilization survey and provid e
a benchmark for this series . For the fourth quarters of 197 3
5

APPENDIX II

APPENDIX I I

and 1974, the Census and Federal Reserve Board composit e
manufacturing rates were almost the same (84 percent compare d
to 82 .6 percent for 1973 and 75 percent compared to 75 .7 per cent for 1974) . However, Census' preliminary result for th e
fourth quarter of 1975 was 75 percent compared to 70 .7 per cent reported by the Board .
In April 1974 the Federal Reserve Board announce d
several steps to try to improve its major materials series .
The Board added three subgroups of the chemicals industr y
to the series, obtained broader representation of the stee l
industry, modified treatment of the capacity utilizatio n
data for the petroleum refining industry, and changed it s
method of aggregating the capacity utilization rates . I n
addition, the Board began publishing data for six industrial subgroups .
The Board announced further steps to improve it s
capacity utilization statistics in June 1976 . A member o f
the Board of Governors stated in a speech that data o n
capacity utilization rates and productive capacity wer e
very unsatisfactory and that the Federal Reserve Board wa s
making a strong effort to improve them . He said that th e
Federal Reserve Board's manufacturing rates wece "far to o
low ." The modifications to this series are expected to sho w
a considerably higher utilization rate than the presen t
series .
Capacity utilization estimates for the Federal Reserv e
Board's manufacturing series are constructed from the (1 )
Board's Index of Industrial Production, (2) Census' measur e
of the gross stock of capital goods, and (3) McGraw-Hill ' s
capacity index and capacity utilization rates . Estimate s
for the major materials series were based on the Board' s
Index of Industrial Production and capacity data .
The Board's methodologie s
The utilization rates for the manufacturin g series ar e
an estimate of production divided by an estimate of capacity .
The estimate of production for this series is obtaine d
from the Board ' s Index of Industrial Production publishe d
monthly . This index is constructed by combining estimate s
of physical auantities of output, either measured directl y
or estimated from information about inputs and productivity ,
with weights based on the relative importance of each marke t
or industry during the base year for the index .

APPENDIX II

APPENDIX I I

The estimate of capacity used in calculating th e
manufacturing series is obtained from a capacity trend lin e
constructed from (1) the perpetual inventory measure of th e
gross stock of capital g oods obtained by Census fro m
surveys of manufacturers, (2) the McGraw-Hill index o f
capacity, and (3) the Federal Reserve Board production index divided by the McGraw-Hill capacity utilization rates .
The major materials capacity utilization series is a
weighted average of rates compiled separately for each o f
the 15 industries covered . In each instance, capacit y
utilization is obtained by dividing production by capacity .
The methodology for the expanded total materials serie s
is expected to be published in a fall issue of the "Federa l
Reserve Bulletin . "
VHARTON ECONOMETRIC

FORECASTING ASSOCIATES, INC .

Wharton publishes quarterly composite ca p acity utilization rates for durable- and nondurable-goods industries ;
manufacturing ; mining ; manufacturing and mining ; utilities ;
and manufacturing, mining, and utilities industries . Thes e
rates will be published in the "Wharton Magazine ." Detaile d
rates for individual industries are available at star,_ .rd fees .
The rates are prepared by Wharton Econometric Forecasting Associates, Inc ., a University of Pennsylvania nonprofi t
organization, to provide a way of looking at the movement o f
economic activity and to develop a variable that is usefu l
in econometric models . Data tor the series has been calculated back to 1947 .
Twenty-seven industries, including both manufacturing an d
nonmanufacturing industries, are covered in Wharton's series .
The capacity utilization rates are based on data obtaine d
from Government sources or trade associations .
Wharton's methodolog y
Capacity utilization rates are calculated by dividin g
the production index by an estimate of maximum p roductio n
capacity for each industry determined by plotting seasonall y
adjusted quarterly production data and identifying pea k
quarters . Production at the p eaks is considered to h e

APPENDIX II

APPENDIX I I

100 percent capacity, 1/ Capacity is assumed to grow alon g
a straight line connecting successive peaks and all point s
along the line represent 100 percent capacity .
For the period after the most recent production peak ,
capacity is assumed to grow along the same straight lin e
that it followed before . If production goes above the lin e
a new peak is established and a new capacity estimate i s
defined .
The capacity utilization rate is calculated by dividin g
the actual production data by the capacity point on the tren d
line . If the calculation is based on a projected trend line ,
the rates are revised when a new peak is determined .
THE CONFERENCE BOARD, INC .
Between 1970 and 1975 the Conference Board publishe d
capacity utilization rates tor durable- and nondurable-good s
manufacturers and a composite rate for all manufacturers .
The rates were published in the Conference Board ' s Manufacturing Investment Statistics series on Capital Investmen t
Conditions .
The Conference Board is a private, nonprofit, researc h
institute and was established in 1916 . It performs variou s
anallses of the current economic situation and outlook .
From 1965 to 1975 the Conference Board performed a
semiannual survey of capital investment conditions in manufacturing .
In 1970 two questions concerning industria l
capacity utilization were added to the Capital Investmen t
Conditions survey . Between 1970 and 1975 the Conferenc e
Board published its capacity utilization series semi annually . Conference Board officials said the Board stoppe d
calculating capacity utilization rates because the statisti c
was not accurately showing the cyclical movement of th e
economy .

1/An exception to this is when Wharton determines industrie s
are producing less than their full potential output, refer red to as a "weak peak ." If independent evidence indicate s
that a production peak is a "weak peak," Wharton does no t
consider the peak to represent 100 percent capacity . Th e
maximum production capacity in this case is determined b y
connecting the previous peak with one subsequently deter mined .

APPENDIX II

APPENDIX I I

The Conference Board's sample was a list of the 1,00 0
largest companies in terms of total assets . Seventy of th e
companies selected chose not to participate in the survey .
Questionnaires were mailed in January and July to th e
remaining 930 manufacturing companies covering variou s
industries . The data was usually published about 2 month s
after the questionnaires were mailed . The response rat e
was about 40 to 45 percent .
The Conference Board did not define capacity in it s
questionnaire because i.t believes capacity is an elusiv e
concept and probably cannot be standardized . Respondent s
were expected to define capacity in their own terms .
The_ Conference Board's methodolog y
Companies were asked to state whether their plant an d
equipment facilities were inade q uate, sufficient, or mor e
than adequate to meet current orde,-s . Companies indicatin g
"more than adequate facilities" were asked to indicate th e
extent of underutilization .
For each response, the Confer ence Board assumed a percentage range of utilization a s
follows .
Assumed rate o f
utilization ( ercenc )

Facilities are :
Inadequate
Sufficient
More than adequate, underutilize d
by :
Under 10 percent
10 to 19 percent
20 and over

93 to 100 . 0
90 to 92 . 9

80 to 89 . 9
70 to 79 . 9
55 to 69 . 5

The midpoints of these ranges were used to weight the asset s
of the companies . The sum of these weighted assets was the n
divided by the unweighted sum of all respondents' assets t o
obtain the final utilization rate .
Using this methodology, it was not possible for a n
industrial capacity utilization rate to reach 100 percent .
The highest rate possible was 96 .5 percent which is th e
midpoint of the ranae for " inadequate " facilities .
BUREAU OF ECONOMIC ANALYSI S
The Bureau of Economic Analysis (BEA) conducts a
quarterly company—level survey to publish statistics showin g
9

APPENDIX II

APPENDIX I I

composite rates of capacity utilization tor manufacturin g
industries and industry groups--such as durable- an d
nondurable-goods industries--by asset size 1/ and utilization rates for individual industries, p rimary-processin g
industries, and advanc--'-processing industries . Thes e
rates are p ublished in BEA's "Survey of Current Business . "
The rates are prepared by BEA's Business Outlook Divisio n
whose main purpose is assessing the short-range economic out look . The Division introduced its capacity utilization serie s
in July 1974, although data for the series has been reconstructed back to 1965 .
Questionnaires are sent to over 3,000 companies coverin g
25 industries and accounting tor about 75 percent of the gros s
depreciable assets in 1969 . The sam p le is essentially th e
same sample used by BEA tor its Plant and Equipment Expenditures Survey . The sample is designed to cover large companie s
with assets ci' $100 million and over while small companie s
were chosen by a stratified probability 2/ sample .
BEA does not define capacity in its questionnaire fo r
its respondents' use . However, the respondents are instructed to estimats their utilization by following "th e
company's usual operating practices with respect to use o f
production facilities, overtime, work shifts, and holidays ,
etc ." BEA claims a response rate of about 75 to 80 percent .
BEA's methodolog y
Capacity utilization rates are computed by assignin g
each responding company to an industry according to th e
company's 1969 primary activity and to an asset-size clas s
according to total assets as reported in BEA's Plant an d
Equipment Expenditures Survey .
A three-step procedure is then followed :
--The individual co m p any capacity utilization rates ,
weighted by the company's gross de p reciable asset s
1/The asset-size classes are $100 .0 million and over ,
$10 .0 million to $99 .9 million, and under $10 .0 mil lion .
2/Probability sampling includes all methods of sampling i n
which the sampling units are selected according to the law s
of chance so that :he probability of being included i s
known (and not zero) for each member of the population .
10

APPENDIX II

APPENDIX I I

for 1969, are combined to give estimates of industr y
rates by asset-size class .
- -The rates for the three asset-size classes, weighte d
by industry gross de p reciable asses for 1969, ar e
combined into industry rates .
- -The industry rates, weighted by an estimate of 196 9
manufacturing capacity for the industry, are combine d
to g ive rates for groups of industries .
BUREAU OF THE CENSU S
The Bureau of the Census annually surveys a sample o f
industrial plants . From this information Census calculate s
and publishes a composite rate of ca p acity utilization fo r
manufacturing industries ; composite rates for durable goods ,
nondurable goods, primary-processing, and advanced processin g
industries ; and rates for individual industries . These rate s
are published in Census' report entitled "Survey of Plan t
Capacity . "
The rates are prepared by Census' Industry Divisio n
whose main objective is to measure the activities of th e
manufacturing and mining segments of the economy to serv e
the informational needs of Government, industry, and th e
general public .
Census performed a capacity utilization survey on a
pilot basis as a result of a November 1971 request from th e
Chairman of the Federal Reserve Board . The Chairman wante d
Census' help in improving the Board's quarterly estimates o f
capacity utilization . The purposes of this pilot survey wer e
to (1) test the feasibility of devising a reasonable definition of capacity and (2) determine the willingness of manufacturers to make responsible estimates of the capacity utilization for individual plants according to a given definition .
The pilot survey, requesting information for the four t
quarter of calendar year 1971, covered 1,000 p lants . Th e
survey was not designed to provide reliable estimates o f
capacity utilization because of the small sample and th e
sample design .
Based on the responses to the pilot survey, Censu s
concluded that (1) the use of a definition of capacity wa s
feasible for later surveys and (2) estimates of capacity an d
capacity utilization could be obtained for individual p lants .

