Consistent with the picture I drew on June 18, Federal Reserve Chairman Ben Bernanke announced that in all likelihood the Fed would begin to reduce the amount of securities it purchased every month by the end of the year 2013 and would most likely end the scheduled purchases by the middle of 2014.
"Bernanke said he was 'deputized' by policy makers to deliver the message for reduced bond buying rather than rely on a 'terse' written statement." This quote from Bloomberg. This will occur "as long as the world's largest economy performs in line with Fed projections." But, "The conclusion to record stimulus may take years to complete as the Fed's forecasts showed most officials don't expect to begin raising the benchmark lending rate out of its lowest-ever range of zero to 0.25 percent until 2015." The outlook taken by the "policy makers" includes "'moderate' economic growth, further labor-market gains and inflation accelerating toward the Fed's 2 percent goal."
To me, perhaps the most important conclusion reached by the officials at the Fed is that the "downside risks" associated with their future projections have been substantially reduced. A major contributor to this is that people are more optimistic about the housing market, where rising house prices and increasing sales seem to have a more solid foundation.
In terms of my outlook, nothing has changed. The economy is growing and will continue to grow. I don't see the economy taking off as fast as the revised Federal Reserve projections -- 3 percent to 3.5 percent real GDP growth next year -- but I do see continued growth in the 2 percent to 2.5 percent range.
There are two basic reasons for this. First, it seems as if the economy has stabilized over the past year or two at a moderate pace of economic growth. At present, I don't see anything coming along that will "kick" the growth rate from present levels up to a faster growth plane.
If one takes a look at the year-over-year rate of growth of industrial production, one sees that the growth rate has stabilized around a 3 percent year-over-year rate of growth over the past 24 months. In the last two months, the year-over-year growth rates have come in at 1.8 percent and 1.6 percent, respectively, in April and May.
The trend in the growth rate of industrial production seems to have stabilized in range around 3 percent and there is nothing on the horizon to will move it out of this range.
Second, I believe that this stabilized moderate growth rate is a result of the need for the economy to restructure. The Fed's forecast, I believe, assumes that the reason the economy is growing at the pace it is, is related to a cyclical problem. That is, economic growth will continue to improve as the business cycle continues. This is the reason that officials at the Fed continue to support quantitative easing.
I do not believe that this is the case. I believe that there are dislocations in the economy that need to be worked out in order for more rapid economic growth to become a reality. But because the problems are structural, the working off of these dislocations will take a relatively long period of time. More robust economic growth will depend upon resolving these structural problems and will not result just because there is continued monetary and fiscal stimulus.
This structural problem can be seen in the chart depicting the utilization of our manufacturing capital. In May, the utilization of our manufacturing capital stood at 77.6 percent. Over the past 24-month period, capacity utilization averaged 77.4 percent.
Capacity utilization seems to be stuck!
But, looking back over the past 48 years, it seems as if capacity utilization seems to get stuck during every period of economic recovery. That is, during every period of economic recovery over this 48 years, capacity utilization seems to get stuck at lower and lower "peaks" of each cycle of economic recovery.
It seems that over this whole time period, capacity utilization is trending downward. This, to me, indicates that there is something "structural" happening to the economy that is causing less and less of our manufacturing capital to be used.
This "structural" problem, I believe, must be worked out. And, this "structural" problem, obviously, is not going to be worked out through the business cycle. Something else needs to be done.
The same thing applies to our problem of "under-employment." I am not talking here about unemployment, the figure that almost everyone seems to concentrate on. I am talking about an under-employment that considers people who have left the labor force and people who are employed part time and would like to work full time.
One looks at a chart of the under-employed over the same 48 years that we looked at capacity utilization and we see essentially the same type of behavior. There has been a secular increase in the under-employed in the United States! Sure, under-employment goes down as economic growth improves, but, under-employment at the peaks of economic growth have been higher and higher during each business cycle over the past 48 years. This performance represents a "structural" problem.
So, it looks as if economic growth in the United States has stabilized for the time being, albeit at a relatively moderate pace. The risk of a second recession has lessened and this gives the Federal Reserve justification to begin withdrawing from its third round of quantitative easing. And if the Federal Reserve begins to "taper" its security purchases, Fed Chairman Ben Bernanke can feel justified in retiring from office at the end of his term.
However, one could also say that with the advent of "tapering", we, the Federal Reserve, the federal government, and the U.S. economy, have just begun the next era of economic restructuring.