The commercial banking industry was still contracting through June. Year-over-year, that is from June 2009 to June 2010, total assets in the United States banking sector dropped by a little more than 1.5%, with the assets of large, domestically chartered banks dropping by 3.0% during this time period. The total assets at small, domestically chartered banks rose by slightly more than 1.0%.
Year-over-year, the loans and leases at commercial banks within the United States dropped by 2.5%. The drop at large, domestically chartered banks was 0.2%, at small, domestically chartered banks was about 3.0%, and at foreign-related institutions the drop was 16.0%.
An interesting pattern is showing up in the data, however, and gives us something to look for going forward. The smaller, domestically chartered banks in the United States increased their loan balances a little bit over the four-week period ending in the week of July 7, 2010.
The Federal Reserve System has defined large commercial banks as the largest twenty-five domestically chartered banks in the United States. These banks control about one-third of the banking assets in America, a total of about $6.9 trillion. Small banks are all of the rest of the domestically charted banks in the country and they number slightly more than 8,000 banks.
Over the past four weeks, all loans and leases at the smaller banks rose by almost $3.0 billion. This is the first time in the past 18 months or so that the small banks have posted an increase in total loans and leases. The increase was not large…but, we are looking for any “green shoots” that we can find.
The increase was not “across the board” but Commercial and Industrial (C&I) loans, business loans, rose by slightly more than $2.0 billion and Consumer loans rose by a little more than $6.5 billion. Real Estate loans dropped by $5.5 billion, mostly in the commercial real estate area. It should be noted that both C&I loans and Consumer loans rose for the last 13-week period, although most of the increase came in the last four weeks. For this latter period, Real Estate loans dropped by more than $21.0 billion, again in the commercial area.
We continue to hear that these smaller banks still have lots of problem commercial real estate loans to deal with and may remain reluctant to lend in this area for an extended period of time.
Remember, it is in the smaller banks that most of the problems still exist relating to bank solvency. At the end of March, there were 775 banks on the problem bank list of the FDIC, implying that roughly one out of every eight of these smaller banks were “problems.” Through July 16, the FDIC had closed 91 banks this year, roughly 3.4 banks each and every week. This pace is expected to continue for at least the next 12 months. Later this month the FDIC will release the list of problem banks it has identified as of June 30, 2010. The expectation is that the number of banks on the list will increase above 775!
At the larger commercial, the largest 25 in the country, Loans and Leases continued to decline. In the last 4-week period these large banks experienced a drop of over $16.0 billion in that line item. For the last 13-week period the drop was in excess of $81.0 billion. Declines in the last 13-week period came in all lending areas as C&I loans fell by about $22.0 billion, Real Estate Loans declined by more than $26.0 billion and Consumer Loans dropped by approximately $31.0 billion.
Declines took place in all loan categories at the large commercial banks over the past four weeks, but the drops were not anywhere near as deep as in the previous two months.
Cash assets at the domestically chartered banks finally seem to be falling. Over the past four weeks, cash at large banks dropped by $35.0 billion while the smaller banks saw cash balances decline by a little more than $11.0 billion. Over the past thirteen weeks, cash assets at the larger banks fell by $61.0 billion while they only fell by $6.0 billion at the smaller banks.
This decline in cash assets is consistent with the drop in excess reserves in the banking system over the past several months. (See http://seekingalpha.com/article/214058-federal-reserve-exit-watch-part-12.)
There was an interesting bump in cash assets at foreign-related institutions during this time period. In the past 4-week period, cash asset at foreign-related institutions rose by $16.0 billion; and they rose by $25.0 in the last 13-week period.
Could this jump have anything to do with the “stress tests” being administered to major European commercial banks?
I don’t remember ever having seen an increase like this in foreign-related banks in such a narrow time span.
Business loans at these foreign-related institutions dropped over the past 4-week and 13-week periods while “other” very short-term lending, which could include loans to banking offices not in the United States, experienced a substantial rise.
Could these movements have anything to do with “window-dressing” for the European “stress tests”?
