Ifo capacity utilisation – a coincident indicator for business activity in German manufacturing

In modern business-cycle theory, business cycles are defined as fluctuations in the rate of capacity utilisation of aggregate production potential. In connection with the Ifo Business Survey, the Ifo Institute releases quarterly data on capacity utilisation in manufacturing and construction in Germany. With an additional smoothing the already very clear signals of the Ifo capacity utilisation can be further strengthened. A particular advantage of the Ifo capacity utilisation figures is that the smoothing is very stable, also at the current edge of the time series. The results presented in this article show that the informative value of the Ifo capacity utilisation is very high, using as a reference value the cyclical components of quarterly, real gross value added in manufacturing. In addition, capacity utilisation is able to signal, in general as a coincident indicator, the turning points of the cyclical components of real gross value added. For business-cycle analysis, the Ifo determination of capacity utilisation has the advantages that it is available without much delay, that it is not subject to subsequent revisions and that it contains a clear signal without major, short-term disturbances. In this way it posseses the important characteristics that a good business-cycle indicator should have. One of its main advantages, however, is that it shows a business-cycle development without the need for a previous trend adjustment. This eliminates the problems associated with such a trend adjustment, since differing methods can extract differing business cycles, and the estimations at the edges of the time series can be very unstable. The Ifo capacity utilisation provides a clear business-cycle signal without a trend adjustment. For this reason it is a key indicator in the assessment of current business-cycle developments.