APPENDIX II

APPENDIX I I

Census conducted a second survey for the Federal Reserv e
Board in August 1974 . Survey questionnaires, requesting in formation on capacity utilization tor the fourth quarter o f
1973, were mailed to approximately 4,000 plants selected b y
a probability sample . This sample was drawn from the sampl e
of about 70,000 plants used by Census for its Annual Surve y
of Manufactures . All but four major industry groups and a
subgroup of a fifth industry were represented in the sample .
These groups were excluded because of the industries' problems in estimating capacity . Census requested that th e
respondents use the followin g definitions of capacity- practical capacity is the greatest level of output a plan t
can achieve within the framework of a realistic work pat tern and the pref e rred level of operations (preferre d
capacity) is the level of operations which the plant woul d
prefer not to exceed because of costs or other considerations .
Census claimed a response rate for this survey o f
69 percent . Generally, those plants that did not respon d
were small and/or insolvent . Census _ublHshed the result s
of this survey in October 1975 .
In March 1975 Census performed its own survey of capacit y
utilization to obtain information for the fourth quarter o f
1974 . Census used the same definitions of capacity that wer e
used for the surveys performed for the Federal Reserve Board .
Census selected a probability sample of about 9,200 plants ,
generally covering all manufacturing industries, from th e
plants covered by its Annual Survey of Manufactures . Plant s
with 2,000 or more employees were automatically chosen whil e
plants with less than 2,000 employees were randomly selected .
Census mailed the questionnaires to the plants in Marc h
1975 . Census claimed that 62 percent of the plants responded .
The results of this survey were published in April 1976 .
Because Census considered the response rate on the 197 4
survey to be unsatisfactory as a basis for developing reliabl e
estimates of capacity utilization, the survey to obtain information on the fourth quartet of 1975 was changed from voluntary to mandatory . According to Census, the response rat e
rose to almost 95 percent . Census issued a press release re porting preliminary capacity utilization estimates for th e
1975 survey on August 12, 1976 . The final report is to b e
issued in the fall of 1976 .
Census' methodolog y
Using Census' definitions of capacity, respondents ar e
asked to provide information, within established percentag e
12

APPENDIX II

APPENDIX I I

ranges, on (1) t .eir actual operations as a percent of thei r
preferred rate of operations and as a percent of thei r
practical capacity during the fourth quarter of the surve y
year and (2) their operations in the fourth quarter of th e
prior year as a percent of their practical capacity at tha t
time .
Census weights the rates obtained from individual plan t
responses by the plant's employment and averages the weighte d
rates to determine capacity utilization rates for the individual industries . Composite rates for durable goods, nondurable goods, p rimary processing, advanced processing, and al l
manufacturing industries are computed as averages of th e
employment-weighted utilization rates of all the individua l
establishments included in the particular composite total .
RINFRET-BOSTON ASSOCIATES, INC .
Rinfret-Boston conducts quarterly surveys of capacit y
utilization and publishes rates for individual industries ,
durable- and nondurable-goods manufacturers, manufacturin g
industries, nonmanufacturing industries, and all industries .
These rate; are published in Rinfret-'3oston's Capital In vestment Surveys series .
Rinfret-Boston is an international economics an d
financial consulting firm . Rinfret-Boston performs variou s
industrial surveys to provide its clients with informatio n
concerning the current and future conditions of the Unite d
States economy .
In the fall of 1972, Pierre Rinfret, president o f
Rinfret-Boston, became dissatisfied with the Federal Government capacity utilization estimates . At that time ,
several industrialists told him they were running out o f
practical capacity ; however, the Federal Reserve Board wa s
reporting that industry still had about 18-percent unuse d
capacity . Through 1974 growing numbers of manufacturer s
reported capacity shortages but the Board still reporte d
about 20-percent unused capacity . As a result, Rinfret Boston decided to do its own capacity utilization survey .
Rinfret-Boston's first capacity utilization survey wa s
performed in the fall of 1974 . Manufacturers responding t o
Rinfret-Boston's survey indicated that, as of September 1974 ,
they were operating at about 91 percent of capacity . Anothe r
survey was conducted from mid-January to mid-February 1975 .
At that time, manufacturers reported that they were operatin g
at 87 percent of capacity . Rinfret-Boston began conductin g
quarterly capacity utilization surveys in April 1975 .
13

APPENDIX II

APPENDIX I I

Rinfret-Boston selected a stratified sample of companie s
representing various industrial sectors, manufacturing an d
nonT,anufactur ing . We could not obtain the size of the sampl e
because it is Rinfret-Boston's policy eot to reveal this in formation . Rinfret-Boston claims that its response rat e
averaged about 45 percent .
Rinfret-Boston does not define capacity for it s
respondents (except for those in the transportation an d
utilities indusLries) because it believes (1) there is n o
clear accepted definition of capacity and (2) a forced definition may lead to inaccurate data because capacity varie s
from sector to sector and industry to industry . Most companies are asked to calculate their capacities based o n
their own understanding of capacity . Companies in th e
transportation and utilities industries are provided definitions which are standard for their respective industries .
Rinfret-Boston's methodolog y
Rinfret-Boston calculates its capacity utilizatio n
rates using its survey respondents' assets as a weightin g
factor . The assets of the companies for 1974 are totaled b y
industry . Each company's assets are taken as a percentag e
of that total . This percentage is then multiplied by th e
capacity utilization rate reported by the company to obtai n
the weighted capacity utilization rate for the company .
The weighted rates for all companies in an industr y
are added to obtain the capacity utilization rate for th e
industry . Then the industry rates are averaged to get a
composite total capacity utilization rate .

APPENDIX III

APPENDIX II I
AN EVALUATION OF CAPACIT Y
UTILIZATION STATISTIC S

Based on discussions with users and preparers of th e
capacity utilization statistics and articles written abou t
the series, we identified several characteristics which w e
used to evaluate the capacity utilization statistics . W e
divided the characteristics into two categories--those applicable to all caries and those applicable to series involving direct surveys of businesses .
The characteristics applicable to all of the capacit y
utilization series relate to definition of terms used i n
publications, calculation frequency, adjustments for seasona' changes, data accuracy, and publication timeliness .
The characteristics applicable to series based on direc t
surveys relate to sampling method, sample coverage, sampl e
size, survey level, definition of questionnaire terms, an d
response rate . They are described in detail in appendix IV .
STRENGTHS AND WEAKNESSE S
--O F T - H E--S ERIES
We found that all of the series have both strengths an d
weaknesses . Following is our detailed evaluation of th e
statistics prepared by the seven organizations . A compariso n
of the capacity utilization series is shown in appendix V .
The McGraw-Hill serie s
Strengths of the McGraw-Hill series include calculatio n
frequency, adjustments for seasonal changes, publicatio n
timeliness, and sample size .
Based on data obtained from an annual survey, McGraw Hill calculates monthly capacity utilization rates . According to a McGraw-Hill official they began calculating th e
monthly rates to prepare a more timely series .
McGraw-Hill uses seasonally-adjusted production dat a
from the Federal Reserve Board's Index of Industrial Production in calculating its monthly rates, Any changes in McGraw Hill's rates should therefore be caused by nonseasonal factors .
McGraw-Hill normally publishes its composite monthl y
utilization rate for manufacturing industries in its "Business Week" magazine during the month immediately followin g
the month to which the data applies . More detailed data i s
sold to users by subscription .
15

}

APPENDIX III

APPENDIX II I

McGraw-Hill's sample for obtaining capacity and investment data currently includes about 1,800 companies, makin g
it the second largest company sample . The sample cover s
companies in the manufacturing, mining, and utilities industries .
Weaknesses in McGraw-Hill's series are the definitio n
of terms used in publications, sampling method, sample coverage, survey level, data accuracy, definition of q uestionnaire terms, and response rate .
McGraw-Hill publishes its capacity utilization rate s
in its annual publication on businesses' plans for ne w
plants and equipment . However, a user cannot identify th e
industries covered by the rates because the industrie s
included in the "Other Durables" and "Other Non-Durables "
groups of industries are not identified . McGraw-Hill als o
does not identify for potential users which industries ar e
covered by the composite manufacturing rate published i n
"Business Week . "
McGraw-Hill's sample of about 1,800 companies was no t
selected according to probability theory . A McGraw-Hil l
official advised us that their sam p le is biased to larg e
firms but they have attempted to improve the sample b y
adding small firms . Though the sample includes companie s
in the manufacturing, mining, and utilities industries, several manufacturing industries are not accounted for .
Therefore we cannot determine whether and to what exten t
certain industries are covered . Selection biases have no t
been minimized .
McGraw-Hill uses a company-level survey to obtain in formation tor calculating individual industry rates an d
certain composite rates . A company response generall y
would cover a company's plants and lines of activity . Th e
response is classified by industry according to its primar y
activity . Consequently, for diversified companies whos e
activities cross industry classifications, the major secondary lines of activity are misclassified distorting the rate s
calculate9 for the individual industries .
The accuracy of McGraw-Hill's data is questionable fo r
several reasons . First, McGraw-Hill's statistics for individual industries may be distorted because secondary lines o f
activity are misclassified because o the level at which th e
survey was performed . Second, a McGcai-Hill official said ,
if the company data does not eem reasonable, they woul d
check with the company . No other checks are performed o n
the data to test - ts accuracy . Thirl, the biases resultin g
from the sample selection method will distort th e
16

