Rational Nonexuberence – Part 2
In Part 1, [here at AB] I looked at factors that tie closely with Total Capacity Utilization (TCU), and saw no reason to believe that TCU is about to surge. In Part 2 I’ll be looking at more general ideas that reinforce my lack of optimism. My underlying assumption is that for TCU to surge, the economy has to surge and pull it along.
In this post, Edward Lambert takes a deeper look at capacity utilization, with a strong suggestion that it’s more important to the economy than the 16% contribution that industrial production makes to the total. So maybe I have my assumption backwards.
First a H/T to Mish. Graph 1 is one He recieved from one of his readers, with the quote: “It seems rather unlikely that private economic activity is poised to accelerate under these conditions.” Mish concurs, and so do I. The graph shows Growth in Bank Lending Per Capita (Black) and Real Final Sales Per Capita (Blue). Both are rolling over from extremely anemic recovery peaks.
Graph 1 – Lending Growth/ Cap and Real Final Sales/Cap
Next, a huge H/T to Stagflationary Mark at Illusion of Prosperity, who sometimes looks at data and relationships that I would never even think of, and often goads me into a different perspective. He has graciously allowed me to use some graphs from several of his recent posts. Graph 2 shows the YoY % change in capital goods orders for non-defense industries. Mark added a twelve month moving average which is clearly sloping down, and is now at 0%. In the following graphs, all trend lines and modifications are Mark’s.
Graph 2 – Non-defense Capital Goods Orders
Graph 3 shows Real Manufacturers’ Sales per Capita. I’ve added TCU in blue. Since the beginning of this data set in 1990, it looks as if these sales have to grow in order to keep TCU constant. Alas, though, they’ve leveled off.
Graph 3 – Real Mfg Sales/Cap and TCU
If TCU is going to surge, I’d expect robust hiring in manufacturing industries. Graph 4 shows the number of employees in goods-producing industries. In what passes for a recovery in this century, it’s approaching flat-line at a level equal to that of 50 to 60 years ago.
Graph 4 – Goods Producing Employment
And, lest you think non-manufacturing employment can bail us out, Graph 5 shows the employment level in sales and office occupations. Since the GR, it has made no recovery at all, and is now at a level from 20 years ago.
Graph 5 – Sales and Office Employment
But maybe none of this matters in a service-based economy. Graph 6 looks at the YoY % growth in personal consumption expenditures on services (PCES). Surprisingly, though, expenditure growth in that area has been declining with a series of lower lows and lower highs since 1980. The post GR high is at the level of the previous recession’s low, and the long range decline in growth rate resumed a year and a half ago.
Graph 6 – PCES – YoY % Change
This is probably why the fraction of employees in service industries has flat-lined, as shown in Graph 7.
Graph 7 – Service Employees / Total Non-farm Employees
I’ll wrap up with one last consideration. Our economy is about 70% consumer driven. If GDP and TCU are going to surge, it will be largely due to a surge in spending. Contrary to what economists will tell you, for the majority of the population spending is driven by income. Or, more specifically, by real disposable income. Graph 8 gives us a look at how that is going, YoY % change, semiannual data.
Graph 8 – Real Disposable Income – YoY % Change
Not so well, as it turns out.
This doesn’t mean we’re going to slip back into a recession next week. I think a Japan-style decades-long doldrums is a more realistic possibility. All that requires, as graph 9 indicates, is to keep doing what we’ve been doing this century. Graph 9 – US Real GDP/Employed person divided by Japan Real GDP per Employed Person, is dead flat this century
Graph 9 – USARGDPC/JPNRGDPC
I’d really like to be wrong about this.
But I can’t think of any reason to suspect that I am.
“Contrary to what economists will tell you, for the majority of the population spending is driven by income. ”
Aren’t you arguing with a straw man? Dean Baker talks about wealth effect numbers of around 6 percent. A person with $50K income whose house goes from $200K to $220K would be expected to spend an extra $1200. Hardly the opposite of the majority being driven by income.
Arne –
Straw man?
Follow the link. Consumption spending and disposable income track with an R^2 of .9957.
This is not a hypothetical.
JzB
Arguing with a straw man does not mean that you are wrong about your conclusions, it just means that you are misrepresenting someone else’s conclusions.
Who says that spending does not primarily track income? Saying that there is a wealth effect does not mean that it is a first order effect.
arne
back in the day “straw man fallacy” meant creating a bogus argument that was easy to defeat, while pretending that it was your opponents argument.
that’s not quite the same as misrepresenting his conclusions. i of course have no idea what logic and language are in the new days.
What is “misrepresenting” other than “pretending” that you have represented someone correctly?
In this case I think the straw man comes from misunderstanding rather than an attempt at misdirection, but it is still a straw man.
Arne –
In this post –
http://angrybearblog.strategydemo.com/2012/01/wealth-vs-income.html
I was reacting specifically to a comment by Roger Farmer, which I quoted there:
“My reading of the evidence is that consumption depends primarily on wealth rather than income. That was the lesson of work by Ando and Modigliani, Modigliani, and Friedman in the 1950s. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.”
Farmer has articulated this view in other places, and cited academic studies to back it up.
I thought he was stating a position shared by economists of a certain stripe, not a uniquely personal view.
Maybe I had that wrong, but I was grappling with a clearly articulated point of view, and certainly not with a straw man.
JzB
Thanks for the response. One has to wonder whether Famer was using terms in a funny way, because that is not the lesson I see when looking into Ando and Modigliani and it is not the way others has presented numbers related to wealth effect. Oh, well.