The summary for this month’s review of the state of the banking industry is much the same as in previous months. The two things to keep a watch on are, first, the small increases in business and consumer lending at the small, domestically chartered banks; and second, the drop in cash assets being held in aggregate by all domestically chartered banks in the United States.
The first piece of information raises hopes that the smaller banks are beginning to lend again to businesses, although not on commercial real estate deals, and consumers, again not on real estate. In terms of the latter, the hopes for a recovery in mortgage lending do not seem very promising as some analysts in the real estate industry predict that foreclosures for the year could approach 1.0 million homes. Some analysts are even saying that banks are not foreclosing as rapidly as they could so as to avoid the housing market being too jammed up with foreclosed houses. That is, the banks are “pacing the foreclosures” so that homes can be sold faster. This does not bode well for the future.
The second piece of information raises hopes that commercial banks are feeling more confident about the future and are, therefore, reducing the amount of cash (excess reserves) they hold on their balance sheets. Not only did lending at the smaller banks increase their lending over the last four weeks, the larger banks only experienced modest declines in their loans outstanding.
Many economists have declared that the recession ended in July 2009. So, the economic recovery has been going on for almost twelve months. The major problem with this claim is that the commercial banking system has not been acting like the recession is over. This has also been reflected in the balance sheet of the Federal Reserve System and in the performance of the monetary aggregates. (See my post referenced above for a discussion on these points.)
Thus, we are scratching around trying to find positive signs in the banking statistics. With this report we are grasping at straws. But, we have not even had tiny straws
Showing posts with label end of recession. Show all posts
Showing posts with label end of recession. Show all posts
Sunday, July 18, 2010
Wednesday, May 26, 2010
Let's Look at the United States rather than Europe for a change
Durable goods orders are up 2.9% in April. New home sales rose last month. More and more statistical releases point to a continuing recovery. More and more it appears as if the Great Recession did end in July 2009 and we are, consequently, in the tenth month of the economic upturn.
However, it still doesn’t quite feel like much of an upturn. But, economic pundits contend that there is very little chance for a “double-dip” recession even with the financial turmoil rocking Europe. One analyst argued that with the European disorder the probability of having a “double-dip” recession has risen, but from about 5% a month earlier to around 20% now. In other words, he believed that it is highly unlikely that we will have a “double-dipper.”
My concern is still focused upon the long-term fact that there is so much un-used capacity in the United States. The efforts to stimulate the economy, as a consequence, represent efforts to put people back into “legacy” jobs (the jobs from which they were released) that will continue to thwart the competitiveness of the United States in world markets and put back to work “out-of-date” plant, machinery, and labor.
If we look at capacity utilization in the United States, we see that we are using more capacity now than we did in July 2009. For April the figure was below 73.7%. However, we are still substantially below the previous peak in capacity utilization, which came in at about 81.5% in 2006. And, the previous peak before that was below the previous high before that, 85% in 1997, which was lower than the previous peak and so forth for the whole post-World War II period.
Adding to this concern is the fact that the labor situation remains weak. Unemployment in April stayed just under 10%, but the number I am very concerned about is the total amount of workers that are under-employed. I am concerned, not only with those that are out-of-work, but those that are not fully employed but want to be fully employed, the discouraged who have left the workforce, and the people that have taken lower positions, positions that they can fill but are fully qualified to perform in other more challenging jobs. My estimate of these under-employed persons runs around 25%, about 1 out of every four people who could be considered to be in the labor force.
However, it still doesn’t quite feel like much of an upturn. But, economic pundits contend that there is very little chance for a “double-dip” recession even with the financial turmoil rocking Europe. One analyst argued that with the European disorder the probability of having a “double-dip” recession has risen, but from about 5% a month earlier to around 20% now. In other words, he believed that it is highly unlikely that we will have a “double-dipper.”
My concern is still focused upon the long-term fact that there is so much un-used capacity in the United States. The efforts to stimulate the economy, as a consequence, represent efforts to put people back into “legacy” jobs (the jobs from which they were released) that will continue to thwart the competitiveness of the United States in world markets and put back to work “out-of-date” plant, machinery, and labor.