APPENDIX

III

APPENDIX II I

statistics . This is particularly true of the large-fir m
bias which normally will cause higher utilization rate s
than would result from a representative sample . A McGraw Hill official told us that the level of their rates may no t
be exactly correct and that he prefers to use the information as a trend indicator .
McGraw-Hill does not define capacity in its questionnaire because it believes the definition will vary betwee n
companies and industries .
McGraw-Hill claims a response rate of 56 percent . Thi s
rate is somewhat lower than the Census and Bureau of Economi c
Analysis rates and slightly higher than the Rinfret-Bosto n
and Conference Board rates .
The Federal Reserve Board serie s
The strengths of the manufacturing series are the definition of terms used in publications, calculation frequency ,
adjustments for seasonal changes, and publication timeliness .
The major materials series had the same strengths .
The Federal Reserve Board publishes its composit e
capacity utilization rate for manufacturing in the "Federa l
Reserve Bulletin ." Composite rates for manufacturing, primary-processing, and advanced-processing industries ar e
published in a statistical release on capacity utilizatio n
in manufacturing . References are provided in the statistica l
release to a published description of the series which identifies the industries included in the respective groupings .
Similar references were provided in a statistical release o n
the major materials series .
A description of the methodolog y
of the new total materials series is expected to be publishe d
in a fall issue of the "Federal Reserve Bulletin . "
The manufacturing series is prepared quarterly and th e
new total materials series is published monthly . The frequencies are better than the less frequently calculate d
series in showing tale 'ho r t-term fluctuations in capacit y
utilization for th,
r : :s covered .
The Federal Re : erve Board seasonally adjusts its capacity utilization Data for both the manufacturing and majo r
materials series . The new total materials series is als o
seasonally adjusted . Therefore changes in the rates ar e
caused by nonseasonal factors .
The overall manufacturing series has generally bee n
published a r gil released to the public within 20 days afte r
the end of the quarter . This series is one of the mor e
17

APPENDIX III

APPENDIX II I

timely series published and is listed as a principal Federa l
economic indicator .
The weakness of the manufacturing series relates to th e
accuracy of the series . The Federal Reserve Board use s
McGraw-Hill's capacity utilization series in calculating it s
manufacturing series . Consequently, the Board's manufacturing series is affected by the weaknesses of the McGraw-Hil l
series . These weaknesses include the sam p le selection resulting in a large firm bias and p otential misclassification s
of industry data resulting from a company-level survey .
According to a present Board staff official, a former staf f
official was trying to re"ise the Board's manufacturin g
series and replace the McGraw-Hill data because there wer e
errors in the data .
Another staff official stated in a "Federal Reserve Bulletin" article published in November 1968 that the Board' s
quarterly estimates of manufacturing capacity and capacit y
utilization were probably subject to much larger measurement errors than most commonly used statistical series be cause of deficiencies in coverage, detail, and accuracy o f
the underlying data ; and the indirect nature of constructing the capacity estimates .
The Board is presently taking steps to try to improv e
its capacity utilization series .
The Wharton serie s
Strengths of the Wharton series are the calculatio n
frequency, adjustments tor seasonal changes, and publication timeliness .
Wharton calculates its series quarterly . This frequenc y
is better than the less frequently calculated series in showing the snort-term fluctuations in capacity utilization fo r
the different industries .
Wharton uses seasonally adjusted production data fro m
the Federal Reserve Board's Index of Industrial Productio n
in calculating its quarterly rates . Therefore rate change s
are caused by nonseasonal factors .
The can ;posite capacity utilization rates calculated b y
wharton will be published in the new "Wharton Magazine . "
However, the detailed rates are made available to subscribers within a few days after Wharton receives the productio n
index data from the Federal Reserve Board .
The weaknesses of the Wharton series include definitio n
of terms used in publications and the accuracy of the data .

APPENDIX III

APPENDIX II I

Wharton published composite rates in its quarterl y
newsletter . The publication did not identify the industrie s
included in its industry groups . In the future, the rate s
will be published in the "Wharton Magazine . "
The main controversy surrounding the Wharton series i s
the concept of capacity, which affects the accuracy of th e
series . Wharton's concept of capacity equates maximum capacity with the level of production represented by a tren d
line formed oy connecting successive production peaks . Fo r
any p articular date, the point on the trend line connectin g
two peaks is equal to 100-percent capacity . The part of th e
trend line that extends beyond the most recent productio n
peak represents a projection of maximum capacity until th e
next production peak is reached . The trend line is then re drawn connecting the two peaks and the final capacity utilization rates are determined .
The Wharton method results in an understatement of maxi mum capacity and an overstatement of the capacity utilization rates . Maximum capacity is understated because capacity is considered to be the actual production achieve d
rather than the maximum production which could be achieve d
through the use of the facilities and equipment . The under statement of maximum capacity will result in the overstatement of capacity utilization when production is compared t o
capacity .
The Conference Boardserie s
Strengths of the Conference Board capacity utilizatio n
series include the level of the survey and the timelines : i n
publishing the data .
The Conference Board conducted a semiannual survey o f
companies and calculated capacity utilization rates for th e
durable-goods and nondurable-goods industries and a composite rate for all manufacturers . Because of this generalized level of detail, we believe the company-level surve y
was appropriate as o p posed to performing the more expensiv e
plant-level survey .
The statistics were also compiled and published in a
timely manner . The Conference Board collected its information in about 6 weeks and tabulated the data in about 2 week s
for release soon thereafter .
The Conference Board's series had several weaknesses .
These relate to definition of terms used in publications ,
calculation frequency, adjustments for seasonal changes ,
data accuracy, sampling method, sample coverage, definitio n
of questionnaire terms, sample size, and response rate .
19

APPENDIX II I

APPENDIX III

For the most part, the Board defined terms includin g
industry groupings used in its publication . However, th e
industries included in the "Nondurables" and "Other Durables "
groupings were not identified in the Conference Board's publication .
The Conference Board published its statistics semi annually . A Board official suggested that the statistics b e
viewed as a trend indicator . Although better than an annua l
frequency, this semiannual frequency will not show the short term fluctuations in the capacity utilization of the manufacturing industries as are shown by the more frequently calculated series .
The Board did not seasonally adjust the utilizatio n
rates calculated tor normal seasonal factors . The change s
in the rates were therefore caused by both normal seasona l
and nonseasonal factors .
Three problems affected the accuracy of the series .
The Conference Board made no routine check of the accurac y
of the data received from the responding companies . However ,
it did attempt to work out any inconsistencies in the dat a
with the companies and eliminated responses from the tabulation process when it questioned the accuracy of the data .
The selection of the largest firms caused a large-fir m
bias and higher utilization rates than would have resulte d
from a sample representative of the manufacturing industries .
In addition, the companies responded subjectively statin g
whether their plant and equipment was inadequate, sufficient ,
or more than adequate rather than providing specific percent ages for their capacity utilization . The Conference Boar d
assumed that each com p any's response would fall within a particular percentage range depending upon the company's subjective response . The midpoints of the ranges were the n
used to calculate the utilization rates . This procedure limited the degree of precision of the statistics .
The Conference Board selected 930 manufacturing companie s
listed as the largest companies in terms of total assets .
The companies were not selected to be representative of al l
manufacturing companies . Because the largest companies wer e
selected, the sample had both large-firm bias and industr y
bias . The large-firm bias would result in the statistic s
showing higher utilisation rates than a series not affecte d
by the bias because large firms have historically reporte d
higher utilization rates than have smaller firms .
The sample also had industry bias because some industries were more heavily represented than others . For exam p le ,
20

APPENDIX III

APPENDIX II I

.textile companies were underrepresented and petroleu m
companies were overrepresented in the sample . The Conference Board representatives agreed that their series ha d
these biases .
The Conference Board did not define capacity in it s
questionnaire used to obtain information from the com p anie s
surveyed because it believed the concept probably could no t
be standardized . The Board relied on the respondents to us e
their judgment in defining capacity .
The 930 companies selected represented one of th e
smaller samples used in compiling capacity utilization statistics . In addition, the response rate (40 to 45 percent )
was among the lowest of any of the capacity utilization surveys .
The Bureau of Economi c
Analysis serie s
The BEA series' strengths include definition of term s
used in publications, calculation frequency, adjustments fo r
seasonal changes, samp'ing method, sample coverage, sam p l e
size, and response rake .
References are provided in BEA's " Survey of Current Business" to a published description of the series which identifies the industries included in different aggregated groups .
BEA surveys companies and calculates its capacity utilization rates quarterly . Although the monthly [McGraw-Hil l
series (calculated from an annual survey) shows monthly fluctuations in the utilization rates, the quarterly frequency i s
the best frequency th e t any of the five preparers achieve d
with a direct survey
The BEA series should record the frequent short-term flu uations in capacity utilization .
In addition, BE .
e asonally adjusts its data to eliminate the effect of nd . il seasonal factors on the movemen t
of the rates . The seasonally adjusted rates would therefor e
show changes in the rates caused by other than normally recurring seasonal factors .
BEA samples over 3,000 com p anies in its capacity utilization survey . BEA's sample size is one of the largest (i f
not the largest) of the company-level surveys used to ore pare capacity utilization statistics .
The sample is designed to cover large companies wit h
assets of $100 million and over with certainty and smalle r
companies were selected based on probability theory . Thi s
21

