The US economy continues to grow, but the pace of expansion is still modest. Industrial production expanded in June at a 4.7 year-over-year pace. This put the average rate of expansion for the quarter at 4.7 percent, year-over-year, up slightly from a 4.4 pace of the first quarter.
Since the current economic recovery began in July 2009, the highest quarterly increase in industrial production came in the third quarter of 2010. At that time, industrial production was increasing at a 7.1 percent, year-over-year rate.
As can be seen in the accompanying chart, the rate of increase dropped off from that date and seems to have settled in the three-to-five percent range, a rate that is rather anemic for this time in the business cycle, but a rate that is consistent with other current measures of economic growth.
Click to enlarge
Real GDP, for example, grew at a 2.0 percent year-over-year rate of growth in the first quarter of 2012, and has only average in the 1.5 percent to 2.0 percent range for the past year. As reflected in almost all of the data, economic growth is taking place, but not at a very rapid pace.
There are three reasons for this slow pace of economic growth in my mind. The first reason is the huge debt overload that exists within the US economy. Individuals, businesses, and state and local governments, overloaded with debt at not able to spend as abundantly as in the past because they are attempting to get their balance sheets back in line.
Second, there is a great deal of uncertainty in the world these days. Washington, D. C. is in a mess and there seems to be no leadership around, especially in the White House. As Larry Summers stated during his recent term in Washington, "the parents are not at home." This lack of leadership in the US, combined with the economic crisis in Europe and the lack of leadership there, leaves us all wondering what is in store for us in the future. And, unfortunately, what we contemplate for the future is not very optimistic.
Third, there are some serious structural matters in the economy that still need to be resolved. For example, I believe that underemployment in the United States is still around 20 percent. That is, one out of every four individuals of working age are either unemployed, employed in a part-time job but would like to work full time, or, have left the work force. The workforce participation numbers are now back where they were in the 1960s.
And, we continue to get stories about how the American society is bifurcating. David Brooks writes of "The Opportunity Gap" emerging in our country, a gap in which "the children of the more affluent and less affluent are raised in starkly different ways and have different opportunities." The ramifications of this split has been researched and discussed by numerous people now and it indicates that we need more than just economic stimulus and good intentions to solve the structural problems that are growing worse every day.
This structural problem is also seen in the data on the capacity utilization of American manufacturing. The data just released indicate that industry is using just under 79 percent of its capacity. Thus, capacity utilization continues to increase in the current recovery.
However, note in the accompanying graph that capacity utilization was around 90 percent in the mid-1960s and has trended downward every since. In fact, this trend matches, to a high degree, the increase in the underemployed in the United States.
Most obvious in the trend is that the peak utilization in every cycle seems to be lower than that achieved in the previous cycle. Capacity utilization continues to increase in the current recovery but is still below the peak achieved in the 2003-2007 period…which was below the peak of the cycle in the mid-1990s.
There are significant structural dislocations in the United States economy and a policy of government intervention and economic stimulus is not going to correct the situation.
Mr. Bernanke, in testimony before Congress yesterday, seemed to be cognizant of the problems the US economy is facing. "Mr. Bernanke's cautious testimony underscored the Fed's reluctance to ride once again to the aid of a plodding economy. The central bank has intervened repeatedly when the economy appears at risk of sliding back into recession, and Mr. Bernanke's testimony Tuesday included his standard promise to maintain that vigilance. But the Fed has not acted with similar urgency to reduce the persistently high rate of unemployment when growth is merely lackluster."
To me, this is about all the Federal Reserve can do right now. The economy is recovering but not at the speed we would like. However, sometimes there is only just so much that can be done in terms of aggregate economic policy.