Manufacturers Approaching Capacity is Employment Good News

News today from several major sources, The Wall Street Journal and Bloomberg Business Week, are both reporting that manufacturers in the United States and abroad are approaching capacity.  Importantly, the news is not simply reporting the content of a press release from a governmental statistical agency.

Instead, the news is coming from reporters that are paying attention to corporations.  These businesses are announcing their need to build new productive capacity to meet growing demand for goods and services worldwide as gross domestic product (GDP) expands.  Of course, what that means is that these businesses need to hire employees.

Analysis:

During the Great Recession, corporations, with breathtaking speed, laid off workers in huge numbers.  Because consumers and businesses rolled back so much of their spending, businesses rolled back headcounts to align them with much lower GDP.  Most of the jobs lost during the past several years were lower paying manufacturer, service industry, -type jobs.  These positions are closely tied to consumer demand in a way that, say, a tax accountant is not.

Yet, after all of the layoffs, manufacturing plants and all of that equipment did not go away.  No, instead, they sat idle waiting for demand to pick up again.  I have been saying on the blog for two years now that eventually the idled capacity would be used up and businesses would have to start building new capacity and hiring people to populate those plants.

That time has come!

For two major business publications to independently report the same news means that the business community is abuzz with news of capacity build out.  This is good news for future declines in the unemployment rate.

Separately, the Wall Street Journal is also reporting that businesses are willingly taking on debt right now.  Why?

First, interest rates are wonderfully low right now.

Second, it is feared that the Federal Reserve’s bias is to increase interest rates in the future.  This makes complete sense.  After having pumped trillions of dollars into the economy over the last three years, the Fed has to pull some of that excess back out of the markets.  If they don’t do this then we will experience runaway inflation.  Ugh!

Third, and most importantly, businesses are not borrowing because they love interest payments (who does?).  Nope.  Businesses are borrowing right now because they have projects in mind for that money.  If they can borrow at 5%, but build out a project that returns 10-20%, then they have grown profits.  This is how it is supposed to work.

Importance grade: 10; Net: we are for the first time, post the Great Recession, in the realm of real economic growth, not just recouping lost sales and demand so the unemployment rate should see continued improvement in the coming quarters.

Jason