Firm-level Capacity Utilisation and the Implications for Investment,Labour and Prices

Business surveys provide a timely read of the average rate of capacity utilisation at Australian firms. However, discussions with company managers in the Reserve Bank’s business liaison program reveal considerable variation in how ‘capacity utilisation’ is interpreted. This variation is important, as it affects the interpretation of survey measures of capacity utilisation and their implications for firms’ resourcing needs and pricing decisions. For firms in the more capitalintensive goods-related industries, a high level of capacity utilisation may reveal an impetus to hire more labour and to invest in the capital stock, while for services firms it is more likely to reflect an incentive to hire more labour only. Consequently, movements in aggregate measures of capacity utilisation are likely to contain information about the labour market, while the implications for business investment are likely to be identified at a more granular level. Much of the recent increase in survey measures of capacity utilisation has been driven by services firms. In contrast, capacity utilisation remains relatively low for firms in goods-related industries, which may help to explain why aggregate capital expenditure has remained subdued.