For sale, office space, never used

The long recession has led to a discussion on economic statistics. In particular, what is evidence of a recovery and what is not. The Dow Jones index isn’t a reflection of the national or international economy, just the health of thirty large companies. And employment statistics as usually reported in the media aren’t useful- the U3 rate doesn’t count “discouraged workers” who leave the labor force due to the economy being too bad to look for work. The rate can go down in a very good economy (more jobs), and a very bad economy (so few jobs people don’t bother to look). And in the event of the latter turning around, the rate spikes as people get back into the labor force. Oy.

When I went to see prominent socialist economist Richard D. Wolff speak two years ago, he recommended a metric reported by the Federal Reserve every month. Called “industrial production and capacity utilization,” it measures how much capital, land, office space, etc. is actually being used to create goods, and how much is standing idle.

Capacity utilization rates over time

The above graph shows the difference between what is being produced and what can be produced at that point in time. The production measurements are set at 100 during the highest level of production- right before the 2007-08 recession. At that time, actual capacity was about 125% of current output. The bottom graph shows the percentage of capacity being used. Historically it’s around 80% in America, but it fell to 66% after the economy cratered. It’s still weak- even a couple percentage points below average is a massive amount of capital and land- and thus a massive amount of jobs.

My anecdotal evidence to support this comes from office space in Silicon Valley. After the economy crashed and credit dried up, many companies based in the Bay Area either went under or contracted dramatically. That led to whole office buildings- big ones, often new- being vacant with large signs advertising bargain-basement space. In 2013, a lot of these buildings have tenets, but rarely are they full on all floors. It’s clear that there is still capacity available- you could expand your business quite a bit without having to actually build anything- but conditions are not what they were before the crash.

It seems that unemployment is more explainable though this than the often contradictory unemployment figures. If a large amount of space, land, tools, inventory is still sitting idle from five years ago, that leads to a corresponding gap in labor use versus capacity.

Now, there are good reasons that capacity utilization is never 100%. Businesses are failing all the time, even if the economic climate is good. Just because you have tools doesn’t mean they’re good enough to compete with. And running machines 24/7 causes wear and requires expensive replacement- which may not be ready. It’s also clear that putting people to work is not a question of physical stuff- it’s also about competition, and how a corporation works. Just because you could employ more people and fill up all that cheap office space doesn’t mean it’ll be more profitable. It’s why economists who advocate for infrastructure projects have a point- some useful employment doesn’t fit into a business model. Capital is sometimes used because of government incentives and subsidies, rather than a calculation by the finance department.

As time goes on, the unused machinery will become obsolete, and the buildings will become dilapidated. Getting little use out of them just makes the investment for the future all the more costly.

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About Andrew Mackay

All reaching a universal conclusion.
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One Response to For sale, office space, never used

  1. Pingback: Kicking the economy when it’s down | Unspoken Politics

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