Economic activity is not going to be very strong in the fourth quarter of 2012. When we got the revised third quarter real GDP figure there was some excitement, especially in the "popular" press. The announced figure showed a 2.7 percent growth from the second quarter, up from a previous estimate of 2.0 percent growth. The year-over-year number came in at a 2.5 percent increase.
Analysts, however, were skeptical that the fourth quarter would be so robust since an inventory buildup accounted for a large part of the revision of the data and the higher growth rate. On Friday, the data on industrial production were released and, although there was an uptick in the series from October, this was expected because of the effect that Hurricane Sandy had on the numbers.
The November number, however, was anything but impressive. Year-over-year, industrial production in November rose by 2.5 percent. This is up from a 1.6 percent rate of increase in October, but still down from the 2.9 percent year-over-year rate of growth in both August and September.
Furthermore, the rate at which industrial production has risen over the past two years has been in decline. Taking quarterly averages of the data to smooth out some of the fluctuations in the series we see that two years ago in the fourth quarter of 2010, industrial production was 6.3 percent higher that it was the year before.
In the third quarter of 2012 this year-over-year increase dropped to 3.3 percent. If we average the October and November numbers we find that industrial production was only 2.1 percent ahead of a year earlier. These data do not give us a picture of a vibrant economy!
This picture is confirmed by the movement of capacity utilization in manufacturing over the past two years. The rate at which manufacturing had been used during this time had risen although the capacity utilization rate had softened since earlier this year.
In November, capacity utilization rose to 78.4 percent, up from the Hurricane Sandy induced drop to 77.7 percent in October. Again, using quarterly averages to smooth out some of the monthly swings, we see that capacity utilization reached a near term peak in the second quarter of 2012. That number was 78.9 percent.
This is not a very high number, but it was the highest rate reached since the summer of 2009 at the time the Great Recession ended. And, this number is substantially below the peak of around 81.0 percent reached in late 2007 before the Great Recession began.
Sadly, the capacity utilization number has dropped since this near term peak. The average for October and November comes out to be 78.1 percent near where it was in the last half of 2011.
So, capacity utilization continues to remain at very low levels. One wonders if this "peak" in this economic cycle will be any higher than this. If this is the "peak" for the current cycle then it will be consistent with the secular decline in economic cycle peaks since the 1960s.
Given both the industrial production numbers and the capacity utilization numbers, the future for economic growth in the United States does not look encouraging. Especially the capacity utilization numbers, like the numbers on the under-employed people in the United States and the decline in the Labor Force Participation rate, seem to me to indicate that there are some major structural problems that have to be solved.
It seems to me that the manufacturing resources we have here in America contain a substantial amount of plant and equipment that are not technology useful. That is, a good part of our manufacturing capacity is "legacy" and will not … and cannot … be useful in the 21st century environment.
I also believe that this is true of a substantial portion of our labor force. It seems as if a goodly amount of our eligible workers have withdrawn themselves from the workforce or have taken on part-time jobs or menial positions. This accounts for the decline in the Labor Force Participation rate and in the large amount of the population that is under-employed.
And, like the decline in capacity utilization, there has been a secular movement over decades in the Labor Participation Rate and in the under-employment rate. This analysis also leads me to be concerned about the monetary policy the Federal Reserve announced this week.
The Federal Reserve does not seem to think that there is any "structural problems" in either the labor market or in the utilization of physical capital in manufacturing. Thus, Federal Reserve officials believe that they can just "step on the gas pedal" and drive the unemployment rate down to 6.5 percent.
I believe that there are structural problems in the United States economy and that a massive effort to drive down the unemployment rate will only create bubbles or something worse. These structural problems must be attacked through longer-term efforts. They cannot be erased though excessive amounts of liquidity in the financial system.
This is why I believe that some people … large banks, hedge funds, and the financial wings of construction companies … are going to make "big bucks" off of the Fed's efforts. Can it be that the Fed is working with a false impression about how the economy is structured? Again?
The housing sector may be picking up, but it is getting started from a very, very low level. Real estate investment spending in the national income accounts are less than half of what they were at the peak six years ago. Housing starts are about 40 percent of what they were during peak times in the 2000s. Even substantial percentage increases at these levels do not produce much "umph" to over all economic growth. There still is a ways to go before activity in the housing industry can be called robust.
Bottom line: economic performance remains weak. Don't expect to see much in the way of more robust growth in the GDP figures for the fourth quarter.