The US Economy: Modest Growth Continues

The July numbers for industrial production have just been released and all one can say about them is that the economy is just showing “more of the same.”  The year-over-year rate of increase of industrial production for July was 4.4 percent.  The average rate of increase for the first six months of 2012 was 4.8 percent.   

Economic growth, as captured by the rate of increase in industrial production, has not been strong and economic growth remains weak.  This growth is not inconsistent with the rate of growth of real GDP, which has been around 2 percent, year-over-year, through the second quarter of 2012.

This rate of growth is not sufficient to reduce the amount of unemployment in the United States and is specifically not sufficient to reduce the amount of underemployment in the nation, which remains in the 15 percent to 20 percent range. 

It is also not sufficient to raise the rate at which manufacturing capacity is used in the United States.  Although the rate of capacity utilization has moved up modestly in recent months, it still remains below the level it was at just before the recent recession set in.

There is much unused economic capacity in the United States these days and the economy is not growing sufficiently to cause this unused capacity to shrink much at this time.  For one, there are just too many problems that people have to deal with before full blown economic growth can continue again.  

Some of these problems have to do with the amount of debt still outstanding in the United States; one out of four residential mortgages are still “underwater”; the are substantial problems in the area of commercial real estate; state and local governments still have massive problems in the area of pensions and debt outstanding (see my recent post titled "Sour Times for Cities"); and there remain many problems in the banking sector…among other things.

Many of these problems need to be “worked out” before people, businesses, and governments can start spending again.   And, this spending must be stepped up if the economy is to return to a level of economic growth more consistent with the last half of the twentieth century.

In addition, people and businesses still need some indication of where government policy is going to go.  This is perhaps the ultimate need.  Right now there is little or no indication of what future government economic policy is going to be.  People and businesses find it very difficult to commit in such an environment.  I am afraid that we are just not going to get much pick up in the commitment people and businesses until they get some idea about what kind of environment the government is going to create for the future.  Right now all they can focus in on is more deficits of one trillion dollars or more and more and more debt.  And, this provides little or no help to them in making decisions about how to spend their funds. 

So, economic growth is going nowhere.  As a consequence, a substantial amount of economic resources are going to remain unused. 

This scenario is not going to change before the presidential election in November.  It is highly unlikely that it will change much over the next year or so. And, this will be the environment we all are going to face in making spending and investment decisions during this time.