Economic Expansion In U.S. Continues But Growth Remains Modest

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by: John M. Mason


Federal Reserve's Beige Book indicates economy continues to recover but at a modest pace.

The important thing is that the economy is growing as fast as it is and seems likely to continue on into 2015 and possibly 2016.

This will make the "Obama recovery" one of the longest recoveries on record.

However, there still remains a lot of work to do on the economy.

The United States economic recovery continues, but the recovery, itself, remains modest.

The year-over-year rate of growth of real GDP was 2.5 percent in the second quarter of 2014. This is down from the rate that was achieved for 2013 where the year-over-year rate of growth in the fourth quarter of 2013 was 3.1 percent.

I still believe that the increase, year-over-year, in real GDP will be in the 2.5 percent to 3.0 percent range. Not great but still increasing.

This is above the revised figure of the IMF, which came out toward the end of July this year: it was dropped to 2.0 percent. Other economists revised their figures at the time to as low as a1.75 percent rate of increase.

The growth, I believe, will continue into 2015 and 2016, putting the Obama recovery right up there in length with that achieved by the Clinton administration. It's just that the growth rate will go no higher than the 2.0 percent to 3.0 percent range.

The latest information on the economy comes from the Federal Reserve in terms of its release called the Beige Book. The information contained in the report is based on general discussions and is not a "statistical" release. Still it gives us a flavor of the attitudes and concerns that exist with the economic environment.

The summary that seems to catch the nature of these anecdotes is this: six of the twelve Federal Reserve districts characterized their economic growth as "moderate"; four of the twelve said that their economic growth was "modest" and two said that there were signs that their economies were improving.

Not exactly busting down doors!

The important thing in this report, to me, is that economic growth is taking place.

And, as is shown elsewhere, the job growth is strong and the under-employment rate continues to fall. Factory orders, the Commerce Department reported, jumped by 10.5 percent in July, which was the largest monthly rise since 1992, but the major reason for the increase was airplane orders, something that will not be repeated going forward. With this increase the jump in orders for durable goods rose by 22.6 percent in July, but orders for durable goods actually declined by 0.9 percent.

More good news, but, given the dominance of the orders from civilian airlines, not good enough for us to translate this into a more robust recovery.

I still have concerns that the modest recovery is, in large part, connected with the transition that is going on within the economy. I reported yesterday, in another context, that economists at Morgan Stanley had estimated that the average age of industrial equipment in the United States had risen to a level in excess of 10 years, the highest level since 1938.

I have argued that the "game" in modern, technologically advanced economies is for firms to operate at a much faster speed than that. That new technologies have been estimated to be introduced in advancing industries in the three- to five-year range. If this Morgan Stanley estimate is correct, on average, American industry is starting to fall behind in technological innovation.

Also, there is a substantial mismatch in the job market. More and more reports come out that businesses want to hire "trained" workers, but cannot fill the jobs they have because those skills are not readily available.

This mismatch, I think, is being captured in the fact that the labor participation rate has fallen below 63.0 percent, the lowest level hit since the middle 1970s.

America, as well as Europe, is in need of a re-structuring and this is going to take time and effort and will result is a more sluggish economy for several years…more sluggish than was experienced over the past fifty years or so.

That is why I am not as concerned about the slower rate of growth, as are some other analysts. The good news is that the economy is growing in the 2.5 percent to 3.0 percent range. The economy has been expanding for more than five years and seems likely to continue to expand for another two or three years…at least.

The economy needs re-structuring. Let's get to work on that!

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