APPENDIX III

APPENDIX II I

manner of sample selection should heLp to minimize the selection biases and the sampling method would be a strengt h
of the series .
BEA's sample generally covers the manufacturing industries but does not include nonmanufacturing industries .
BEA's series is unique because BEA publishes composite utilization rates stratified by company size for the overal l
manufacturing level and for the durable- and nondurable goods industries .
The 75- to 80-percent response rate claimed by BEA i s
a good return rate .
Weaknesses in BEA's series include publicatio n
timeliness, level of the survey, data accuracy, and definition of questionnaire terms .
BEA has been publishing its capacity utilization rate s
during the third month following the period to which th e
data applies . This kind of delay in publication reduce s
the statistics' value as a current economic indicator .
BEA calculates capacity utilization rates for individual industries, such as primary metals, electrical machinery ,
textiles, and petroleum, and composite rates for durable goods .,
nondurable goods, and all manufacturers .
BEA surveys companie s
to acquire its data and assigns each company's response to a n
industry based on the company's primary activity . Since a company-level survey normally includes all lines of activity (including those crossing industry lines), this survey level ca n
cause industry rates to be misstated because prominent secondary activities of the companies are misclassified .
The main problem relating to data accuracy concerns th e
potential misstatement of the industry rates because of per forming a company-level rather than a plant-level survey ,
In addition, BEA's quality control procedure to assure dat a
accuracy is generally limited to identifying any company' s
response which looks "out-of-line ." For any company s o
identified, BEA will telephone the company to try to obtai n
usable information .
BEA does not define capacity in its questionnaire use d
to collect information from the companies . It requests tha t
the companies estimate their utilization based on their usua l
operating practices such as the use of productive facilitie s
and work shifts .

APPENDIX III

APPENDIX II I

The Census serie s
Strengths of the Census series include definition o f
terms used in p ublications, data accuracy, sampling method ,
sample coverage, sample size, survey level, and respons e
rate . Although the capacity definitions given to the respondents are a strength of the series, the same definition s
for all industries seems to be unworkable .
Census defined its terms, including the
ered by its survey, in its publication .

irustries cov-

Census' methodology and sample characteristics are goo d
and should result in reasonably accurate information for th e
manufacturing industries . However, in its published result s
for the survey of the fourth quarter of 1373, Census recog nized that it was extremely difficult to translate the concept of plant capacity into a working definition which wa s
applicable to all industries . Because of the definitiona l
and conceptual problems associated with the survey, Censu s
concluded that it was likely that the response errors wer e
greater in magnitude than for some other manufacturing surveys .
The survey sample for the fourth quarter of 1973 covered all but four major manufacturing industry groups an d
a subgroup of a Eifth industry . These were excluded b y
Census because of the industries' problems in estimatin g
capacity . However, Census included these groups in it s
1974 survey resulting is coverage for the major manufacturing industries . The Census survey excluded nonmanufacturin g
industries as do some other capacity utilization surveys .
Census selected a sample of about 9,200 plant', from a
probability sample of about 70,000 plants used in its Annual Survey of Manufactures . Plants having 2,000 or mor e
employees were automatically selected and plants with les s
than 2,000 employees were selected in accordance with probability theory . This selection process will help to minimize the biases of selection . Census also has more reporting units than most, if not all, of the other utilizatio n
surveys . Rinfret-Boston's sample size is unknown .
Based on t'e detail of the statistics which Census calculates and publishes, the plant-level survey is bette r
than a company-level survey for calculating industry rate s
to reduce errors in assigning responses to industry classifications . Census assigns the responses to an industr y
based on each plant's primary activity acco ::ding to the 197 2
Standard Industrial Classification manual .

APPENDIX III

APPENDIX

II I

In an attempt to get consistency in the responses ,
Census provided its respondents with definitions of capacity . As previously discussed, Census has experienced som e
problems with its definitions . Two preparers consider th e
definitions not applicable to all sectors and industrie s
covered by Census' survey .
The 69- and 62-percent response rates for the 1973 and
1974 surveys are good returns for voluntary surveys . Censu s
made its survey mandatory in 1975 and the response rate ros e
to almost 95 percent .
Weaknesses in Ce :_aus' capacity utilization series re late to the calculation frequency and publication timeliness .
The Census survey is conducted annually . This frequency is not often enough to show the frequent short—ter m
fluctuations in the capacity utilization of the manufacturing industries .
The results for Census' survey of capacity utilizatio n
for the fourth quarter of 1973 were published in Octobe r
1975 . The results for the fourth quarter of 1974 were published in April 1976 . Preliminary results for the fourt h
quarter of 1975 were issued in a press release on August 12 ,
1976 . Officials estimate that, in the future, the dat a
should be available 5 to 7 months after the end of the perio d
covered .
The Rinfret-Boston serie s
The Rinfret-Boston series' strengths include calculatio n
frequency and publication timeliness .
Rinfret-Boston conducted its first capacity utilizatio n
survey in the fall of 1974 . A second survey was performe d
in mid-January to mid-February 1975 . In April 1975 Rinfret Boston began conducting surveys quarterly which is the bes t
frequency achieved by any of the organizations using a direc t
survey to collect its information . The series should recor d
the frequent short-term fluctuations in capacity utilization .
The results of the first two surveys were published i n
the first month after the survey . The series, therefore, i s
one of the more timely series published .
Weaknesses in the Rinfret-Boston series include definition of terms used in publications, adjustments for seasona l
changes, sampling method, sample coverage, survey level ,
data accuracy, definition of questionnaire terms, and response rate .
24

0
1

APPENDIX III

APPENDIX II I

Rinfret-Boston publishes detailed rates in it s
publication but does not identify the industries included i n
the "Other Durable Goods" and "Other Nondurable Goods" industry groups . Therefore, p otential users will not kno w
which industries are covered by the series .
Rinfret-Boston does not seasonally adjust its statistics because they do not have a long enough history to determine what seasonal adjustments should be made . Consequently, the changes in the rates would be caused by bot h
seasonal and nonseasonal factors .
A Rinfret-Boston official advised us that their sampl e
was a stratified sample of companies in all asset ranges bu t
concentrated on companies having assets exceeding $200 mil lion . According to this official, sampling a representativ e
number of smaller firms would make the cost of the surve y
p rohibitive . Rinfret-Boston declined to divulge the size o f
its sample because of company policy . Based on our analysis ,
the sample appears to provide at least some coverage of mos t
of the major industries, manufacturing as well as nonmanufacturing . However, according to the official, the smalle r
firms are not well re p resented in the sam p le .
A company-level survey is used by Rinfret-Boston to calculate individual industry rates as well as various composite rates . The questionnaire instructions request that th e
companies provide information on the domestic operations o f
the companies' principal product lines . If the com p anie s
respond to the questionnaire based solely on their principa l
products, it may partially offset the problems of misclassification when working with company responses . A Rinfret Boston official told us a more accurate picture of capacit y
utilization could be obtained through a p lant-level surve y
but the cost of such a survey was prohibitive .
The accuracy of the series is limited to a certain ex tent because company-level data rather than plant-level dat a
is obtained
The sample size and coverage may also plac e
limitations oe the series' precision .
In addition, a
Rinfrrt-Boston official told us they do not routinely chec k
the accuracy of the data obtained from the companies . Shoul d
the response loo'< questionable, however, they sometimes wil l
check with the company .
Rinfret-Boston does not define capacity in its questionnaire used to collect information from most companie s
because it believes capacity varies between industries an d
there is no clear accepted definition of capacity . Standar d
definitions are provided for companies in the transportatio n
and utilities industries .
25

APPENDIX II I

APPENDIX III

For the first two surveys, Rinfret-Boston obtaine d
responses from 40 to 45 percent of the companies in the sample .
This rate is among the lowest of any of the capacit y
utilization surveys .

APPENDIX I V

APPENDIX IV

CHARACTERISTICS USED TO EVALUATE TH E
•CAPACI-TY UTILIZATION STATISTICAL SERIE S

Based on discussions with users and preparers of th e
capacity utilization statistics and also articles writte n
about these statistics, we identified several characteristic s
to evaluate the statistical series . The characteristics ar e
general in nature and can be used in evaluating the adequac y
of other statistical series .
For discussion purposes we divided the characteristic s
into two categories--those applicable to all series regard less of the sources of information used in calculating th e
series, and those applicable to series involving direct surveys of respondents . Although the direct survey characteristics might not seem to apply to a statistical series usin g
secondary information to calculate the capacity utilizatio n
rates, these characteristics would generally apply because o f
the initial source of the secondary information . The secondary information used in calculating the capacity utilizatio n
series can often be traced back to surveys of businesses a s
the initial source for the information . However, we did no t
evaluate the validity of the secondary information bein g
used to calculate the capacity utilization series .
APPLICABLE TO ALL SERIE S
The characteristics applicable to all of the statistica l
series relate to definition of terms used in publications ,
calculation frequency, adjustments for seasonal changes, dat a
accuracy, and publication timeliness .
Definition of terms usedin publication s
The preparers should identify, in their publications ,
any terms which may lead to variations of interpretations b y
potential users . Terminology as well as the composition o f
the statistics should be clearly identified to preclude misinterpretation and misuse of the data .
Calculation fregenc y
The frequency of calculating a series relates to th e
period of time that lapses between each calculation of th e
statistic . The purpose of a statistical series is to mea -

