Economy is set on idle: Nation's use of capacity is nearing a modern low

Airlines these days fill little more than half the seats on their planes, leaving hundreds of the world's aircraft sitting idle.

America's automakers have the capacity to build 2 million more cars each year than people buy.

And in 2001 and 2002, the nation's paper-making heartland - concentrated in Wisconsin - decommissioned 104 paper-milling machines, each the length of a football field.

From greasy tool-making machinery to high-speed fiber-optic data lines, the United States has mothballed more industrial equipment this year than it has since 1982.

The shuttered offices and factories - some mutely awaiting an upturn and others closed for good - are a legacy of the longest economic expansion in post-World War II America. The giddy years of the late '90s,before the boom abruptly turned to a bust, left the economy saddled with more capacity than the marketplace can absorb.

And in the view of economists, the years of over-investment are now impeding a broad-based economic revival.

"If you have 26 percent of the capacity of the economy sitting idle, it is hard to sell to your board or your bank that you need to invest in new capacity," said Charles W. McMillion, chief economist of MBG Information Service, a forecasting firm in Washington, D.C.

An excess of office space, computer networks and assembly lines has prolonged a stumbling on-again, off-again recovery. An essential driver of any rebound, economists say, is a willingness of companies to fork out money for new factories, equipment and workers.

But those big-ticket investments have yet to materialize. And firms that cannot justify new capacity because they already preside over idled factories also are hard-pressed to justify adding jobs.

Just as disconcerting, the overall glut of industrial capacity has worsened, not improved. In April and May, the latest months for which data are available, the rate of capacity utilization turned down again, this time dipping to 74.3% - the lowest in the current economic cycle, according the Federal Reserve.

The over-capacity is so severe in part because so many industries over-invested on such a grand scale - including airlines, telecommunications and automakers, McMillion said.

Even in the recession of 1991, which was compounded by the first Persian Gulf War, the nation never took more than a fifth of its productive capacity out of commission. The latest reading is approaching the severity of the 1982 recession, when only 71% of the nation's production was in use.

In good years, U.S. industry keeps some 82% to 83% of its plants up and running.

"We had to add capacity," said Kristian Talvitie, a spokesman for Plexus Corp. in Neenah, one of the state's technology leaders. The maker of high-end networking and data-communications equipment rode a breathtaking boom that carried its annual sales to more than $1 billion by 2001 from $416 million in 1998. It projected even higher growth into 2002.

But in the gut-wrenching technology downturn that followed, 23-year-old Plexus last year announced that it would close its maiden factory in Neenah, an 84,000-square-foot plant that once employed 400 people. Within a matter of months, it also announced the closure of manufacturing sites in San Diego, and Richmond, Ky., as well as its "new product introduction" complex in Minneapolis.

The most massive accumulation of overcapacity in more than two decades has confounded policy-makers.

The Federal Reserve Bank, which cut its interest rates last week to 45-year lows, so far has been unable to revive activity even as the cost of borrowing approaches zero.

And President Bush, who successfully steered the biggest and then the third-biggest tax-reduction packages in history through Congress, has injected an unprecedented dose of stimulants into an unresponsive economy.

Government reports reveal hopeful patches of revival, meaning that the catalysts from the White House and Fed have begun to work.

But the nation would need to defy economic gravity to generate an expansive rebound as long as supply outstrips demand, economists say. And many caution that the nation needs to finish sweating off the excesses of the bonanza of the 90s before a recovery takes hold.

"This recovery may be characterized by slower growth than past recoveries largely because of the overhang of excess capacity and its impact on overall business investment," said Scott Anderson, senior economist in Minneapolis at Wells Fargo & Co.

On the north side of Milwaukee, the cavernous 150-acre Tower Automotive Inc. auto-parts works sits more than half empty - a testament to a global auto industry that can produce 20 million more vehicles each year than the world will buy. By the end of the year, only a quarter of the 3.1 million-square-foot plant will show signs of life.

Already the company has cut nearly 2,500 jobs in Milwaukee since Tower acquired the plant in 1997, said Tower Automotive spokesman Paul Omoldt. By December, after the next round of cuts, the plant will employ 560.

With the global economy unable to support so many automakers, the industry is abuzz with speculation that the roster of big-name auto companies will shrink within the next decade.

High-tech turmoil

Nowhere is the glut more pronounced than in the feast-and-famine world of technology.

