Long Term Perspective
The Federal Reserve monitors capacity constraints because they indicate where supply bottlenecks are developing and inflation is percolating. The capacity utilization rate in the economy's industrial sector is down sharply from the cyclical highs established in 1995 and again in 1997. The National Bureau of Economic Research (NBER) declared that the business cycle peaked in March 2001. Yet, the capacity utilization rate was declining long before the recession began. The employment-to-population ratio is more comprehensive than the jobless rate in revealing labor market conditions. Note that this index peaked about one year before the recession began in 2001.

Short Term Perspective
The employment-to-population ratio dropped to its lowest rate in eight years in November; there is no question that labor market conditions remain stagnant. The capacity utilization rate edged down in October, for the fourth straight month; this is not a good sign for economic recovery. Fed officials believe the recovery is underway, but it will be a modest one.