APPENDIX IV

APPENDIX I V

sure and identify changes in activities . The trend line s
formed by the statistics should accurately record thes e
' changes . The more frequently calculated series will identif y
short-term changes whereas the less frequently calculate d
series will identify only long-term changes .
Adjustments for seasonal change s
Changes in the data being measured may result fro m
seasonal factors . The factors include such things as climat e
conditions, production cycles, model changes, holidays, an d
sales . Adjustments to the data for seasonal factors shoul d
eliminate the effect of changes that normally occur at th e
same time and in about the same magnitude each year .
Data accurac y
The utilization rates calculated can be only as good a s
the quality of the data and procedures followed in makin g
the calculations . Quality control procedures should be included in the plans for the statistical series to (1) tes t
the reliability of the data obtained and (2) insure th e
accuracy of the calculations . These procedures are neede d
to insure the publication of accurate data .
Publication timelines s
Statistics should be prepared and ready for issuanc e
without unnecessary delay . The shortest interval practica l
should exist between the date or period to which the dat a
refer and the date when compilation and publication is completed . Otherwise the usefulness of the statistics fo r
decisionmaking may be limited .
The Office of Management and Budget has establishe d
a goal of compiling and releasing principal statistica l
indicators within 20 working days . In the case of othe r
series, the Office says that more time can be allowed, bu t
every effort should be made to keep the time to a minimum .
However, delays in publishing these series will result i n
the statistics no longer reflecting the current condition s
and therefore the usefulness of the statistics in makin g
decisions will be diminished .
We established a cutoff point of 2 months after th e
period to which the data relate in evaluating the timelines s
of the seven preparers in publishing their capacity utilization series . The cutoff is essentially twice the amount o f

APPENDIX I V

APPENDIX IV

time established by the Office for compiling and releasin g
the principal statistical indicators . If the statistic s
were released within the 2 months, we considered publicatio n
timeliness a strength of the , series . If the statistics wer e
not published within 2 months, we concluded that the statistics were not published in a timely manner . Publication timeliness was therefore a weakness of the series .
APPLICABLE TO DIRECT SURVEY SERIE S
The characteristics applicable to statistics based o n
direct surveys of respondents relate to sampling method ,
sample coverage, sample size, survey level, definition o f
questionnaire terms, and response rate .
Sampling metho d
The sampling method relates to how the sample is selected . The sample should be selected in a manner which wil l
assure that the individual companies or plants selected wil l
be representative of the universe . Where there is potentia l
for unknown biases of selection, the sample should be selecte d
in accordance with probability theory to avoid biases o f
selection and permit the preparer to calculate estimates fo r
the universe with a measurable degree of reliability .
Sample coverag e
The sample coverage relates to whether all types o f
units . in the universe being measured are represented in th e
sample . A nonrepresentative sample can cause certain biases- such as large-firm bias and industry bias--in the fina l
product .
Large-firm bias occurs when the final product is influenced more by the capacity utilization rates of larg e
firms than would occur with a re p resentative sample . Th e
Bureau of Economic Analysis' series, shown on the graph o n
the following page, identifies the capacity utilization rate s
for companies falling within three different asset-size gro u p s .
As shown on the graph, the utilization rates for the larges t
companies for the years 1970 through 1975 were higher tha n
the overall rate . This indicates that a series which is affected by larae-firm bias would show higher utilization rate s
than a series not affected by this bias . According to th e
Secretary of Commerce, large companies have historically re ported higher utilization rates than small companies .

90%

BUREAU OF ECONOMIC ANALYSIS RATE S
FOR TOTAL MANUFACTURIN G
AND THREE ASSET SIZE S
1970 THROUGH 197 5

ASSETS $100 MILLION AND OVE R
ASSETS $10 TO
99.9 MILLIO N

80%

70%

60%

2 3 14 1 1
1970

1
1971

~' 1

3
1972

2 j 3 14
1973

CALENDAR YEAR AND QUARTER

2 13
1974

3
1975

1 21

APPENDIX I V

APPENDIX IV'

Industry bias occurs when certain industries are over represented or underrepresented in the sample . This bias ca n
affect the calculation of both individual industry rates an d
rates for groups of industries .
The rates calculated may be overstated or understated i f
the units in the sample are not representative of the univers e
being measured .
Sample siz e
The sample should be of an adequate size . Factors whic h
affect the sample size include the size of the universe an d
the amount of detail and degree of precision desired . Limit s
on the sample size may result in biases--such as industr y
bias--in the statistics .
Survey leve l
The level of the survey relates to the organizationa l
level of the units included in the sample . In the case o f
the capacity utilization series, five of the preparers o f
the series request information directly from either plant s
or companies to calculate their statistics . A plant is normally engaged in one line of manufacturing . A company generally would include more than one plant and line of activity which, depending on the degree of diversification, ma y
cross industry classifications .
The decision as to the level at which a survey shoul d
be made, however, is based on the degree of detail of capacit y
utilization statistics which the preparer calculates . We believe a plant-level survey should be conducted if a prepare r
calculates individual industry rates . This will allow th e
plant's response to be properly classified by industry ac cording to its activity since it is generally engaged in a
single activity . The preparers of the statistics classif y
a company ' s response by its primary activity . Conse q uently ,
major secondary and tertiary lines of activity are misclassified for diversified companies whose activities cross industry classifications . These improper classifications ca n
lead to overstatement or understatement of the industry utilization rates .
Definition of questionnaire term s
The preparers should define in their survey questionnaires any terms which may lead to variations of interprets -

APPENDIX I V

APPENDIX IV

tion by the respondents . Otherwise, the respondents wil l
use their own judgments about the meaning of these term s
and comparable data may not be obtained . Most preparers d o
not provide a definition of capacity to the respondents .
Response rat e
The percentage of units in the sample which provide use able information to the surveying organization is called th e
response rate . The response rate will affect the reliabilit y
of the series . Generally, the higher the response rate, th e
greater the dearec of reliability . A low response rate ma y
lead to large-firm bias because the larger firms have mor e
resources to respond to such surveys than smaller ones .

d l

. y

gam«

;

vr: elm. . ovwarn

APPENDIX V

APPENDIX

COMPARISON OF INDUSTRl y.L CnF,lrlIc UTILIZATIO ;. STFTISTICAL SEPSE S
S
MCGRAW-HILL PUBLICATION
CATEGORY
COMPANY
THE FEDERAL RESERVE 8050 C
!'9anu .ncsuring )
Publication
Media

Business Week magazine ;
detailed date sold b y
subscription ; Annua l
survey report on businesses ' roves-meet
plan s

Frequency

Annually 1955 to pre sent, monthly begin ping October 196 4

Coverage
Industries
Covered

About 1,800 companies
in 21 manufacturing ,
utility, and mining :ndestrles

Federal Reserve Bulletin ;
Capacity Utilizatio n
nufactur :nn Iotetistica l
Release E , R ;
att .:rly, tro

-r .

Va roee manufacturing
`

Rates
Published

Composite rate ter manRates for primary pine acturing industries,
essmg industries, ad rates for eining Indusvaneed processing i tries and utilities, and dust[ ies, and tota l
rates for individual in- manufacturing .
gantries .

Methodology

Prorates capacity ie-

creases reported by
respondents t annual
survey . Calculate s
capacity an d
chan g e in pr oduction in de . . Divides productio n
index change by capacit y
change to determine
change in utilization
rate . previous ionth' s
utilization rate is ed usted oy amount o f
jchange .

Copy microfilmed
was of poor quality .

Rates are obtained b y
dividing production b y
estimates for car-city .

THE FEDERAL RESERVE 80000
lea testa Ts)
industrial Productio n
IStatistteel Releas e
e .12 .3 )

.iHART"i :i ECONOMETRIC eOeECA511dC
ASSOCIATES . ENC .
E CONFERENCE BOARD . INC .
.. art on magazine ; detailed
ustr'y rates sold at
standard tees

nufacturing Investment
Statistics series on
Capital Investment Condi tion s

BUREAU OF ECONOMI C
ANALYSIS

BUREAU SF TIIE CENSUS

Rl .iFRie -ROti'Ur i
ASSOClr.ES, INC .

Survey o1 Current Dusi nee e

Current Industrial Re ports series on Surve y
of Plant Capacit y

Capital Inu n. stmenr leer i .y c

Yearend 1965,
annually 1966 andmi1967 ,
quarterle thereafte r

Annually, starting 197 3

Septeoher 1974, Januar y
1975, quarterly beginnin g
April 1175 .

About 9 , 2 0 0 plants i
the m nuf actu[ing industries

Selected companies repreenting a ,uf arturing ,
utility, mining, and othe r
indeetri e

Quarterly, from. 1,46 t
1976 ; ,eonthly beginnin g
July 197 6

„u rterly . from 1947

16 eaterua

ing, utility ,
ace m-nieg industrie s

930 companies in various
Over 3,000 companie s
manufacturin g industries . 25 m nufaenunine n industries

Composite rates for tota l
materials : durable goods
nondurable g oods ; energ y •
materials ; dhd Oxide ,
paper, a
cal mate rials . Separate re it es fo r
basic metal materials ,
chemicals, paper, and text :1es .

Pe t ers for

individual ino p posite
for durable and
.trios reble goods Maus; manufacturing :
• ning ; nufacturing an d
• ing ; utilities ; an d
manefacterteg,
ing, an d
etillt ;es Industries .

Composite rate for al l

Composite rates for menufeaturing industries, an d
certain industry groups b y
asset s
and rates fo r
individual industries an d
primary and advanced processing industries .

Composite rates for m
fecturing, durable goods ,
Oederat,lc goods, primar y
pr ocesoin , ano advance d
processing industries ;
rates for individua l
industries .

Rates for indrvreual iustries, durable. and non durable geode, manufacturing Industries, n
nefee Curing indeetri's,an
n . al l
ed g e[ .*•, .

