Wednesday, January 9, 2013

Capacity Utilization and Unemployment

As an addition to the previous post about how GDP is lagging potential GDP, it's worth pointing out that unemployment is the major driver of the gap.  Below is a chart which plots the employment rate (inverse of the unemployment rate) against the potential GDP gap.  Also included is capacity utilization data, which is compiled by the Fed and is also still below its peak from the last cycle.  Capacity utilization has been trending lower for decades.

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