If we look at capacity utilization in the United States, we see that we are using more capacity now than we did in July 2009. For April the figure was below 73.7%. However, we are still substantially below the previous peak in capacity utilization, which came in at about 81.5% in 2006. And, the previous peak before that was below the previous high before that, 85% in 1997, which was lower than the previous peak and so forth for the whole post-World War II period.
Furthermore, industrial production remains depressed from the level it attained in early 2008 and also in 2000. Both series are making progress, but we are still running way below levels that were previously attained and although the “catch up” seems to be robust, the question remains as to whether or not these measures will exceed earlier highs in the near future.
Adding to this concern is the fact that the labor situation remains weak. Unemployment in April stayed just under 10%, but the number I am very concerned about is the total amount of workers that are under-employed. I am concerned, not only with those that are out-of-work, but those that are not fully employed but want to be fully employed, the discouraged who have left the workforce, and the people that have taken lower positions, positions that they can fill but are fully qualified to perform in other more challenging jobs. My estimate of these under-employed persons runs around 25%, about 1 out of every four people who could be considered to be in the labor force.
The fact that these factors are running so low relative to “capacity” employment raises concerns about the United States achieving its “potential” any time soon. To examine this possibility we look at a comparison between the estimates of the Congressional Budget Office of potential real Gross Domestic Product and the level that real Gross Domestic Product was actually attained. Not only was the United States economy producing at a level of output only 94% of potential, the rates of growth of actual real GDP seem to lie below the rate at which the CBO is estimating that potential real GDP should grow.
The economy of the United States is recovering, but one can understand why many people really do not seem to be experiencing it. Nothing in the previous stimulus plan, or in the one being developed, or in the current stance of monetary policy, gets the United States back on track. Different types of policies are needed to renew the productive capacity of the United States so that the U. S. can become fully competitive again and fully use its resources…both human and physical. Unfortunately no one seems to be working on these kinds of policies because they rely so heavily on the private sector. Also, these policies take too long to achieve results; politicians have a much shorter employment cycle.
Tuesday, April 13, 2010
The Recession Isn't Over Until It's Over
Yesterday, the members of the National Bureau of Economic Research’s Business Cycle Dating Committee refused to make a decision.
The questions: Is the Great Recession over or not?
The Answer: Too soon to call.
“The committee is very careful to guard against surprises,” the chairman of the committee Robert Hall stated. Since the designation of the end of a recession is important for historical reasons, the committee wants to make sure data revisions don’t result in the need to revise it’s claim that the recession is over.
To me, the crucial part of the comment here is the emphasis on “surprises.” We get into a liquidity crises because we are surprised. Something happens in the market, something that was not expected, like the financial difficulty of a firm that, say, had highly rated commercial paper which was now going to be down-graded. This down-grading then results in investors pulling back from the market because of a concern that the commercial paper of other highly rated firms will be down-graded. Buyers in the market take a vacation until confidence is re-gained in the information pertaining to these other highly rated firms.
A credit crises occurs when investors get concerned about the value of the assets on the books of a financial institution, something that had not been questioned before. This “surprise” is connected with the fact that the financial institution either did not recognize that the value of their assets had changed and so had not reported it to the market, or, the executives in the financial institution did not want to recognize that the value of their assets had changed and were attempting to keep this information to themselves hoping that this value would revert to earlier, healthier, levels.
“Surprises” generally occur when events, which had been heading in one direction, change direction. Like, when housing prices that had been rising decade after decade begin to fall. Or, when the Federal Reserve reverses monetary policy without notice after continually following a different path. Or, when the overly optimistic expectations given an industry, like the dot.com startups, are recognized as too optimistic.
“Surprises” hurt because people, investors, have to revise expectations and markets have to absorb the new information, dig for additional information relevant to current valuations, and then adjust as fully as possible to all of the new information.
That is why, at this stage of the economic drama, we hope that the problem areas where future surprises might arise have been identified and that people and institutions are working to resolve the difficulties in as orderly a fashion as possible. “Quiet is good!”
