America's Plowhorse Economy Rolls On
Brian Wesbury et al. at First Trust Advisors point out that amid all of the media reports of economic "gloom and doom," our “plow horse economy” keeps moving forward, demonstrating that the relentless media pessimism is "being defeated by the American entrepreneurial spirit." Here are some examples from First Trust of how our "plow horse economy" is moving forward:
1. Consumer spending is at a record high, on both a real and nominal basis. Retail sales were up in April for the 21st time in the
past 22 months, rivaling the 1998-99 streak of 16
straight monthly gains, a period everyone looks back on as a boom. Real retail sales are up 4% from a year ago.
2. Private payrolls are up 26 consecutive months, hours of work
are rising, and consumers’ financial obligations are the smallest share of
income since 1984. No wonder sales of autos and light trucks were up in April almost 10%
from a year ago, and at the highest level for the month of April since 2008.
3. Business investment is soaring. While overall
industrial production is up a robust 5.2% from a year ago, the production of
business equipment is up a stellar 12%.
4. Capacity utilization hit 79.2% in April, equal to the average of the past twenty years. What this means is that firms have an increasing incentive to build out capacity by investing in plant and equipment. At the same time, profits and balance sheet cash are at record highs. In other words, prospects in the business sector look good.
5. Despite all you hear about banks not lending, commercial and industrial loans are up 13.6% in the past year. The story about banks not lending to companies is getting very stale, the bottom for these loans dates back to late 2010.
6. Housing is clearly on the mend. Starts are up 30% from a year ago. Every major region of the country shows growth in the past twelve months, for both single-family and multi-family homes. Residential investment (home building) has been a positive factor for real GDP growth in each of the past four quarters and looks poised to do it again in Q2.
39 Comments:
What is the basis for Westbury to assume America has an 'entrepreneural spirit' and other countries do not??
Ed-
I don't think Westbury was saying that America has a entrepreneurial spirit that other nations do not have. At least, that's not what I got from the article. What I understood his meaning to be is that Americans are creative and innovative and, despite the myriad of barriers in our way, we have grown our economy.
That's what I understood him to mean.
I like Dr. Perry's optimism; it is much of what keeps me coming to his site. But what this article indicates to me is that the money printed in 08-09 has made it past the initial beneficiaries (big banks) and into the hands of small businesses and consumers who are inflating the latest bubble in our perpetual bubble economy. The question becomes: when to jump ship before the next crash?
fwiw, capacity utilization averaged more like 84% during the healthy economies of the 80's and 90's. 80% was the low bound that you saw as real weakness.
that 79% average is mostly driven by the deep dip into the 60's in this last recession.
not sure that's the correct benchmark to use. if this were 1999, 79% would be viewed as very low, not average.
The average capacity utilization rate BEFORE December 2007 was 81.4%, going back to 1967. The average from 1967-2012 is 80.7% and the average over the last 20 years is 79.2%.
Going back to the 1960s, there has been an ongoing downward trend in capacity utilization, so a comparison over the last 20 years is probably more relevant than using earlier data from the 1960s and 1970s.
We could also say the capacity utilization rate is at the highest level since April 2008.
Yes, and we could also say that capacity utilization is at a 4-year high!
We could also way the utilization rate is a mere 1.2 percentage points below the 45-year average.
Boy, it's fun saying the same thing in different ways. No wonder politicians do it.
mark-
i was eyeballing. the actual number for 1980-1999 is 81.4%, so thanks for the data, but 79% would have been considered low, not high during that 20 year boom, so i think the meat of the point stands.
i'd tend to exclude the 2000-7 period as i do not view that as a healthy period for the us economy but a period of stagnation and sub par (if any) growth driven by massive debt accumulation.
looking at the other data here, real retail sales, while up, are still below pre recession levels, and if you take their growth year on year, there were over 110 months of consecutive positive figures up until 2000, so this run is not really anything special at this point.
it looks quite good in comparison to payrolls though, which, while up, have made up only about 1/3 of the drop from pre recession levels making this the slowest jobs recovery since the 30's and leaving us with civilian labor force participation numbers at 30 year lows driven, contrary to many pundits, not by retirees by by lost jobs among the younger workers.
http://www.qando.net/?p=12967
jobs among those 55 and older have risen by 3.9 million. for under 55's it has dropped by 8.1 million leaving the key 25-55 demographic down 4% in participation.
to be sure, there has been some marginal improvement in the economy from the nadir of the recession, but i think going so far as to call it "healthy" outstrips the facts.
a plow horse this may be, but when one is used to a tractor, that can seem a bit lackluster.
