Capacity utilization

I recently learned that capacity utilization rate is probably one of the most useful explanatory factors of corporate bond spread.

It is indeed a useful concept that is rooted in microeconomics and yet has important macro and market implication. In other word, while this data has to be aggregated from firm level, it can be used for monetary/fiscal policy implication – as the measure of output gap is based on capacity utilization. In addition, it is an important driver of sector profitability, and hence it is relevant when one assesses equity/corporate bond risk.

And yet it is a measure for which it takes a lot of effort to collect statistics and estimate. Issues include how to select sample firms, how to survey them and how to aggregate across different industries, and most importantly, how to make sure firms report relatively accurate figures on full capacity – which is more a theoretical than a actual measure.

Indeed, whether or not a country publishes this measure, how often it gets published and how robust its methodology is in return reflects the quality of macro data as supplied by the country’s statistical bureau. I hope in the future there will be a database that ranks countries by their macro data quality/breadth and capacity utilization measure should certainly be one of the main data points to consider.


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