Nee eethodo logy t
puellshed in a CallIssue of the Federal Re serve Bul l etin

•

Respondents state d
whether their plant an d
uipeent facilities
eere ufictent, nadequate,or more than ade quate .
each [ nse, opercentage
range of utilieatron wa s
assumed . Midpoints of
rc t o
these range eere
eight the assets of b e
coepeeeee . The totals o f
these arty. ted assets
were then divided by th e
runeerghted total of al l
respondents ' assets .

Companies ere
signed t o
industry and to a as set
class . Indiv ual c
rates
com bined to get industr y
rates Oy asset size . As set
e class rates ar e
combined into industr y
rates . Industry rates com bined to give rates fo r
groups of industries .
Rates are weighted at eac h
level of aggregation .

Operating rates a t
preferred and practica l
capacity are c a lculate d
by weighting the plants '
responses by their employent, adding the response s
for each industry, an d
dividing the total by the
umber of respondents .
The composite rates ar e
the average of the plants '
employment-weighted utilt ':ation rates included i n
the particular composite
total .

Assets of re . .p,.n, p .nts ar e
totalea by rode try and
each r
any ' '.:
eet*'. arte
taken a a percentage o f
that total . I•errentege. i s
then multiplied I . ; rate
of rapacity ut ilixal io n
reporte0 by company . Re sulting anlgbted capacit y
utilization rates for th e
compan
are added au obtain they utilization late.
for the industry . Indus try totals arc averaged t o
get composite totals .

:noeetr lei

for industries ar e
o0yotnO by plottin g
seasonally adjusted o
erly production indexafo r
each industry to de t ermine
peak garters o
tput .
Capacity utilization i s
calculated by dionding th e
production index for the
period by the capacit y
point on the trend line .

1975

nually, 1970 to

nufacturing and rate s
for durable an
durable goodsomanufac t .COS .

APPENDIX

WRARTON ECONOMETRIC FORECASTING
THE FEDERAL RESERVEBOARASSOCIATES,
D
"
INC,
THE CONFERENCE BOARD, INC .
(Materials )

BUREAUOF ECONOMI C
ANAL'YSIS

BDREAD 9F THE '082.'

--Defined terms used in
publication for major
material . series. Total,materiuls description n vet published

--Define .terms . used
;rubl'catio n

--Defin e, terms .
poollcutios..

--Rates calculated quarterly --Company level surve y
shoving snort-term!lustu alien s

-Rates calculated monthly --Uses
shoving short-term
dat a
f l uctuations
seasonally adjusted pro:dl:ttiOn data is used in
calcdlating the ra't.es

Seasonally adjusted
production data vas
used as calculating
the major materials
rates .

.u ..

y adjusted

-.-S rvey' results calculated inapp :osimately 2 weeks " .

--De a c ed rate availabl e
to s ..scribe . .. cultist a GeV
ass after ptod'•ctico inde x
data is received .

tcalculated
terly shoving

tion ,
--Data . ae .asonelly
adjuste d
--Large cospaties .
selected autom a
tically end . smal l
companies . chosen
by probability
techniques minisiting biase s
--Broad survey coverage

--Claimed response rat e
of 75 to 80 percen t

--levies ' based On Cola Au-

Hill's Capacity urul izu '
[ion : rates .'and ecefor •
sn9fvB-some of tne' same
w•erRnessesf affecting dat a
accurac y

--Te'r'ms ace not

publ :rcation

defined

--Concept of capacity used
result's in cverstaremen t
of'tbe utilization rates
and . understatement . of the
estimates of-availabl e
capacity
__Ur._- r
!j

er age o f :...
ndusrrie s

all terms
were defined in publication

--Some but not

--Company response

classified by"primary
activity could lead .
to misclassification o f
prominent secondar y
activities
'

--Semiannual frequenc y
would notshov short tero fluctuation ;

--Delayed publication o f
results .d'iminishes' : valu e
aS a current economic
Ind Ica fo r

--Data was not seasonall y
adjusted

--Company level survey
to calculate individua l
industry rate s

--Procedure limited' . Se- --Definition . of capacit y
gree of precision
not given to respondent s

:au is

- -Data accurac y
—Statactic .11yiYslid .
riling, me-trod
- -Sampl.;' generally .
co-ICry . ma')or an .ufacCuring,Endustriec

--Definition of capa-.
city g"i.vtn to = vey
respondents
--Claimed 67, 62, and.
95 percent respons e
,s for. 1973, 1974 ,
and 1975surveys ,
respectivel y

--Su :vey conducted an -

nually.

--Delayed pool icatlon. o f
r caul CS

de fined in publicatio n

--Som e terms are nut

--NO seasonal ad)ustment s
made ru Oars
--Crump,, ,,).caps nv may
:ul i'i osisflvn sr.

tiff.

int .,

ondaiy activities
--Sampling mrrnrnl t sul t s
is Mtge tiim gis t
--maple
le,Be ssovanio t

--Survey sampl e. selection was not statistically representativ e
--Certain industries ver e
overrepresented and
otners underrepresented ;
large firm bias
--Respondents were not give n
a definition of capacity
--Small sampl e

--LOV response rate

Copy microfilmed
was of 0000f quaky_

- Definitinn i t , ' . i)t 1r
sot given: to

i?~.

MA'FER1.4 L
USE OF THE POO R
SUBMITTED FOR

APPENDIX

`1I

APPENDIX V I

EXECUTIVE OFFICE OF THE PRE

t -lEN T

OFFICE OF MANAGEMENT AND BUDGE= I
WASHINGTON, OC . 26543

SEP 30 197 6

Mr . Victor L . Low e
Director, General `cvermien t
Divisio n
General Accountinu Offic e
Washington, D . C Y 20 54 6
Dear Mr . Lowe :
Thank you for Pro`-9i ' `. us vi is tZi p opportunity to comment on th e
draft entitled, " Itn Assessment of Capacity Utilization Statistics - Strengths and Weaknesses ." With all of the ca p acity utilizatio n
measures presently being p :bli :hFd, including three produced b y
Federal agencies, this is a timely study . I do have some suggestions which are aimed at strengt ethe report, and some
reservations about your recoI _ e ndatio' s .
I would urge that the final retort be reorganized to provide a
clearer distinction between the Federal programs and the privat e
capacity utilization series . This change would help the reade r
to focus on your recommendations dealing with only the thre e
Federal programs . In addition, the readers of this report shoul d
not confuse the quality and properties o the private sector serie s
with those published by the Federal agencies .
I would hope that the final report could assess the quality of th e
various series . I feel there is a marked superiority in the qualit y
of the Federal series vis-a-vis those of the private sector .
Fo r
example . in the sample design for the direct surveys, BEA conduct s
the largest sample of firms among all the programs listed (with
the possible exce p tion of Rinfret-Boston), and it is the only on e
based on stratified probability of selection methods . The Censu s
conducts the only establishment sample, the largest sample o f
reporting units by far . It is selected on a probability basis a s
well . The response rate for these Federal surveys -- especiall y
in view of Census' experience with a 95% response for their 197 5
mandatory survey -- is far superior to that experienced by the
private organizations . The FRB series is undergoing major improvements in methodology . When implemented, the FRB series will becom e

APPENDIX VI

APPENDIX V I

the most carefully prepared secondary source series of all thos e
considered . In the industry detail presented, it is also true tha t
the three Federal series are superior and that the BEA series is th e
only one giving data by size classes .
The reservations cited in your draft report with respect to thes e
series are the following :
Untimely publication schedule for the BEA and Census series .
. Infrequent observations from the Census Bureau's annual survey .
. Use of the BEA company survey to determine utilization rate s
by industry .
. Use of McGraw-Hill as an annual benchmark for the FRB series .
Lack of definition for capacity in the BEA survey .
I would like to discuss each of these in turn, and suggest some way s
in which the report could be ;_mproved in these respects .
Concerning timeliness of the BEA's publication schedule, I would not e
that, of the ongoing programs which rely on direct surveys for thei r
periodic reports, only the Rinfret-Boston series is published on a
more timely basis . We have no indication from that organizatio n
about the size of the sample or the methodology used, although w e
do know that they accept a significantly lower response rate tha n
does BEA . While an improvement in the timeliness of the BEA publication schedule would be desirable, there is no substantial evidenc e
that a direct survey yielding industry detail in the published result s
can be done on a more timely basis while maintaining a high qualit y
output .
Concerning the Census publication schedule and lack of frequency ,
the final report should make note of the purposes of that particula r
survey . It is designed to provide an indepth picture of industria l
capacity utilization and to provide a periodic benchmark on a n
industry-by-industry basis for the FRB series . While timeliness o f
publication is not unimportant for these purposes, it is not th e
highest priority of the Census program . To achieve these purpose s
requires a larger sample of establishments and a high response rate ,
each of which takes time to secure .
The draft report points out that the BEA uses company level survey s
and thus may not be able to represent industry detail with th e
accuracy of an esta .ulishment report such as that conducted by th e
Census Bureau . While this comment is well taken and is applied t o