Something else we can say:
The utilization rate has risen 3.1 percentage points from April 2011.
Morganovich,
I agree that 83%+ was regularly obtained in the 1990s (but not in the 1980s until 1988).
The data at the Federal Reserve's Industrial Production and Capacity Utilization - G.17 web page show some low points during other recessions:
May-1975 ..... 74.2
Dec-1982 ..... 70.9
Mar-1991 ..... 78.8
Dec-2001 ..... 73.6
Jun-2009 ..... 66.8
Capacity has remained below 80% for a long time. The U.S. has experienced other long periods:
20 months in mid-1970s
30 months in early 1980s
27 months in the mid-1980s
50 months from Dec-2000 to Jan-2005
49 months since Apr-2008
morganovich: "i'd tend to exclude the 2000-7 period as i do not view that as a healthy period for the us economy but a period of stagnation and sub par (if any) growth driven by massive debt accumulation."
U.S. GDP reached all time highs in 2004, then again in 2005, 2006, and 2007. Why do you view those years as a period of stagnation?
Real Personal Consumption Expenditures are almost 3% above 2007 levels, I think that is what Brian referred to as "consumer spending."
Capacity utilization from 1980 to 1999 was 81%, not 81.4%.
And the current level of 79.2% is at a 4-year high, and has risen by more than 12 percentage points in just 3 years.
Capacity utilization has increased (or stayed the same) in 11 out of the last 12 months and 20 out of the last 24 months.
At the current rate of increase, capacity utilization will be above 80% by August and might be above 81% by the end of the year.
I think Brian Wesbury's point is that the economy is gradually recovering, and the increase in capacity utilization to a four-year high in April is just one of many indicators showing that the "plow horse" is moving forward.
"U.S. GDP reached all time highs in 2004, then again in 2005, 2006, and 2007. Why do you view those years as a period of stagnation?"
because growth was well below the trends of prior decades, because employment did not really recover from 2000 until 2005 and even then did not keep up with population growth and declined through the decade because of sub par job creation in spite of the huge jobs boom from a debt bubble funded housing boom.
it was a decade that saw consumer debt soar. take out the effect of consumer and federal debt, and almost 1/2 the reported growth disappears.
but mostly because i think inflation was grossly under-reported during that decade and that if one uses the pre boskin cpi, we were actually in recession for about half that decade which explains the low job creation and the huge debt accumulation better than the bea gdp figures in my opinion.
morganovich: because employment did not really recover from 2000 until 2005 and even then did not keep up with population growth
My question was about the years 2004-2005. Employment by the end of 2004 did reach the overheated year 2000, and exceeded 2000 in the following three years. Also, employment throughout 2004 was higher than every other previous year except 2000. But that really doesn't matter. Employment is not a measure of economic activity. Furthermore, employment always lags economic output during a recovery.
morganovich: "take out the effect of consumer and federal debt, and almost 1/2 the reported growth disappears."
So what? Your argument was not that you cannot include the years 2000-2007 because of debt. Rather it was that capacity utilization was not comparable for that period because of stagnation. Whatever caused the economic growth - increased global trade, consumer debt, government debt - there is no question that the reported GDP was anything but stagnant.
morganovich: "but mostly because i think inflation was grossly under-reported during that decade"
I cannot debate this with you. If you are going to argue that "the numbers lie", it's pointless to even discuss the issue. Regardless of what argument I put forth, your answer will always be "the numbers lie".
We definitely disagree about inflation. Discussing this further is a waste of my time.
Morganovich is basically arguing that the current recovery is not a recovery because it is not as strong as the 1990s economy. To that I say, "So what?"
