US factories are running well below their historical utilisation rate while regional surveys show orders rising. The gap between the two is not demand. It is labour, and September's Federal Reserve data suggests it is getting tighter.
On paper, American manufacturing has room to spare. The national utilisation rate sits well below its long-run norm, which in a normal cycle would mean plants could absorb new orders simply by running harder. Three Federal Reserve releases published in the past fortnight tell a different story. Orders are rising in several regions, prices are climbing, and a growing share of manufacturers say the thing holding output back is not machines or demand. It is the people needed to run them.
The Federal Reserve's industrial production release on September 18 showed manufacturing output decreased 0.3% in August, with overall industrial production unchanged. Capacity utilisation for manufacturing declined 0.3 percentage point to 75.7%, a rate 2.5 percentage points below its average from 1972 to 2025.
Read in isolation, that looks like slack: almost a quarter of the sector's theoretical capacity is sitting idle. The regional surveys suggest a good deal of it is idle because nobody is available to switch it on. The Philadelphia Fed's Manufacturing Business Outlook Survey, released on September 17, asked firms directly what was limiting their utilisation this quarter. Seventy-two percent said labour supply was at least a slight constraint, up from 50% when the question was last asked in June. Forty-four percent called it a moderate or significant one.
Labour now outranks every other factor the survey tested. Sixty percent of firms cited supply chains as at least a slight constraint, and 24% cited energy markets. The median firm reported running at 70% to 80% of capacity, unchanged from a year earlier, even as the survey's new orders index held at 29.2 and its shipments index at 27.7. Demand is moving; utilisation is not.
The same pattern shows up further west. The Kansas City Fed's September survey of Tenth District manufacturers, reported by Oklahoma Energy Today, found that activity continued to increase and that every month-over-month index was positive. One Oklahoma manufacturer told the bank, "Things are starting to look very good for us for the 4th quarter in terms of new orders and shipped orders." The finished products price index reached its highest reading since July 2022.
Meanwhile the Philadelphia survey's employment index fell 16 points to 11.8. More firms are still adding staff than cutting them, but the margin narrowed sharply just as the order book filled.
Nor do manufacturers expect the picture to ease on its own. Asked how labour supply would change over the next three months, 76% of Philadelphia firms said it would stay the same, 16% expected it to worsen and just 8% expected improvement. For an operations leader planning the fourth quarter, the working assumption has to be that the crew available in October is, at best, the crew available today.
The longer-range data is more sobering. The Kansas City Fed asked firms what share of their current workforce is within five years of retirement eligibility. Half said less than 10%, but 29% put it at 10% to 20%, 12% at 20% to 30%, and 7% at more than 30%. Nearly one in five manufacturers in the district, in other words, could see more than a fifth of its people become eligible to leave before the end of the decade.
Manufacturers already know which levers they intend to pull. "When asked about strategies for an aging workforce, the top methods cited were an increase in automation and technology, investing in training and upskilling current workers, and offering flexible work arrangements," said Cortney Cowley, assistant vice president and Oklahoma City Branch executive at the Kansas City Fed.
That matters for capacity in a way headcount figures do not capture. The workers closest to retirement tend to be the ones who know which machine runs hot on a humid afternoon, how to recover a line after a jam, and which changeover steps can safely be shortened. When they leave, a plant does not just lose a body on the roster. It loses throughput it may not realise depended on a single person.
If demand is not the binding constraint, then selling harder will not close the gap and neither will waiting for the hiring market to loosen. The capacity that plants can realistically add this quarter has to come from the people and equipment they already have.
The national utilisation figure invites the conclusion that manufacturing has room to grow. The plant floor says otherwise. Until operations leaders treat available labour as the real ceiling on output, the spare capacity in the Federal Reserve's numbers will stay exactly where it is: installed, paid for and idle.
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