APPENDIX

APPENDIX V I

several of the other series as well, the final report might include s :'ts
factors which should be taken into account . The BFA company survey i s
tied to their plant and equipment expenditures and anticipations surve y
which indicates the respondent's investment plans . Similarly, thi s
report can be compared with the Federal Trade Commission's Quarterl y
Financial Report (QFR), conducted on a company basis . The QFR provide s
income statements and balance sheet positions by industries . Profit ability, financial position, and capacity utilization are among th e
main factors which lead to capital investment, and analyses of dat a
from these similar Federal surveys when taken together can yield a
better understanding of such investment plans and hence the busines s
cycle . Thus, when viewed as a whole, the Federal statistical program s
made a great deal of sense .
The FRB's use of the McGraw-Hill annual survey as a benchmark is cite d
as a criticism . It could be pointed out more forcefully in the fina l
report that the FRB plans to use the Census data as a benchmark onc e
sufficient historical data become available .
Turning to the recommendations, the draft report makes the point tha t
there should be a family of capacity definitions developed under th e
leadership of OMB for use in these surveys . 0 worked with th e
Census Bureau, nongovernsnent experts, and reporting firms in th e
development of the definitions used on the Census questionnaire .
The concepts of capacity and its utilization are complex, to say th e
least, and those employed depend on the purposes for which the information is to be used .
Emergency mobilization could perhaps rely on usin g
existing capacity around the clock without concern for long-term plan t
maintenance, labor market conditions and other factors, and engineering
capacity is a useful concept in this case . The level of capacity, an d
hence its utilization, at cyclical troughs is different from that a t
cyclical peaks, largely due to the use of outmoded capacity with hig h
levels of demand and prices . Practical capacity is important here .
For investment decisions, desired capacity may be the most important .
There is little that can be done to advance the state of the art a t
this point without additional research on these factors, and th e
report might be revised to focus on this approach rather than pro posing further refinement of existing definitions at this time . Th e
comments from all of the private sector compilers of survey data woul d
tend to support this position . The report should, at least, recogniz e
the OMB leadership role in developing the only specific definition s
currently in use .
The second recommendation is that 0MB designate one agency to calculat e
the capacity utilization series to serve the needs of all agencies . I n
fact, 0-B did look into the possibility for consolidation of the serie s
after the Census benchmark survey was approved . The comments in th e

APPENDIX VI

APPENDIX V I

previous paragraphs indicate that there are important interrelationship s
between the existing series and other statistics published by the Federa l
agencies . To centralize the data series, perhaps with a quarterly estab lishment based survey at Census, would sever the relationships the BE A
company based series maintains with other data collected from compan y
decisionmakers, and the FRB series from the industrial production index .
While there may be some public confusion with the three series, that wil l
be reduced significantly after the FRB improves its methodology . A s
to the public reporting burden aspect of these programs, there is almos t
no burden from the FRB program, and the BEA survey is not excessive i n
this regard . The Census' annual survey is burdensome, but that is pre cisely why we would not consider conducting it on a more frequent basis .
Many of the p ublished series are outside the Federal sphere of contro l
and would not be discontinued in any case . Given the different uses o f
the three Fede°al activities, t feel they should not be consolidated a t
this time .
One final suggestion for improving the clarity of the report would b e
to move some of the descriptive ;material from the evaluation section t o
the appropriate paragraphs in the section on the p reparers and thei r
methodology . The present mixture in the later section is a bi t
confusing .
I welcome your inquiry into the adequacy of capacity utilizatio n
statistics . I hope you will find my suggestions helpful in draftin g
the final report .

APPENDIX

VII

APPENDIX VI I

UNITED STATES DEPARTMENT Or COMMERC E
The Assistant Secretor .: fcr Administration
Wash,rtgtc1 . D C 2023 0

SEP 23 197 6

Mr . Henry Eschweg e
Director, Community and Economi c
Development Divisio n
U .S . General Accountin g Offic e
Washington, D . C .
2054 8
Dear Mr . Eschwege :
This is in reply to your letter of September 2 ,
1976, requesting comments on the draft repor t
entitled "An Assessment of Capacity Utilizatio n
Statistics -- Strengths and Weaknesses" (B-163762) .
We have reviewed the enclosed comments of the Chie f
Economist for the Department of Commerce and believ e
they are responsive to the matters discussed in th e
report .
Sincerely ,

E . Kas'5ty s
ssisant Sec t o
for Administratio n

Enclosure

APPENDIX VI I

APPENDIX VII

UNITED STATES DEPARTMENT OF COMMERC E

Chief Economist for the Department of Commerc e
Washington, DC_ 20230

17 SEP 197 6

Mr . Henry Eschweg e
Director, Community and Economi c
Development Divisio n
U .S . General Accounting Offic e
441 G Street, N .W ., ROOM 614 6
Washington, D .C .
2054 8
Dear Mr . Eschweae :
I have reviewed the draft report sent to Secretar y
Richardson entitled " An Assessment of Capacity Utilizatio n
Statistics--Strengths and Weaknesses" and, on the basi s
of my review and discussions with the Bureau of Economi c
Analysis and the Bureau of the Census, I offer the following suggestionF .
In general, the report is a careful and accurate stud y
of the various measures cf capacity
t ilization . Whil e
there are some technical errors, they are not monumenta l
and do not detract from the overall quality of the report .
These technical considerations are detailed below .
As one of its major objectives, the report makes tw o
recommendations . These recommendations are that "th e
Director of the Office of Management and Budget 1 )
develop, in conjunction with interested organizations ,
a family of capacity definitions for use in calculatin g
the statistics, and 2) desi g rate a single Federal organization to calculate a capacity utilization series ." I fee l
that these recommendations suffer from an inadequat e
reconiticn of the needs of the various users of capacit y
utilization statistics and that when these needs ar e
appropriately analyzed some modest rewording of th e
recommendations would be in order .
There are two primary uses of capacity utilizatio n
statistics : first, to assess potential bottlenec k
situations and their inflationary consequences i n
particular product markets, and second, to assess the

.~i5_,gt 6

APPENDIX VI I

APPENDIX VII

profits outlook and potential investment decisions fo r
companies who produce for various product markets . I t
should be clear that these respective areas of analysi s
require not only different capacity concepts , bu t
different sampling universes as well . The curren t
estimates made by the Bureau of the Census conform, a s
closely as possible with the establishment or produc t
specification, while the estimates made by the Burea u
of Economic Analysis focus on the company, where profit s
are generated and investment decisions are made .
This distinction has been overlooked in the draft report .
As an example, the report states on page 10 that the BE A
survey, a company survey, "may result in misclassificatio n
of prominent secondary activities ." If the focus o f
attention is only specific products, then the statement i s
correct . But in the BEA survey, which includes an integrated company-based package of information on actua l
investment expenditures, anticipated sales and capita l
outlays, capacity evaluation and utilization, the presen t
classification is not only appropriate but constitute s
an important strength of the statistical series .
Fu rt hermore, it is incorrect to infer, as the repor t
appears to do, that the estimation of these statistica l
series are overlapping and therefore redundant activities .
These are distinct activities, largely complementary ,
and serve specific users . If these activities were t o
be combined into a single agency there would still be a
need for two statistical samples, drawn from two universes ,
to satisfy all users of these statistics . Since the BEA
capacity utilization estimates are derived from thei r
existing plant and equipment survey, the additional cos t
of these statistics is quite small . If a single agenc y
were to collect both sets of estimates such that the BE A
capacity utilization estimates were distinct from the plan t
and equipment survey, total costs would likely increase .
Once this basic difference is accepted, the first recommendation of the report becomes mere important, for it is withi n
a product universe that a family of capacity concepts becom e
relevant .

43
t

APPENDIX VII

APPENDIX VI I

The Commerce Department has long recognized that th e
definition of capacity is perhaps the most critica l
element in capacity measurement . Recently, the Burea u
of the Census has done some work to get a better under standing of this problem . Approximately 35 field inter views have been conducted with survey respondents whic h
investigated (among other items) the problems respondent s
have with the Census definitions . These interviews an d
telephone conversations with many other respondents hav e
helped identify specific industries which experienc e
difficulty in applying Census definitions to thei r
operations . Although the current definitions of th e
Bureau of the Census (which were developed in cooperatio n
with many Government agencies) seem appropriate for th e
majority of U .S . industries, the fact that certai n
industries have difficulties may distort the estimate s
for these industries and hence the higher level total s
which include these industries . If a series of definition s
were constructed which could be applied to particula r
industries, it would establish a firmer base for th e
development of capacity estimates . These definition s
should be applied on an industry-by-industry basi s
(4 digit SIC) .
It was noted in the draft repo r t_ that the timeliness o f
the Census data was less than adequate . The calculatio n
frequency (once a year) was based upon the assignment to
the Census Bureau to develop benchmarks for the Federa l
Reserve Board capacity series . Subsequently, in orde r
to provide additional data relating to capacity, a numbe r
of q uestions were added to the report form . These include d
questions on the reasons for under-utilization, the numbe r
of shifts and hours of production employed at the plant ,
the length of time to expand to capacity and the time thes e
capacity levels could be maintained, and, finally, how muc h
(and by which method) the practical capacity of the plan t
could be exp anded under an .ssumptinn of continuou s
o p erat e-ens . These additional data, though valuable, mak e
the form more difficult to complete for the respor :dent an d
result in publication delays .
There were also other difficulties encountered in startin g
up a new survey which resulted in the 1973 and 1974 Censu s

APPENDIX VI I

APPENDIX VII

reports being released quite late . However, there has bee n
a significant improvement in the release of the 1975 data .
A press release showing preliminary capacity estimates fo r
1975 was published in August 1976 . The final publicatio n
will be available in September or October 1976 . In the
future, annual utilization rate data should be availabl e
five to seven months after the end of the period covered .
Census can collect capacity data quarterly and publish a
report within 60 to 90 days of the reporting period . Thi s
time estimate assumes a smaller sample with reportin g
being voluntary . A 75 to 80 percent response rate seem s
reasonable assuming the form is limited to a few question s
on capacity utilization and does not include the detaile d
questions on the present Census capacity form . Thes e
capacity estimates would be based upon individual establishment reports, the value of which were described in the GA O
report .
The Census Bureau in conjunction with a quarterly serie s
could also conduct a mandatory annual capacity serie s
designed similar to the present form . This would serv e
two purposes : (l) the mandatory annual series would bench mark the voluntary quarterly survey to the appropriat e
levels, and (2) the form would also collect the supplementa l
capacity information (e .g ., reasons for under-utilization ,
length of time to reach capacity, etc .) which has been mos t
useful in the present Census capacity publication .
In addition to the above comments on the draft report, th e
following c ehnical errors and additions should be noted :
1) The Census Bureau survey response rate a s
quoted on pages 27 and 44 indicated that the 1973 respons e
was 69 percent and 1974 was 67 percent . The 1974 respons e
data provided GAO were based on preliminary estimates o f
response . The actual 1974 rate fell to 62 percent, whic h
the Bureau considered unsatisfactory as a basis fo r
developing reliable estimates of industrial capacit y
utilization . As a result, the 1975 survey was change d
from a voluntary to a mandatory survey, and the respons e

APPENDIX

APPENDIX VII

1 9 7 5 _cse tc almo_t 95 percent, thereby improvin g
_eloabilit
the data .
The re port states on page 28 and in the tabl e
the _om posite utilization rates for durable _ cds ,
urab_e cords, p rimary processing, advanced processin g
all manufacturing industries are the average of th e
Bust
rates in Census estimates . This is not correct .
A com p osite rate is computed as an average of the employmen t
kei .ted utilization rates of all of the individual establish _nchided in that p articular com p osite total . Th e
industry rates themselves are not avera g ed .
_

. . .s

-i In the BEA survey, 2,400 companies is the numbe r
-sponses,
the number
the sample, which is ove r
- companies paces 24 a'_ . 41) .

assets

smaller

The _EA sample is des i g ned tc cover com p anies wit h
__0C mill= and over with certaint y , and to cove r
. ._es on a representative basis pa g e 24 ; .

