Since the current economic
recovery began in July 2009, the highest quarterly increase in industrial
production came in the third quarter of 2010.
At that time industrial production was increasing at a 7.1 percent,
year-over-year rate.
As can be seen in the
accompanying chart, the rate of increase dropped off from that date and seems
to have settled in the three-to-five percent range, a rate that is rather
anemic for this time in the business cycle, but a rate that is consistent with
other current measures of economic growth.
Real GDP, for example, grew
at a 2.0 percent year-over-year rate of growth in the first quarter of 2012,
and has only average in the 1.5 percent to 2.0 percent range for the past year.
As reflected in almost all of
the data, economic growth is taking place but not at a very rapid pace.
There are three reasons for
this slow pace of economic growth in my mind.
The first reason is the huge debt overload that exists within the US
economy. I have written on this in "The Debt Crisis Goes On and On."
Individuals, businesses, and state and local governments, overloaded
with debt at not able to spend as abundantly as in the past because they are
attempting to get their balance sheets back in line.
Second, there is a great deal
of uncertainty in the world these days.
Washington, D. C. is in a mess and there seems to be no leadership
around, especially in the White House.
As Larry Summers stated during his recent term in Washington, “the
parents are not at home.” This lack of
leadership in the US, combined with the economic crisis in Europe and the lack
of leadership there, leaves us all wondering what is in store for us in the
future. And, unfortunately, what we
contemplate for the future is not very optimistic.
Third, there are some serious
structural matters in the economy that still need to be resolved. For example, I believe that underemployment in
the United States is still around 20 percent.
That is, one out of every four individuals of working age are either
unemployed, employed in a part-time job but would like to work full time, or,
have left the work force. The workforce participation
numbers are now back where they were in the 1960s.
And, we
continue to get stories about how the American society is bifurcating. David Brooks writes of "The
Opportunity Gap" emerging in our country, a gap in which “the
children of the more affluent and less affluent are raised in starkly different
ways and have different opportunities.”
The ramifications of this split has been researched and discussed by
numerous people now and it indicates that we need more than just economic
stimulus and good intentions to solve the structural problems that are growing
worse every day.
This structural problem is also seen in the data on the
capacity utilization of American manufacturing.
The data just released indicate that industry is using just under 79
percent of its capacity. Thus, capacity
utilization continues to increase in the current recovery.
However, note in the accompanying graph that capacity
utilization was around 90 percent in the mid-1960s and has trended downward
every since. In fact, this trend
matches, to a high degree, the increase in the underemployed in the United States.
Most obvious in the trend is that the peak utilization in
every cycle seems to be lower than that achieved in the previous cycle. Capacity utilization continues to increase in
the current recovery but is still below the peak achieved in the 2003-2007
period…which was below the peak of the cycle in the mid-1990s.
There are significant structural dislocations in the United
States economy and a policy of government intervention and economic stimulus is
not going to correct the situation.
Mr. Bernanke, in testimony
before Congress today, seemed to be cognizant of the problems the US economy is
facing. “Mr. Bernanke’s cautious
testimony underscored the Fed’s reluctance to ride once again to the aid of a
plodding economy. The central bank has intervened repeatedly when the economy
appears at risk of sliding back into recession, and Mr. Bernanke’s testimony
Tuesday included his standard promise to maintain that vigilance. But the Fed
has not acted with similar urgency to reduce the persistently high rate of
unemployment when growth is merely lackluster.”
To me, this is about all the Federal Reserve can do right
now. (See my post on "The
Fed is Doing Enough For Now.") The economy is recovering but not at
the speed we would like. However,
sometimes there is only just so much that can be done in terms of aggregate
economic policy.
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