For example, we know that states and local governments are having problems with their finances. No apparent surprises here. People are working to resolve these situations, both locally and nationally. For example, we hear that Felix Rohatyn is back at Lazard Ltd., working on the problems related to state and local government finance. He has proposed “an IMF” to help American cities and states “stave off budget crises.” (http://online.wsj.com/article/SB20001424052702304506904575180363245274300.html#mod=todays_us_money_and_investing)
Greece is obtaining help. But, the problems of Spain, Italy, and Portugal are well known and efforts are underway to resolve the issues being faced by these countries.
The banking system does not seem to be out-of-the-woods yet, but banks have seemingly identified their problem areas and are working to resolve them. The FDIC continues to move in an orderly fashion to close those commercial banks that are insolvent. Again, quiet is good!
Here, the Federal Reserve seems to be playing an important role in helping the commercial banking industry to get back on its feet. Having injected a huge amount of reserves into the banking system and seeing these reserves hoarded by commercial banks to the tune of $1.1 trillion excess reserves, the Fed is being very careful not to “jerk” these reserves out of the banking system at too swift of a pace. The effort on the part of the Fed is not to “surprise” the banking system by removing the excess reserves too quickly in a fashion similar to the “surprise” 1937 Federal Reserve decision to raise reserve requirements to reduce the unused reserves in the banking system just sitting idly on the balance sheets of the banks.
And, other areas in the economy are seemingly being handled in a calm, orderly manner.
The Business Cycle Dating Committee does not want surprises. Well, I don’t want any surprises either! I want a dull, ordinary, business-as-usual environment for dealing with all we have to deal with.
My guess is that the recession is over. Markets, in general, seem to be reflecting this fact. Certainly there are areas of concern here and there and new data releases are not always positive. But, financial markets seem to be reflecting that the economy is improving, even if at a very slow pace.
My first inclination is to trust the markets. It doesn’t mean that markets are always correct, but one should look first to see what the markets are trying to tell us and then, only after sufficient study, should we claim that the markets might be wrong if we can justify this latter conclusion. Yes, I still believe in markets. But, like many other people, I am more cognizant of the existence of Black Swans in the world than I was at an earlier date. We can still be hit by “surprises” but, for now, things are moving in the right direction.
There are still longer run problems in the economy that need dealing with. I will not get into those now but interested people can go to two of my recent posts to pick up my thinking on this point: See http://seekingalpha.com/article/197948-economic-recovery-what-s-missing and http://seekingalpha.com/article/192713-the-trouble-with-recovery. The existence of these longer run issues do not negate the belief that the Great Recession seems to be over.
The real question of this blog post is, does it matter whether this committee makes a decision or not? Robert Gordon, a member of the committee, has stated that delaying the decision “raises unnecessary questions about the health of the economy—that the whole committee wouldn’t think the recovery is strong enough to be able to say that it’s a recovery.”
Personally, I don’t think the committee’s decision is that important! It certainly is not going to impact my business and investment decisions.
Note: the Federal Reserve Bank of St. Louis has apparently already declared the end of the Great Recession. Check out all their charts. The grey area on the charts depicting the start of the recession begins in December 2007. The grey area on the chart, signaling the end of the recession, stops before the beginning of the third quarter of 2009. So much for that!
The questions: Is the Great Recession over or not?
The Answer: Too soon to call.
“The committee is very careful to guard against surprises,” the chairman of the committee Robert Hall stated. Since the designation of the end of a recession is important for historical reasons, the committee wants to make sure data revisions don’t result in the need to revise it’s claim that the recession is over.
To me, the crucial part of the comment here is the emphasis on “surprises.” We get into a liquidity crises because we are surprised. Something happens in the market, something that was not expected, like the financial difficulty of a firm that, say, had highly rated commercial paper which was now going to be down-graded. This down-grading then results in investors pulling back from the market because of a concern that the commercial paper of other highly rated firms will be down-graded. Buyers in the market take a vacation until confidence is re-gained in the information pertaining to these other highly rated firms.
A credit crises occurs when investors get concerned about the value of the assets on the books of a financial institution, something that had not been questioned before. This “surprise” is connected with the fact that the financial institution either did not recognize that the value of their assets had changed and so had not reported it to the market, or, the executives in the financial institution did not want to recognize that the value of their assets had changed and were attempting to keep this information to themselves hoping that this value would revert to earlier, healthier, levels.