Actually, morganoivch initially argued that capacity utilization averaged 84% during the 1980s, and that 80% was the low bound. That argument is not true. Capacity utilization was below 80% over half the months of the 1980s. The median for the 1980s was below 80%.
I have provided a link which shows that a 79.2% capacity utilization would not have been low for the 1970s, for the 1980s, or for the 2000s.
Morganovich seems to be arguing that any decade other than the 1990s should not be used as comparison for 2012.
"Private payrolls are up 26 consecutive months"...
This is the one I'm having a bit of trouble digesting but only because of anecdotal information locally...
More on private payrolls increasing...
Consider the following from USAToday: Of the 100 most populous metro areas, 70 saw declines in traffic congestion while just 30 had increases, says Jim Bak, co-author of the 2011 U.S. Traffic Scorecard for Kirkland, Wash.-based INRIX.
That was a reversal of what happened in 2010, when 70 had increases in congestion and 30 had declines. Tampa had the biggest increase in congestion, and Minneapolis the biggest drop....
It would seem to me that if there is 'less' vehicle traffic that it might indicate that the economy is maybe recovering in staggered stop and go fashion...
juandos,
Here in Dallas Fort Worth, I've seen more small road projects the past three years than I ever remember before. I hate Obama, so I've blamed any traffic congestion on stimulus spending. I think these road projects would have been spread out over 5-6 years were it not for stimulus spending,
" I've seen more small road projects the past three years than I ever remember before"...
So no major arterial road work to speak of, eh jet b?
What I find interesting in your comment is that it mirrors the opinion of people I know living in both Chicago and Denver...
Locally the only 'new' road work going on is another bridge across the Mississippi to Illinois but that was a project that basically got started some eight years ago...
Otherwise all we have going on around here is some basic highway improvement work...
.
"Employment by the end of 2004 did reach the overheated year 2000, and exceeded 2000 in the following three years"
and population expanded as well.
payrolls did not reach 2000 levels until 2005, 5 years after a peak. that is a VERY weak recovery from such a reportedly shallow recession. impossibly so. the real issue is that the recession was deeper and longer than reported.
think back to 2001-2. did that really feel like the mildest recession since ww2? it was just statistical shenanigans.
whatever one believes the better way to measure inflation is, pre of post boskin, there remain some completely unavoidable facts:
1. inflation now reads lower that it used to for any given set of price moves (real world states).
2. this carried through into gdp-d at the bea.
thus, for any given set of real world states, current cpi will read lower than before and gdp higher.
you can claim 2000-5 is correct, but then you must greatly boost earlier data. or you can say the early data is correct and then greatly reduce the latter data making the whole decade from 2000-10 zero growth.
in either case, the difference beteen earlier and later growth rates is wider than reported, thus my claim that 2000+ was a very weak period despite record consumer debt assumption etc.
the constant bubbles since the late 90's a a direct result of money being too lose and it has badly undermined the real economy.
you appear to be trying to twist my arguments as well. i did not say that because this recovery is slower, it is not a recovery. i said it is a very weak recovery at best or, that is you used that economic terms from the 80's, no recovery at all.
if you set your scale back 20 pounds, you would not expect that to help you get into your old pants. so why, when we have done the exact same thing with inflation would you expect to call what was, pre 1992 called recession, recovery?
during the 90's, the old and new cpi did not merely diverge, they had different slopes. by 2000 the gap between them exceeded 600bp. (it currently sits at 300-400bp).
that's a lot of difference.
you are correct that i am not that familiar with cap utilization. i never use it as a metric because it is based entirely upon fictions and assumptions. stop and consider: where to they get the numerators and denominator of that figure?
do you really think they have any idea what the overall productive capacity of us industry is? it's a dramatically moving target and not even the factories themselves have that data in many cases. and then % used? seriously? monthly? and then they pretend to provide a number with tenth of a percent accuracy? the error on that is +/- 10-20%. it's a number with virtually no meaning because the numerator and denominator cannot be determined with accuracy better than most of the swings in the index.
you are correct that i am not that familiar with cap utilization. i never use it as a metric because it is based entirely upon fictions and assumptions. stop and consider: where to they get the numerators and denominator of that figure?