According to the Federal Reserve, producers of telecommunications gear currently operate at 50% of capacity. Industrywide, the electronics industries in the United States took out 27% of the square-footage of their production facilities, leaving gaping holes in the once-bustling business corridors of Silicon Valley.

Plexus in Neenah, which maintains a diverse portfolio of businesses that include non-Internet industries such as medical equipment and automated-teller machines, took out 7%, said Plexus' Talvitie.

"We had grown our capacity to handle revenue in excess of $1 billion, and then the downturn hit," Talvitie said. Analysts said it is unlikely that Plexus will exceed $800 million in full-year sales.

Old-line makers of durable machinery operate at only 67% of productive capacity. The figure is only 65% for producers of semiconductors and electronic components.

Midwest Air Group, which owns Midwest Airlines and its commuter partner Midwest Connect, is feeling the downdraft that has blindsided airlines and aerospace companies alike.

Oak Creek-based Midwest has since cut unprofitable routes and the frequency of flights, reducing its flight capacity by nearly 21% in May. It furloughed 13% of its workers. The airline ended 2002 with a loss of $10.5 million.

According to the International Air Transport Association, a Geneva, Switzerland-based industry trade group that represents the world's carriers, airlines on average fill only half the seats on their total fleet. In response, airlines have grounded an estimated 500 to 800 unneeded jets, many of them parked in the deserts of Arizona. By taking planes out of service, airlines on average now fill 64% of the seats on their active fleet, said IATA spokesman William Gaillard.

Wisconsin, which is the nation's leading paper-making state, has steadily reduced paper capacity throughout the downturn.

In Wisconsin Rapids, the North American division of the big Finnish paper-making group Stora Enso Oyj last year halted production on two of its paper-making machines in the state, each the size of a factory unto itself. That cut 145,000 tons, or 5%, of its capacity. This year, it said it would take a third Wisconsin plant out of use. Stora, which has most of its paper mills in Wisconsin, now employs 5,200, down from its peak employment of 7,200 in 1997.

Stora's situation is little different from the entire paper industry. According to the American Forest and Paper Association, the nation's paper producers shut down 40 paper mills and 104 machines in 2001 and 2002, bringing overall capacity back to where it was in 1994.

"We are spending money to improve existing machinery," said Stora spokesman Scott Deitz, "but we are not adding capacity."

"Whether we sell to them (illegal immigrants)there or they come here it would help with the oversupply problem."
Not really - they don't have the money in their own countries to buy our goods (that's why they come here - duh). If they come here they are a negative drain on our economy, using more of our resources (hospitals, welfare, public schools,etc) than they produce, and don't have to contribute into our social security or tax system. IMHO illegal immigration is one of the root causes of our stagnant economy (next to global over capacity). Certainly the very wealthy benefit with cheap lawn care and nannies (nouveau planation owners) but the rest of us pay every time we go to the hospital or take our kids to school having to wade through the flood of illegals to make our way to what we paid for and they didn't.

"Old-line makers of durable machinery operate at only 67% of productive capacity. The figure is only 65% for producers of semiconductors and electronic components."

Chip foundry capacity has grown in Asian by 40 percent since 2000. Half of the equipment in the new Chinese factories is procured from the surplus used equipment.

Have to wonder with the interest rates cut to 1 percent this week and the US attempting to devalue the dollar, it wouldn't just be cheaper to just move the plants out of the country. If the dollar continues to sink, the effective interest rate on the loan would be negative. Didn't Japan go through this process ten years ago?

"The ultimate question is, will the socialist democrats have the opportunity to ruin this nation?"

The ruin was accomplished before you were born. FDR laughed at how he had made something that could not be fixed by coming generations.

Yes, they did. Theoretically, all free markets reach an equilibrium where there is zero real profit on any one good or unit of labor; profits are generated by increasing productivity faster than competitors for a given good or by innovation to produce demand for new products. That's just life-cycle characteristics of the market. So, with the free trade agreements, we can probably expect to reach economic equilibrium with the 3rd world countries. Those last two sentences have some large logical jumps, I know, to the non-pessimist.

Deflation seems to me to be an inevitable consequence. And, as you say, the plants will go, sooner (as you recommend) or later (in more expensive fashion).

What you see is true, in the sense that energy costs dropping adequately would "return prosperity", and in the sense that this can only be done through violent means. Further, this approach is so politically attractive that the political class is pursuing it avidly. The Arabs realize this fully. So do the Russians, Chinese, and even French. Utterly common knowledge. Wars do not occur for simple reasons, nor do other aspects of politics.