“Surprises” generally occur when events, which had been heading in one direction, change direction. Like, when housing prices that had been rising decade after decade begin to fall. Or, when the Federal Reserve reverses monetary policy without notice after continually following a different path. Or, when the overly optimistic expectations given an industry, like the dot.com startups, are recognized as too optimistic.
“Surprises” hurt because people, investors, have to revise expectations and markets have to absorb the new information, dig for additional information relevant to current valuations, and then adjust as fully as possible to all of the new information.
That is why, at this stage of the economic drama, we hope that the problem areas where future surprises might arise have been identified and that people and institutions are working to resolve the difficulties in as orderly a fashion as possible. “Quiet is good!”
For example, we know that states and local governments are having problems with their finances. No apparent surprises here. People are working to resolve these situations, both locally and nationally. For example, we hear that Felix Rohatyn is back at Lazard Ltd., working on the problems related to state and local government finance. He has proposed “an IMF” to help American cities and states “stave off budget crises.” (http://online.wsj.com/article/SB20001424052702304506904575180363245274300.html#mod=todays_us_money_and_investing)
Greece is obtaining help. But, the problems of Spain, Italy, and Portugal are well known and efforts are underway to resolve the issues being faced by these countries.
The banking system does not seem to be out-of-the-woods yet, but banks have seemingly identified their problem areas and are working to resolve them. The FDIC continues to move in an orderly fashion to close those commercial banks that are insolvent. Again, quiet is good!
Here, the Federal Reserve seems to be playing an important role in helping the commercial banking industry to get back on its feet. Having injected a huge amount of reserves into the banking system and seeing these reserves hoarded by commercial banks to the tune of $1.1 trillion excess reserves, the Fed is being very careful not to “jerk” these reserves out of the banking system at too swift of a pace. The effort on the part of the Fed is not to “surprise” the banking system by removing the excess reserves too quickly in a fashion similar to the “surprise” 1937 Federal Reserve decision to raise reserve requirements to reduce the unused reserves in the banking system just sitting idly on the balance sheets of the banks.
And, other areas in the economy are seemingly being handled in a calm, orderly manner.
The Business Cycle Dating Committee does not want surprises. Well, I don’t want any surprises either! I want a dull, ordinary, business-as-usual environment for dealing with all we have to deal with.
My guess is that the recession is over. Markets, in general, seem to be reflecting this fact. Certainly there are areas of concern here and there and new data releases are not always positive. But, financial markets seem to be reflecting that the economy is improving, even if at a very slow pace.
My first inclination is to trust the markets. It doesn’t mean that markets are always correct, but one should look first to see what the markets are trying to tell us and then, only after sufficient study, should we claim that the markets might be wrong if we can justify this latter conclusion. Yes, I still believe in markets. But, like many other people, I am more cognizant of the existence of Black Swans in the world than I was at an earlier date. We can still be hit by “surprises” but, for now, things are moving in the right direction.
There are still longer run problems in the economy that need dealing with. I will not get into those now but interested people can go to two of my recent posts to pick up my thinking on this point: See http://seekingalpha.com/article/197948-economic-recovery-what-s-missing and http://seekingalpha.com/article/192713-the-trouble-with-recovery. The existence of these longer run issues do not negate the belief that the Great Recession seems to be over.
The real question of this blog post is, does it matter whether this committee makes a decision or not? Robert Gordon, a member of the committee, has stated that delaying the decision “raises unnecessary questions about the health of the economy—that the whole committee wouldn’t think the recovery is strong enough to be able to say that it’s a recovery.”
Personally, I don’t think the committee’s decision is that important! It certainly is not going to impact my business and investment decisions.
Note: the Federal Reserve Bank of St. Louis has apparently already declared the end of the Great Recession. Check out all their charts. The grey area on the charts depicting the start of the recession begins in December 2007. The grey area on the chart, signaling the end of the recession, stops before the beginning of the third quarter of 2009. So much for that!
