Discussion of the Bosworth and Poole Reports

1973, No. 1

SEVERAL PARTICIPANTS QUESTIONED the use of traditional capacity utilization
indexes for analyzing price movements. Alan Greenspan contended
that the concept of capacity that is most relevant to price determination is
the effective capacity that is available in a very short period of time. For example,
a company may be operating at 80 percent of capacity, as measured
by the McGraw-Hill index, but its capability of producing goods with a
four-week lead time may be only 3 percent higher than its current rate of
production. He suggested that we recognize that the McGraw-Hill capacity
figures implicitly measure what is available to a particular company or industry,
given the long lead time necessary to obtain the needed workers or
materials and to get idle facilities into operation. Greenspan argued that
order backlogs and the pace of new orders are more appropriate statistics
for price analysis than is the level of capacity utilization. He pointed out
that these order measures have risen rapidly and are at historically high
levels in many industries.