The Federal Reserve System announced the last two pieces of macroeconomic data to be released before the November presidential election yesterday. For President Obama the information was not that good.
Industrial production in the month of September was up only 2.8 percent, year-over-year. This is up from 2.6 percent in August, but still not a very robust number.
As can be seen in the accompanying chart, the growth of industrial production in the United States peaked in 2010 and has been relatively stagnant ever since. This year, industrial production averaged a 4.5 percent growth rate in the first quarter, rose to 4.8 percent in the second quarter before falling to a 3.2 percent rate in the third quarter.
These are not the kind of figures that indicate the economy is beginning to pick up steam. Furthermore, the capacity utilization of American industry was at 78.3 percent in September, up from 78.0 percent in August.
However, we see the same pattern over time in capacity utilization that we saw in the industrial production figures. In the first quarter of the year, capacity utilization was 78.7 percent, in the second quarter 78.9 percent, and then 78.5 percent in the third quarter.
Capacity utilization is moving in the wrong direction for a strong recovery. Putting this into the longer-term context, however, we see that capacity utilization continues to trend downward over time.
As can be seen in the accompanying chart (below), capacity utilization in the United States has trended downward since the 1960s when this series was started. Note that each peak in industrial production tended to be at a lower rate than the previous peak.
In the late 1960s, capacity utilization was around 88 percent. The peak in capacity utilization in the late 1970s hit 86 percent. Then the peak dropped to 85 percent in the late 1980s. In the late 2000s the peak was just over 80 percent. And, now it looks as if the peak is coming in around 79 percent.
This secular drop, I believe, is particularly important because it points to the structural problems the United States is now facing.
Not only do we see the possibility that we have reached the current cyclical peak in capacity utilization, we, the United States, are experiencing another decline in the secular movement of capacity utilization.
I combine this information with the fact that the under-employment figures continue to remain quite high and that just as capacity utilization has fallen consistently over time since the 1960s, under-employment has increased in a secular fashion during the same time.
The conclusion I draw from this is that the cyclical improvement in economic growth, as represented by the year-over-year growth of industrial production (and real GDP), has leveled out at a sub-par rate while both the capacity utilization and under-employment figures point toward a continuing secular decline in how the United States uses resources.
The United States may still have economic issues indicating a cyclical problem, but, the bigger problem facing US policymakers is the secular decline in our productive capacity, both from the standpoint of labor … and of capital.
If so, the ability of the country to get much more out of the cyclical rebound may be severely limited by the structural problems that must be over come before a more robust rate of economic growth can be achieved.
The problem is, politicians only tend to concentrate on the short-run issues because they don't believe that a focus on longer-run solutions will get them re-elected.