Monday, October 26, 2009
The State of the Economy and Supply Side Concerns
Several of the aggregate economic indicators are indicating that the economy has bottomed out. Industrial Production seems to have hit a bottom in June 2009 as the year-over-year rate of decline on a seasonally adjusted basis was -13.3%. Since then the negative rates of growth have fallen: in August the rate of decline was -10.4% and in September this rate dropped to -6.1%. The index has actually increased, month-over-month, beginning in July.
The decline in real Gross Domestic Product (GDP) lessened in the third quarter this year on a seasonally adjusted year-over-year basis. The greatest year-over-year decline came in the second quarter of 2009 when real GDP fell at a 3.8% annual rate over the second quarter of 2008. The first look at the third quarter number is to be released on Thursday. According to the Wall Street Journal, estimates for the third quarter over the second quarter annual rate of increase stand at a positive 3.1%. If this quarter-over-quarter rise takes place, the year-over-year rate of decline for the third quarter of 2009 will be -2.4%.
On the surface, it does look at this time as if the third quarter of 2009 will be declared the beginning of the economic recovery in the United States.
That is the good news.
The not-so-good news, to me, is the extent of the recovery. There are some areas we need to keep our eyes on in order to help us understand what is going on in the economy. These are the “supply side” conditions that indicate something else is happening in the economy other than just an economic recovery. They are conditions that tell us that some economic dislocations exist that will have to be resolved in the future if the United States economy is going to become robust once more.
The first of these areas has to do with our manufacturing capacity. Capacity utilization in September of this year stands at 70.5%, up from the trough of about 68% in June. So, capacity utilization has begun to increase.
The problem is that this capacity utilization is at a post-World War II low! But, even more important is that the previous peak in capacity utilization came in the 2005-2006 period but was just over 80% at that time. And, this peak was down from the 85% capacity utilization of the 1995-1997 period and the 1988 period. And, these peaks were down from the 87% capacity utilization of the 1978 period, which was down from the 89% rate of the 1974 period and the 90+% of the middle 1960s.
The United States has seen over the past forty years or so a deterioration of its industrial base. There is a lot of idle capacity that is in place but, for various and sundry reasons, is not being used. We can address some of these reasons in forthcoming posts. The important concern to me is that in the economic recovery we will not even us get back to the 80% range of capacity utilization. The implication of this is that unemployment will not fall as much as we would like and that business investment spending would not be very robust because firms won’t need manufacturing capacity, they already have it.
This would lead one to the conclusion that business spending will not be too strong in the recovery. But, it is a supply side problem, not a demand side problem.
And, speaking of employment, there is an unused capacity problem as far as the labor market is concerned. The official unemployment rate, the total unemployed as a percent of the civilian labor force, stood at 9.8% in September 2009. The rise over the last year is from 6.0% in September 2008.
The total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers is 17.0% in September 2009 up from 10.6% in September 2008. That is, there has been a substantial increase in persons who are neither working, nor looking for work but indicate that they want a job and are available, discouraged workers and people working part time who would like to work full time.
There is a lot of unused capacity in the population as a whole. From everything we are hearing, the marginally attached and the discouraged do not have too much to hope for in the upcoming economic recovery and this doesn’t even consider the expected rise in the official unemployment rate.
The conclusion one can reach from these data is that whatever has been going on in the United States for the past 40 or 50 years has not been totally healthy for the supply side of the economy. Basically, the past 40 or 50 years has seen a lot of inflation. Since January 1961, Consumer Prices in the United States have risen by 625%, or, in other words, the real value of a dollar has decline by 86% since then.
One could easily make the argument that whatever went on in the United States over this period, it was a period of extended inflation and that such an environment was not the most productive one for economic resources. This environment resulted in a lot of unused productive capacity, in terms of physical resources but also in terms of human resources.
Current policy is doing what has been done consistently in this period, emphasized a demand side bias. An inflationary policy, created using fiscal and monetary policy to stimulate aggregate demand, has been the response to the economic slowdown. And, the policy attempts to achieve higher rates of employment by putting resources back to work at their old functions. Of course, this cannot be fully achieved as technology and other efficiencies allow new jobs to be created that do not use the old skills, or old jobs to be eliminated and excess capacity to grow. Thus, capacity utilization continues to drop and those in the workforce that are discouraged from seeking a job remain unfulfilled.
