I continue to be more optimistic about the path of economic growth that is occurring in the United States. There are still potential "bumps-in-the-road" like the recession in Europe and the slowdown in the economic growth of China. Still, the economic recovery in America goes on.
On the positive side, I am encouraged by the fact that bank lending is getting stronger. The important signal, to me, coming from the banking data, is that the health of the banking system is improving. Although many commercial banks still have major problems, the system, as a whole, is getting stronger and this is allowing for greater loan growth. In the first quarter of 2012, the annualized rate of growth in loans and leases at commercial banks was almost 6.5 percent. This is good.
Today, we got some encouragement from the housing industry: "Building permits in March 2012 were at a seasonally adjusted annual rate of 747,000, up 4.5 percent from the revised February rate and up 30.1 percent from March 2011. Housing starts in March 2012 were at a seasonally adjusted annual rate of 654,000, down 5.8 percent from February's revised estimate but up 10.3 percent from March 2011." The decline from February to March was due to unseasonal strength in the housing area because of the very mild winter weather experienced this year. The year-over-year rate for March is much more indicative of the pick up in this construction.
The economic recovery is continuing.
On the negative side, I still believe that economic growth will continue to be anemic compared with historical trends. As I have argued before, I am expecting economic growth to be in the 2 percent to 3 percent range, but I believe growth will be closer to the former figure than the latter.
There are several reasons for this. One reason is that under-employment will still remain high. I don't care that much about unemployment in the current case because under-employment has remained in the 20 percent range and as long as this condition exists in the United States, consumer spending will remain relatively weak. Furthermore, this condition just adds to the pressure for families to deleverage and get out from under the debt loads they have been carrying. This helps to account for the very weak consumer loan data at commercial banks.
There are also other reasons for only moderate economic growth. State and local governments still have a ways to go before they become a positive force in the economy again. With declining property values and huge problems in the pension area, these governmental bodies will continue to slash payrolls and other budget items in an effort to return to some form of fiscal prudence.
And, there is one other area that I believe will continue to weigh on the economy over the near future. I have written from time-to-time about the impact the last fifty years of credit inflation has had on the productive capacity of the United States manufacturing base. Credit inflation is not good for producing improvements in the productivity of capital. And, if the productivity of capital is not increasing then economic growth is going to suffer.
The effects of this credit inflation are picked up in the utilization of our productive capacity. In the 1960s, capacity utilization in the United States was well in excess of 90 percent. There has been a secular decline in capacity utilization in America as the peak of every business cycle over the past fifty years has been at a lower utilization of our capital base. At the last cyclical peak we were using slightly more than 80 percent of our capacity. At the present time capacity utilization is increasing as the economy has expanded since June 2009, but we remain around 78 percent. (The March figure of capacity utilization of 78.6 percent was released this morning.)
I believe that the economic growth rate of the United States will remain below the post-World War II level of about 3.2 percent as the rate of capacity utilization continues to lag.
The problem with this is that this growth rate will not accelerate as potential inflation problems arise.
This inflation problem is raised by Francesco Guerrera in the Wall Street Journal: "Sowing Seeds of the Next Major Crisis." For one, the Federal Reserve has pumped massive amounts of reserves into the banking system. This was done to protect against a greater financial crisis than was experienced and to prevent the banking system from collapsing. The post-crisis problem is about the ability of the Fed to remove these reserves from the banking system without jump-starting another crisis. But the question is, if the commercial banks have all these excess reserves (about $1.5 trillion of them) and if the banks are beginning to lend again, where is all this money going to go? If the economy will not grow much faster, the answer is that the money will force up prices. These are not "normal" times. As Guerrera states, "Unfortunately, there is little 'business as usual' around. Not at a time when Europe is in recession, the U.S. in the throes of an anemic recovery and even China is slowing down. And not when bank balance sheets are saddled with decaying leftovers of the crisis-asset-backed securities, bad loans and litigation-and vital parts of the system, such as derivatives trading, are gummed up by fears of new regulations." This scenario has "stagflation" written all over it. The economy will continue to grow, but maybe we should start to prepare for our next series of problems.