Consider a chip maker that has an obsolete factory that is shut down but not written off yet. Even though it is useless for building new generation products it is still counted as idle capacity. That is the type of fiction that makes the cap utilization reports little more than noise.
vangeiv: ". Even though it is useless for building new generation products it is still counted as idle capacity."
I do not think that is exactly correct. According to the Quarterly Survey of Plant Capacity Utilization FAQs:
3. What if the plant is no longer in business?
In item 1, indicate the month and year when operations ceased at this plant. If the plant was in operation at ANY time during the quarter, complete items 2 through 5. Report full production as if the plant operated the entire quarter.
That answer implies that the capacity is counted for only the quarter in which the plant shuts down.
morganovich: "where do they get the numerators and denominator of that figure?"
According to the Federal Reserve website:
Capacity data reported in physical units from government sources (primarily from the U.S. Geological Survey and the Department of Energy's Energy Information Administration) and trade sources are available for portions of several industries in manufacturing (e.g., paper, industrial chemicals, petroleum refining, motor vehicles), as well as for electric utilities and mining; these industries represent about 25 percent of total industrial capacity. When physical product data are unavailable for manufacturing industries, capacity indexes are based on responses to the Bureau of the Census's Quarterly Survey of Plant Capacity (QSPC); these industries account for a bit less than 70 percent of total industry capacity."
So seventy percent of the figure comes from surveys of factories. As this survey has been around for a while, I'm confident it is being completed consistently by those factories from year to year. I say that because I've been responsible for completing government surveys in five companies in three different industries.
jet-
but you are assuming that everyone faithfully updates that data, that factories are not deliberately mischaracterized for tax reasons, that factories even really know what their capacities are, and that the survey has anything like a full reach or consistent response patterns as well as respondents bothering to actually describe changes as opposed to checking boxes, using the same data, and fulfilling a federal task with minimum effort.
i think most of them just use shoot from the hip guesses.
also note:
they use a quarterly survey and provide monthly data? that doesn't strike you as odd?
it's a survey that would require respondents to do serious work for no benefit to respond to accurately.
what do you think the likelihood is that they really put in the effort?
the kind of effort that gets to 0.1% accuracy?
imagine if i sent you a survey like this. how much time would you spend getting it right?
ideas like "mining capacity" are ridiculous. what's capacity? tons of rock moved? how is that relevant to output in comparison to, say, whether you are in a good seam or not?
half the time you do not even know what the capacity of the plant you run until you really try to go flat out.
i'm not even sure this data controls for number of shifts worked. 1?2?3?
this is a classic example of data and decimal points masquerading as precision. one of my econ profs used to use this series as a classic example of pretending to know what you do not.
the error bars are bigger than the swings.
morganovich: "I think most of them just use shoot from the hip guesses."
As I said earlier, I've been responsible for completing government surveys at 5 companies in 3 different industries. I've been trained by my predecessors and I've trained others to complete such surveys. We didn't shoot from the hip, and I doubt anyone else does either. Industry relies on the data governments collect, and it is in everyone's best interests to submit accurate data.
morganovich: "what do you think the likelihood is that they really put in the effort?"
Very high. As I said earlier, industry relies on the data collected by the government.
morganovich: "half the time you do not even know what the capacity of the plant you run until you really try to go flat out."
Engineers definitely know the sustained full capacity of a plant. That's what the federal government asks them to supply. Furthermore, as long as the plant consistently reports the same capacity as full capacity, the statistic has meaning.
Many economists and planners (public and private) have been using the plant capacity statistics for decades. If you do not believe them to be accurate, don't use them. But don't expect anyone else to use the arguments you are making about something you apparently know little about.
In item 1, indicate the month and year when operations ceased at this plant. If the plant was in operation at ANY time during the quarter, complete items 2 through 5. Report full production as if the plant operated the entire quarter.
That answer implies that the capacity is counted for only the quarter in which the plant shuts down.
But many of these obsolete facilities do small runs and are not totally shut down until long after they have been replaced by new mills that produce better product. I chose the example specifically because it was used a few years ago to show exactly why the number was way off.
