Forthcoming Economic Growth: What Can The New Administration Achieve?

by: John M. Mason


The latest numbers on industrial production still imply that the economy is just not growing that rapidly and may not be able to grow very rapidly in the near future.

The new administration would certainly like the economy to grow more rapidly than the 2.1 percent compound rate of the current recovery, but that may not be possible.

The supply-side of the economy is not what it was in the 1980s indicating that faster economic growth may not be possible because of capital utilization and labor participation.

The industrial production number for December 2016 showed that manufacturing output rose year-over-year at a 0.5 percent annual rate. This figure is not that good but it is better than all the negative numbers that came before it last year.

The annual rate of increase of industrial production for 2016 was -1.0 percent.

The industrial production numbers are important because the rate of growth of the real economy seems to parallel the growth in industrial production.

For the last six years, the average rate of growth of industrial production has been 1.6 percent.

The annual rate of growth of real GDP has been 2.0 percent.

And, for both series the year-by-year growth rates follow the same path.

What is the implication of the industrial production performance?

Well, it is that the economy is not growing very rapidly…and, in it is expected that the real economy will not grow very rapidly over the next several years.

Ruchir Sharma, Chief Global Strategist at Morgan Stanley Investment Management, gives us the background reasoning why economic growth in the United States will remain so tepid.

Mr. Sharma argues that the long-term economic growth of the country is limited by two factors, the growth rate of the labor force and the growth rate of labor productivity.

Right now, these growth rates are around 0.75 percent, so the expected longer-term growth rate of the economy is around 1.5 percent.

I have noted before that the long-term growth projections of the Board of Governors of the Federal Reserve System is for the US economy to grow at a 1.8 percent annual rate. Getting to this figure, officials at the Fed see economic growth to be 2.1 percent in 2017, 2.0 percent in 2018, and 1.9 percent in 2019.

The International Monetary Fund has revised its expected growth rates due to the expected economic proposals of the incoming administration, but these figures only jump to 2.3 percent in 2017 and 2.5 percent in 2018. Not much of a boost…and, then after the short-run stimulus wears out, the rates of growth fall back again, closer to the Fed's longer-term projections.

Aggregate demand management may help to fight recessions, but it just deficit spending and rapid monetary growth does not seem to have much impact on growth rates over time.

Factors that are tied to the longer-run performance of the economy also include things like the capacity utilization of physical capital of the United States and the labor force participation rate. These are supply-side factors that give us an indication of how productive resources are being used in the country.

The rate at which capital is being used in the United States has been declining since the late 1960s. The peak capital utilization rate achieved in the current economic recovery is below the peak reached in the economic recovery in the 2000s, and below that in the previous recovery.

The peak capital utilization rate reached in the current recovery was achieved in 2014 and was at 78.2 percent that year. The peak in the previous recovery period was around 81.0 percent in 2007.

The historical peak for the labor force participation rate was hit in early 2000 and was just over 67.0 percent. Currently this number has been around 63.0 percent.

The point is that productive resources in the United States are not contributing to output the way they once did and this is reflected in the growth of labor productivity numbers.

Economic growth in the United States is just not going to get much better over the next few years, regardless

But, what about a new administration with new ideas about stimulating the economy?

Mr. Sharma has a response to that: "The risks of excessive ambition are real. In recent years the actual growth rate of the United States economy has been about 2 percent, which is disappointing in comparison with the 1980s, but far from horrible, given its diminished potential. Often, if a country pushes the economy to grow much faster than its potential, it will start to suffer from rising debts and deficits….The risk is particularly high at a time, like the present, when the United States is already running the largest deficit ever recorded at this stage of an economic expansion."

And, this may be exactly where the Federal Reserve is, given the way that Fed officials are talking up higher interest rates and "prudence" when it comes to fiscal policy.

The economy does not seem to be showing any signs of exuberance at this stage in the economic recovery, but it seems to be maintaining a solid, steady pace. But, looking at the capacity utilization numbers, nothing really seems to be heating up at this time.

But, a new administration, with new ideas, and new energy is more than likely to "put on a show" for the constituency that elected it. Unfortunately, the "show" may not be what is needed at this time. Keep your eyes open.

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.