Economic Growth Remains Steady In October

by: John M. Mason

Summary

Industrial production improved modestly in October, although the year-over-year rate of increase was still around the third quarter average of --1.0 percent.

Capacity utilization also remains low as physical resources, as well as labor resources, are just not being used.

And, the problems seem to be supply-side problems, something that cannot be fixed by more and more stimulus from the demand-side.

Economic growth continues to improve in October, but the pace of economic growth continues to disappoint.

Industrial production rose in October to 104.3 and continues to be above its most recent trough of 103.4, which occurred in March.

Year-over-year, however, industrial production declined by 0.9 percent in October, roughly matching its decline in the third quarter of 2016 of 1.0 percent.

It continues to appear as if the trough of quarterly year-over-year growth was achieved in the first quarter this year when industrial production was declining at a 1.6 percent rate.

Again, the monthly trough came in March at a 2.0 percent decline.

Tracking industrial production is helpful in understanding where the growth rate of real GDP is going because the two series tend to parallel one another.

Since the fourth quarter of 2015, the year-over-year rate of growth of industrial production has been -1.6 percent in the fourth quarter; --1.6 percent in the first quarter of 2016; --1.1 percent in the second quarter; and -1.0 percent in the third quarter.

Real GDP growth has a similar trajectory: year-over-year growth in the fourth quarter of 2015 was +1.9 percent; it was +1.6 percent in the first quarter of 2016; +1.3 percent in the second quarter; and +1.5 percent in the third quarter.

So, it looks as if the path of economic growth in the US economy has turned around and is now heading in the right direction.

One cannot be overly excited about the speed at which the economy is growing, but, at least, it is moving in the right direction.

Reflecting the continued weakness of the economy, capacity utilization dropped to 75.3 percent in October from its September number of 75.4 percent and is down from its third quarter average of 75.6 percent. But, the second quarter capacity utilization was only 75.2 percent, which was down from the first quarter level at 75.4 percent and the last quarter of 2015, which was at 75.8 percent.

The overall assessment of these data leave us with the feeling that the modest slowing of the economy in early 2016 has ended, but the overall growth rate of the economy still leaves much to be desired.

This is consistent with what we have seen in the pace of the economic recovery since the end of the Great Recession. Economic growth is being dominated by the supply side of the economy and this is picked up in both the amount of unused resources in the economy…capacity utilization being just a little more than 75.0 percent…and the labor force participation rate being a little more than 62.0 percent.

Furthermore, the growth of labor productivity still remains close to zero.

There is nothing in the numbers to suggest that one can become overly optimistic about the future, even with a new administration with some new economic policies. The resolution of the current dilemma is not going to come from demand-side stimulus and supply-side policies take a lot of time to work themselves out.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.