And if you think that the people who tick off the survey boxes are very accurate or that the information is more than an inch deep you are very naive.
i think most of them just use shoot from the hip guesses.
If you have ever looked at self audit paperwork you know just how wild some of the guesses really are. Many people are too busy with activities that are required for their professional advancement to worry about accuracy or meaning on government forms.
As I said earlier, I've been responsible for completing government surveys at 5 companies in 3 different industries. I've been trained by my predecessors and I've trained others to complete such surveys. We didn't shoot from the hip, and I doubt anyone else does either. Industry relies on the data governments collect, and it is in everyone's best interests to submit accurate data.
I disagree. Most surveys are not very accurate because there is no incentive to take a lot of time to perform non-value-added work in a competitive environment. Most companies do not have dedicated employees whose job is to answer forms. The job is usually given to people who have better things to do and give the surveys the little time that they deserve.
vangeiv: " Most companies do not have dedicated employees whose job is to answer forms. The job is usually given to people who have better things to do and give the surveys the little time that they deserve."
I can't answer about most companies, and I do not believe you can either. But I know positively that two energy companies and three air transport companies I've worked for take very seriously their government reporting responsibilities.
Furthermore, the two manufacturing companies I briefly worked for didn't just take seriously the reporting of plant utilization to government. That metric was reported to plant workers and management regularly.
I believe you are mistaken about how seriously corporations treat government reporting requirements. I know I'll never change your mind. But, as before, I only reply to your comments in hopes of influencing other readers.
morganovich: "i think most of them just use shoot from the hip guesses."
I suspect this will be the answer you and vangeiv provide every time data does not support your view:
"the data is wrong".
Please note that you, morganovich, used this very data in your argument above:
morganovich: "fwiw, capacity utilization averaged more like 84% during the healthy economies of the 80's and 90's. 80% was the low bound that you saw as real weakness."
Now that both Prof Perry and I showed that your interpretation of the data was incorrect, you responded:
morganovich: they use a quarterly survey and provide monthly data? that doesn't strike you as odd?
it's a survey that would require respondents to do serious work for no benefit to respond to accurately.
what do you think the likelihood is that they really put in the effort?"
Do you not see the inconsistency of your comments about this post?
I can't answer about most companies, and I do not believe you can either. But I know positively that two energy companies and three air transport companies I've worked for take very seriously their government reporting responsibilities.
Sorry but I don't buy the idea that companies in competitive industries care much about accuracy on government surveys. What I can tell you is that the companies that I worked for could not answer the capacity question even internally because it depended on a number of assumptions about shift availability, vendor changes, line changes, etc. If they did not know what rate they could produce at how can they report capacity to the government?
And let me point out that you can keep the same plant open and still produce only 15% of its maximum capacity. If the usual output was only a third of the designed maximum there is a lot of wiggle room about how you report your numbers to the government particularly if the plant was designed for multiple shifts initially but plans have been changed. If you are a small manufacturer, and most manufacturers are small you don't waste time on the subtleties necessary for accuracy. You certainly don't have people whose only job is to report to government. (Unless your system is far more screwed up than I thought.)
Furthermore, the two manufacturing companies I briefly worked for didn't just take seriously the reporting of plant utilization to government. That metric was reported to plant workers and management regularly.
I worked in a plant where the plant workers reported their output. It made wings for commercial aircraft. About three or four times per year we would find out that the output had been overestimated by a full unit or two just because of rounding errors. Now if you can be that far off for audited internal reporting I am sure that you can be pretty inaccurate for voluntary government reporting that is not checked for accuracy.
I believe you are mistaken about how seriously corporations treat government reporting requirements. I know I'll never change your mind. But, as before, I only reply to your comments in hopes of influencing other readers.
It is not logical to waste resources on non-value-added functions. It is not any more logical to assume that you can figure out things for the government that you have trouble calculating for internal purposes. It is not logical to assume that employees who are not audited for accuracy will pay that much attention to their reporting to external bodies.