The decline in real Gross Domestic Product (GDP) lessened in the third quarter this year on a seasonally adjusted year-over-year basis. The greatest year-over-year decline came in the second quarter of 2009 when real GDP fell at a 3.8% annual rate over the second quarter of 2008. The first look at the third quarter number is to be released on Thursday. According to the Wall Street Journal, estimates for the third quarter over the second quarter annual rate of increase stand at a positive 3.1%. If this quarter-over-quarter rise takes place, the year-over-year rate of decline for the third quarter of 2009 will be -2.4%.
On the surface, it does look at this time as if the third quarter of 2009 will be declared the beginning of the economic recovery in the United States.
That is the good news.
The not-so-good news, to me, is the extent of the recovery. There are some areas we need to keep our eyes on in order to help us understand what is going on in the economy. These are the “supply side” conditions that indicate something else is happening in the economy other than just an economic recovery. They are conditions that tell us that some economic dislocations exist that will have to be resolved in the future if the United States economy is going to become robust once more.
The first of these areas has to do with our manufacturing capacity. Capacity utilization in September of this year stands at 70.5%, up from the trough of about 68% in June. So, capacity utilization has begun to increase.
The problem is that this capacity utilization is at a post-World War II low! But, even more important is that the previous peak in capacity utilization came in the 2005-2006 period but was just over 80% at that time. And, this peak was down from the 85% capacity utilization of the 1995-1997 period and the 1988 period. And, these peaks were down from the 87% capacity utilization of the 1978 period, which was down from the 89% rate of the 1974 period and the 90+% of the middle 1960s.
The United States has seen over the past forty years or so a deterioration of its industrial base. There is a lot of idle capacity that is in place but, for various and sundry reasons, is not being used. We can address some of these reasons in forthcoming posts. The important concern to me is that in the economic recovery we will not even us get back to the 80% range of capacity utilization. The implication of this is that unemployment will not fall as much as we would like and that business investment spending would not be very robust because firms won’t need manufacturing capacity, they already have it.
This would lead one to the conclusion that business spending will not be too strong in the recovery. But, it is a supply side problem, not a demand side problem.
And, speaking of employment, there is an unused capacity problem as far as the labor market is concerned. The official unemployment rate, the total unemployed as a percent of the civilian labor force, stood at 9.8% in September 2009. The rise over the last year is from 6.0% in September 2008.
The total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers is 17.0% in September 2009 up from 10.6% in September 2008. That is, there has been a substantial increase in persons who are neither working, nor looking for work but indicate that they want a job and are available, discouraged workers and people working part time who would like to work full time.
There is a lot of unused capacity in the population as a whole. From everything we are hearing, the marginally attached and the discouraged do not have too much to hope for in the upcoming economic recovery and this doesn’t even consider the expected rise in the official unemployment rate.
The conclusion one can reach from these data is that whatever has been going on in the United States for the past 40 or 50 years has not been totally healthy for the supply side of the economy. Basically, the past 40 or 50 years has seen a lot of inflation. Since January 1961, Consumer Prices in the United States have risen by 625%, or, in other words, the real value of a dollar has decline by 86% since then.
One could easily make the argument that whatever went on in the United States over this period, it was a period of extended inflation and that such an environment was not the most productive one for economic resources. This environment resulted in a lot of unused productive capacity, in terms of physical resources but also in terms of human resources.
Current policy is doing what has been done consistently in this period, emphasized a demand side bias. An inflationary policy, created using fiscal and monetary policy to stimulate aggregate demand, has been the response to the economic slowdown. And, the policy attempts to achieve higher rates of employment by putting resources back to work at their old functions. Of course, this cannot be fully achieved as technology and other efficiencies allow new jobs to be created that do not use the old skills, or old jobs to be eliminated and excess capacity to grow. Thus, capacity utilization continues to drop and those in the workforce that are discouraged from seeking a job remain unfulfilled.
Subscribe to:
Comments (Atom)
