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 previous 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. This index peaked about one year before the most recent recession began in 2001. Both measures have increased steadily through 2005 and most of 2006, only leveling off or slipping during the second half.

Short Term Perspective
The employment-to-population ratio remains low by historical standards for late in expansion, but is performing better in 2006 than in 2005 and now is high enough to be a concern for the Fed. The capacity utilization rate increased dramatically from mid-2003 to mid-2006, peaking above 80 percent, when analysts worry that potential supply bottlenecks will lead to inflationary pressures. During the latter part of 2006, the capacity utilization rate eased slightly.