In the real world incentives matter. Since there are no incentives to be all that diligent or accurate I do not understand why that would be a priority when there are more pressing issues to worry about.
jet-
and i have sat on the boards of several small manufacturers. when we sent that stuff in at all, we just tossed down some wild guesses.
boeing may have a guy who deals with that, but a small company does not and does not want to waste the time.
engineers do NOT know the capacity of many plants. i know this from first hand experience with retroreflective sheeting. we had no idea how fast we could go reel to reel until we really needed to find out. turned out we had 40% more capacity than we though.
you are making some wild, blanket assumptions that simply do not hols in small and medium sized businesses.
i already admitted that i waded into the capacity utilization issue knowing little about it and that i had been eyeballing etc and thanked mark for his info. now you are just being absurd and digging back into the conversation without reading what followed. honestly, i'm not sure why i commented on it as i think it's useless as an indicator. i guess i just felt like playing with the data.
i then went on to describe WHY i never use it as an indicator and was, therefore, unfamiliar. do you really find that so difficult to understand? why all the petulant whining?
you really think a small water purification equipment company knows the production capability of it's assembly floor until they run 3 maxed out shifts? i can tell you, they don't. i know because i watched them ramp and saw how it compared to what they modeled.
i spend my life working with small companies, some of them manufacturers. for you to tell me what they know based on no info is just silly. i have sat on a dozen boards and worked with hundreds of companies. this is not some quaint fancy of mine, it's a huge pile of actual experience. there are a lot more small companies than big ones.
hey, believe in magic technocrats and far reaching studies of universal reach diligently filled out by all knowing respondents who posses and want to share all the facts, but to me, that sounds like the Easter bunny.
if you can extract investable knowledge or anything that forms i predictive model out of it, well, that's great, but i do not think you can. i think it's as much a sentiment barometer as anything else.
surely you agree that all data has error bars right? i presume you also were taught not to trust data that lacks them? you really think a 1/10 of 1% accuracy there works? even a 5% accuracy? stop and really think about it for a minute.
also:
appeals to authority like "lots of economists use it" are pretty meaningless. lot's of scientists believed the sun moved around the earth.
lots of climatologists relied on mann's "hockey stick" reconstruction that turned out to be statistical garbage and bad data.
lots of climate scientist still use the us NOAA terrestrial thermometer data and pretend it has accuracy to .01 degree and can spot a .5 degree per century trend even after the surface stations project surveyed the sites and found, that according to the NOAA's own guidelines over 70% of the thermometers are sites so badly they get over 2 full degrees of artificial heat from surroundings and many more than 4.
people get very attached to their tools and their data, but that does not make them good tools or good data.
that's why it's so important to look deeply at the sourcing of all the data one uses and make your own judgment on whether to trust it.
many people on this site have a tendency to get really upset when you question the reliability of data be it capacity, unemployment rates, inflation, or whatever. i'd think that a researcher interested in accuracy would welcome such disputation and ideas about why data may be wrong. after all, garbage in, garbage out, right?
the most important thing in modeling is data integrity and knowing its limits.
absent that, no model is worth the zeros and 1's it's written with.
morganovich,
It doesn't matter if the small manufacturers know exactly what their maximum capacity is. It only matters that they report it consistently.
There's a huge gap between Boeing and the small manufacturers you referred to. I believe there are thousands of medium sized plants - plants with a few hundred employees - with engineers who can and do estimate maximum sustainable capacity. I've worked with such engineers at a couple of medium-sized plants.
You know, I'm bored with this thread. Argue away if you wish to do so.
boeing may have a guy who deals with that, but a small company does not and does not want to waste the time.
I worked for Boeing and can tell you that individual plants have a hard time figuring out their total capacity at any one time. The facilities can be run on three shifts or one. You can add lines to increase rate or subcontract some work that impacts the critical flows in order to increase total output. You can't pick one number that is 'right'. There are several numbers that are just as good as the rest.
And let me point out that Boeing had a hard time keeping internal inventories or work flows. It was not uncommon for us to wind up with a missing wing set or two a quarter because of overmarking by supervisors under pressure. The way they figured it, it was easier to get screamed at once a month than once a day.
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