Utilized U.S Manufacturing Capacity as an inflationary predictor

Torbjørn Flåtene

Student thesis: Master thesis


This thesis includes an analysis and discussion regarding forecasting models in US, as a response to the financial disturbances of 2008, also known as the Financial Crisis. The focus of this thesis has been on capacity utilization, a forecasting model derived from the more reckoned Phillips Curve. In this assignment the reader will be provided a closer look at the Federal Reserve’s actions as a response to the crisis, and how this might lead to better performance of the forecasting model. The framework used in this thesis is based upon the relationship between aggregated demand and inflation, which normally includes an analysis of unemployment and inflation. A.W. Phillips proved such a relationship in 1958 after a close investigation of the British economy. His work has been one of the most significant in modern economy, and his findings are still used in prediction of future inflationary trends. Several analysts use the Federal Reserve capacity utilization numbers as an indicator of future inflationary pressures. The Board of Governors (1994), Citibank (1996), Copper and Madigan (1996) and Merrill Lynch (1996) are among those who have used capacity utilization in order to predict future inflationary trends. Unfortunately, the concept has underperformed in its relationship to inflation the last decades, and I want to investigate whether this could be reasoned in the economic situation and economic changes since the 1980s. The cyclical fluctuations in output are driven by shifts in the aggregate demand, stemming from changes in consumption, investment and government expenditures, or in the stock of money. I have reason to believe that in the latter part of US economic history, the cyclical fluctuations in output have been driven mostly by extreme consumption, government expenditures, and a rise in the quaintly of money combined with heavily increased foreign debt. By discussing how the recent crisis may have changed some of the variables, I could see whether it is possible to reverse the factors responsible for cyclical fluctuations, and to once again prove capacity utilization as a reliable and valid measure for inflationary trends.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2011
Number of pages76