I, too have endured such times in the early 80s and can only say that I have personally experienced every doubt and ultimate loss of (self) confidence which you describe.

But every economic swing carries inchoat the very forces which will slow it and ultimately return it. We have the nimblest big economy there is and a lot of smart people have been making adjustments just like you have described you have made. Cummulatively, they will have their effect. We have a tax cut, albeit small and delayed. Oil is coming down, albiet slower than we want. Inventories are down. Productivity is improving as a new wave of technology takes effect.

Unless we get dragged down by a world wide deflationary spiral, and we will be the last to go down, our economy will revive. I think the bad news is out. Now it gets better.

What makes this real to me are the mountainous stacks of air conditioners at places like Best Buy not moving even though priced as low as $89.

In the fall I bet you get one free if you buy a TV.

I think the bad news is out. Now it gets better.

Actually, the bad news isn't out. The government has stepped in to sidetrack the normal economic cycle by lowering interest rates, injecting massive amounts of liquidity into the system and encouraging further excesses especially by the consumer. Now we have a massive debt problem, a stock and bond market bubble and a real estate bubble . . . and NO pent-up demand. Where is the recovery going to come from?

Richard W.

In case you might have missed some news, Republicans control both houses of Congress, control the White House, and appointed all but 2 or 3 of the SC Injustices.

that is only if you believe that Snowe, Chafee, and McCain are Republicans. Remember Jim Jeffords, the Republican. The SC is doesnt too bad in my book. So what if some homos are now permitted to bugger each other inside their homes. Do I care, no.... And if Michigan lets a few blacks into law school, one of them may turn into Clarence Thomas, my favorite justice.... Anyway, it will have to get a lot worse before we change policies in this nation...

Cutting interest rates won't cut the mustard. We need another 15 million illegals (consumers) to come pouring across our borders.

That's it, we we don't have enough, we need to get hundreds of thousands more, uneducated, unskilled, people that don't speak English, maybe that will pull us out...Yes, that could only help!

The government has stepped on the economic cycle since Roosevelt, usually with precisely counter indicated nostrums. Yet the economy, with the signal exception of the tightening and free trade restrictions which led to the great depression, has alwaysw staggered back, sometimes at an astonishing rate.

Of course the fed is loosening, and this will inflate for now. Which is the time period we are talking about. Whether you are right that in the long run we ought to leave everything alone and take our medicine now, I cannot see so far ahead. I am glad you can. Please keep me informed.

I am also worried about the supposed real estate "bubble" but lower interest rates will prolong it. Recovery will come from the adjustments being made every day in every business and home which will find new markets, new products, new methods, etc.

Airlines these days fill little more than half the seats on their planes,
leaving hundreds of the world's aircraft sitting idle.

So the response of American civil aviation to the disaster of 9-11?

1. Cooperate with nimrods like Norm Mineta and discourage MILLIONS of
paying passengers by subjecting them to meaningless searches...because
sensible profiling would offend Norm Mineta's memories of Japanese-American incarcerations
during WWII.

2. Decrease service, stop senior programs, close convenient ticket offices
at high-traffic offices and hotels throughout the country.

3. Continue to give executives big salaries (and bonuses) for flying their
companies into the ground, as long as they can get guvmint funding/subsidies.

This ain't just my opinion: "Travel Detective" Peter Greenburg of NBC's Today Show
and KABC radio (www.kabc.com) routinely profiles some of the insanity of the management
of American airline companies.
In response to an aviation airline executive's claim that "there is no room for
ego or incompetence at this company", Greenburg quipped "of course, all those positions
have been filled!"

Well yes...the problem is that credit is a cheap as it can be but it hasn't seemed to increase demand for credit in large part for the reasons you cite. The typical reason for such inflexible demand is oversupply and you either have to reach deep into foreign markets to use up that capacity or you have to allow for serious contraction (which is what I think Moonman was getting at though in different terms). If the oversupply problem is itself global then your options become politically limited.

This is the United States of America!

If we can't do it, no one can!

There is too much poor mouthing and too few visionary business leaders nowadays.

Not to mention too much government intervention in trying to micro manage every aspect of the economy. Do they really and truely believe in a free market system?

War? Worked for FDR.

Oh, those pesky evil-doers. Problem is that in previous wars, the public made personal and financial sacrifices. Rationing coupons=pent-up demand. It was guns or butter. Now it is guns and more butter. Ought to be interesting to see them pull this rabbit out of the hat.

Richard W.

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