The Meryl Streep of the Stock Market

January 21st Weekly Market Update

 Some things just go together — like the Oscars and Meryl Streep. The actress received her 18th Academy Award nomination last week. It is not all that surprising since half of the annual Academy Awards over the past 36 years have featured Meryl Streep as a nominee. While not as well known, business spending and stock market gains go together at least as well — especially when it comes to renewed spending by manufacturers and the stocks in the industrials sector.

 Last week’s monthly report of U.S. factory capacity utilization, which measures the percentage of maximum potential output currently in use, reached the highest level since mid-2008. The drawdown in spare capacity highlights how long it has been since capacity has been expanded for America’s manufacturers. After a binge of investment in the late 1990s, almost no growth has occurred in manufacturing capacity in a decade.

No new investment in capacity in 10 years means that equipment and plants have aged and are now old by any historical comparison. A consequence of aging equipment is that productivity decreases as older machines tend to break down more often and require more maintenance, leading to more costly operation. At capacity utilization of 79.2%, manufacturers still have more than 20% of full capacity to spare and seemingly have no need to expand. However, this is misleading since the remaining spare capacity is old and no longer efficient to operate. If sales accelerate on better domestic and global economic growth in 2014, manufacturers will likely look to upgrade capacity in order to maintain profit margins on increased output.

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