Capacity Utilization

Capacity utilization compares actual output with the maximum output possible using existing equipment, buildings and workforce under normal conditions.

For example, a factory that can produce 10,000 units a month but is producing 7,500 has a capacity utilization of 75%.

For a business, higher utilization usually means fixed costs are spread over more units, lowering cost per unit and raising profit. Low utilization can signal weak demand or excess capacity. Very high utilization, close to 100%, can bring strain, such as more breakdowns and overtime costs, and suggests the business may need to invest in more capacity.

For an economy, capacity utilization is an economic indicator. In the United States, the Federal Reserve publishes a monthly measure for industry. High utilization across the economy can signal inflation pressure, as businesses struggle to meet demand, while low utilization suggests spare capacity. Industries such as airlines and hotels track similar measures, such as seat or room occupancy.