_he vAC repert fails to point out the uniqu e
a_ . . . ._- es
a compan y -based survey which permits th e
de:eneet o= utilization rates by asset sloe class .
Se_data have im p ortant ana
t_ical uses since the y
indicate jj differences in both p referred and actua l
't . . . . aticn rates, within industries, depending upon th e
zempany size .
report does not adequately reference th e
app . -ii _t_ source materials used in preparation of th e

repert .

There is ae Inadequate discussion of the actua l
_ e_hedc_ :c es used by the various g roups to construc t
these eapeeit
i _izat_On statistics .

table

The chart
mace = should be accom p anied b
a
a _istinc o_ the actual data pr esented in th e

VI I

APPENDIX VII

APPENDIX VI I

9) On page 3, the report states that "capacity i s
an economic concept that generally refers to the maximu m
quantity of output per unit of time using existing plan t
and equipment ." This should be altered to define economi c
capacity in terms of preferred operating rates .
10) There should be a discussion of the uses of thes e
capacity utilization statistics, focusing on potentia l
capacity bottlenecks, inflation, profits and investmen t
ex p enditures .
1, or members of my staff, would be willing to discus s
further drafts of this report if that were desired .
Sincerely ,

John W . Kendric k
Chief Economis t
for the Department of Comm :tee

APPENDIX

VII I

APPENDIX VII I
BOARD OF GOVERNOR S
OT TH E

FEDERAL RESERVE SYSTEM
WASHINGTON,

C . 20551
AOO C## O f Ctil CO ; ;[#tONO[MC C
TO THC #Ox ; O

September 13, 197 6

Mr . Henry Eschwege, Directo r
United States General Accounting Offic e
Community and Economic Development Divisio n
Washington, D .C . 2054 8
Dear Mr . Eschwege :
I have been asked by Lyle Cranley to review the GAO draft repor t
"An Assessment of Capacity Utilization Statistics -- Strengths an d
Weaknesses ." The report is objective and clearly written, nevertheles s
the second recommendation "that the Director of the Office of Managemen t
and Budget . . . designate a single Federal organization to calculat e
a capacity utilization series" ignores important factors and is therefor e
erroneous .
While various utilization rate surveys indicate approximat e
utilization rate levels, utilization rate estimates derived from detaile d
production measures show greater cyclical movements than those base d
solely on business judgments reported in utilization rate surveys . Consequently, both these sources of information should be used to estimat e
current utilization rates . Thus the government ' s relatively inexpensiv e
program of capacity utilization measures -- including both surveys an d
derivations from production indexes -- is not as duplicative as i t
appears . At a minimum both detailed production measures and an establishment-based survey large enough to provide substantial industry detail ,
such as is conducted by Census are required .
Undoubtedly, the availability of a variety of private an d
public estimates of capacity utilization has confused Congressmen ,
economists, and others ; however, this variety of estimates is symptomati c
of underlying ambiguities in concept and different approaches to measurin g
different concepts of capacity and capacity utilization .
An administrative proposal aimed at eliminating the inheren t
ambiguities by reducing the number of governmental series is aime d
purely at the symptoms and not at the underlying problems . The existenc e
of widely-used private estimates such as that estimated at the Wharto n
School points up this fact, In fact, even the symptom of widely differen t
utilization rates will not be eliminated by your proposal because th e
Wharton and Rinfret utilization rate services will differ widely in leve l

APPENDIX

VIII

Mr . Henry

VII I

hwea e

and in movement from -n goer€cent series based solely on BEA o r
In fact, an array of capacity utilization rates corre Census Surveys .
different
con gy p 's is '?rob= i' - arr3nted as are the set s
sponding to
me .° res .
of unemployment and -o n
As is indicated iaa your draft rei .Yrt, the FRB itself conduct s
Its capacity utilization series are a n
no capacity utilization surve .
inexpensive analytical use of the 235 :monthly detailed industrial production (IP) indexes in conjunction wit a util i? ._ation rate data from
v, rious surveys . The I_' indexes have long provided a useful record o f
vr~ gproduction developments . The short-term
monthly detailed . , .d
€,rt as a ive data and more definabl e
ed on -.are
movements of IP arcMore im concepts than are current survey-- utilization .
`.utilization reporte d
portantly, the short-term and Cr' l _? i movements
=zltun==-st+_=nt wit h
particularly in the . ._> utilization
production movements . The utilization surveys tend to show less cyclica l
variation than is consistent with production data . We feel that I1'
-term movements i n
indexes provide e better btasi_ a r
et,
smell-stale current surveys based o n
utilization tla=n do te l
it's utili _raaisas_ the =lus >
businessmen ' s I' d_ rit e
nation .
capaci t y economis t
In order to derive utilization rates,
e s tivates capacity consistent with roe li' indexes in girder to calculat e
utilization . The Census Bureau ' s SurveyofPlant Capacity has only recently begun to provide us _ itla is c ; uality and detailed quantity o f
t, derive .a ,'al? set of relativel y
information Which will enable the
detailed capacity utilization sF_ries, in ~ or 3 y sr--_ when mole Censu s
observations are available, the FRB plans to calculate capacity indexe s
consistent with each of the IP inva €s . ;"a)re detailed series will b e
published at that time . The FRB staff agrees with your authors tha t
more detailed utiliz=ation ,ten
are .-re useful than overall _aggregates .
Another characteristic
deriving utilization rates fro=g
series is that other industry data on capac
v can be utilized . Ex-ht information is
rail bls for petroleum refinery, paper and pulp ,
m, copper, raw steel, and certain chemicals and textiles .
Thi s
data has been used to develop the "major materials , ' utilization rate :_
which have recently been expanded with the use of the Census surve y
data to encompass 96 materials series . Wr b=elieve that the major an d
total materials seri e s have been the most useful capacity utilizatio n
series available because they relate to important bottlenecks and th e
materials shortages of 1973-74 .
one feel that the FRB rroduction indexes in conjunction wit h
the annual large scale Census surer and industry data provide the basi s

APPENDIX

VI I I

APPENDIX

VII I

Mr . Henry Eschweg e

for a very useful system . However, we must also admit that in the pas t
five years the FRB ' s total manufacturing utilization series has not bee n
updated often enough ee a revision is practically complete and will b e
published in the Bulletin this fall . More frequent revisions of FR B
capacity estimates shenld improve the usefulness of the utilization
rate estimates in current economic analysis .
At the same time we have to recognize, that the period o f
research and experimentation is not yet finished in this area of statistics .
The underlying conceptual and statistical difficulties are of such a
magnitude, that a fully acceptable standard definition of capacity an d
utilization ca e :- be prenulgated yet . This being the case this is a n
area where wt
he the best use of our decentralized statistica l
system to produce the meet effective solution by working on the relevan t
problems from different anles .
Naturally, the need for proper coordination of these activitie s
rehaine high . We on our art wish to submit our test :Its to the scrutin y
of diseneeione of ell interested psrties and hope to be
be to do thi s
seen on the
is of our artitle to he published in the Federal Reserv e
Llulletin this fall .
Hopefully further discussions can lead to agreemehts concernin g
'Lenity of utilizltieo indicators, which will he interrelated, bu t
still different in various reards .
While the preceding text covers our main points, a few brie f
supplemental cements are Aso in order :
(i) It ih, .,aid he noted that the HKA tri-monthly survey o f
company utilization retee is the only significant quarterly surve y
ef utilizatioe rates . Such a servey previdee interim data concernin g
hosinesemen 's jteigneats about the utilization of their facilities . W e
at the FR_ uie such data to review oar estimates although a Larger ,
quarterly es
Ifs
nb"d iervey could he more helpful .

(in In your draft there was no mention of the costs of th e
various Federal efforts te estihete capacity utilize ion . It surely i s
not very ginet in comparison to conceptually similar statistics on unemploment_ The FRBs program is not very expensive because it is largel y
by-product of estinating the industrial production indexes, Most o f
the data end the computer prograhs uied in calculating capacity utilization are part o : the overall production index system .

APPENDIX

APPENDIX VII I

VIII

Mr . Henry Eschwege

( iii) An error _ate »! on page 30
your report -- the FR B
des not report "assests of co=pazies for 1974" in any detail for
Renfret-Boston to mew calculating utilization rates .
Yours truly ,

"C-tle 1(4,1

P, Ra6doc .
;;
Rt
5usine55Conditions Sectio n
Division of Research and Statistics

Full text of GAO Reports & Testimonies : An Assessment of Capacity Utilization Statistics - Strengths and Weaknesses

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