Economic growth continues to be anything but robust.
The January numbers for industrial production were released on Friday, February 15. From December to January, the index fell 0.1 percent. Year-over-year, the January number was up 2.1 percent from January 2012. So, from this measure, we can say that output in the United States is increasing. However, it is increasing at a decreasing rate.
The near term peak of the growth rate of industrial production came in the second quarter of 2012, when the second quarter average of the industrial production index was increasing at a 4.7 percent year-over-year rate.It should be noted that this peak growth rate for industrial production was the lowest for any recovery since the Second World War. This economic recovery has been the weakest on record.
In terms of real GDP growth, the near-term peak of 2.6 percent was achieved in the third quarter of 2012. In the third quarter of 2010, the year-over-year growth rate hit 2.8 percent, but then dropped off to 1.6 percent in the third quarter of 2011 before rising again. This growth experience was also the weakest economic recovery in real GDP in the post-World War II period.
The American economy is apparently going nowhere very fast.
There are two major reasons for this, I believe. First, it appears as if most of the monetary efforts have gone into the "credit pyramid." This is the superstructure of credit that has been built up since the 1960s, and represents the money traveling from one financial institution to another, one structured financial deal to another. In a sense, one could describe this as the "velocity" of money within the financial community, but also the turnover of money outside the real economy.
Second, the credit inflation of the past 50 years has impacted the economy in some very severe ways. By trying to keep capital, both human and physical, as fully employed as possible, the Federal government's policies tended to push both kinds of capital back into use in the same old employments. That is, the aggregate economic policies of the government supported keep human capital and physical capital employed in continual usage. The policies tended to keep plant and equipment in use and provide incentives for manufacturing workers… as well as others… to stay in the same line of employment for their working careers.
This has resulted in the percentage usage of manufacturing to trend lower and lower from the late 1960s to the present. Capacity utilization tends to move cyclically, with cycle peaks being reached during the expansion phase of economic activity. Since the latter half of the 1960s, the peak of each cycle has tended to be lower than the peak reached in the earlier cycle. So, cyclical peaks have gotten lower and lower and lower over the past 45 years or so.
Capacity utilization has been relatively flat in 2012, and has averaged around 78.5 percent. In January 2013, capacity utilization came in at about 79.1 percent. In the previous cyclical peak, the 2006-2007 period, capacity utilization averaged in the 80 percent to 81 percent range.
In essence, it appears as if more than 20 percent of the manufacturing capacity of the United States is under-employed.
Looking at the human capital situation, I come to the estimate that about 20 percent of the human capital of the United States is under-employed. This number has also trended upwards since the late 1960s. In the latter half of the '60s, my measure of under-employment was around 7.5 percent. The rate of under-employment has risen relatively steadily since then, and has not been as cyclical as the capacity utilization measure. That is, people enter or leave the workforce more slowly than manufacturing capacity cycles around due to the business cycle.
Hence, one could argue… and, I do… that there is a real structural problem in the United States, and this structural problem was created by the policy of credit inflation that the American government has followed for the past 50 years.
And this structural problem of the under-employment of both human capital and physical capital limits the productivity of our capital resources, and in limiting the productivity of our capital resources, also limits the amount of growth that the United States economy can achieve.
We are seeing this happening right before our eyes. This is the most anemic economic recovery in the post-World War II period. There is no indication that it is going to get much better. The structural problems in the markets for human capital and for physical capital are real, and will require a lot of time to be worked through.
Still, Mr. Bernanke and the Federal Reserve System keep pouring money into the financial system. Mr. Obama and the Federal government continue to keep pouring government debt into the financial markets. This, to me, is a real danger because it is creating over the next seven years or so what people at Bain and Company refer to as a "superabundance of capital."
Over the past 50 years, the policies of the Federal government and the Federal Reserve System have created, in my mind at least, an abundance of financial capital. And look where we are now.
How are we going to handle a "superabundance of capital"? As I have written in the past, it sure doesn't seem like the real economy and employment are going to be great beneficiaries of the government's largess.
Hence, one could argue… and, I do… that there is a real structural problem in the United States, and this structural problem, created by the policy of credit inflation that the American government has followed for the past 50 years, will take a fairly long time to unwind.
And while the structural problem of the under-employment of both human capital and physical capital limits the productivity of our capital resources, the slow improvement of the productivity of our capital resources will also limit the amount of growth that the United States economy can achieve.
At present, I see no end to the credit inflation being created by the Federal government. It may not get as bad as Bain and Company has predicted, but credit inflation will continue on unabated for the near future. But the economic growth, measured by the rate of increase in industrial production and the growth rate of real GPD, will continue to be less than impressive. This slow economic growth, however, will not stop a huge amount of activity in the financial markets.