Jobs, Investment, and a Fed Report
Sometimes a picture is worth a thousand words. The following is from the January 14, 2011 G17 Fed report on industrial production and capacity utilization.
This is not the whole economy. Industrial production is what we make. It isn't just manufacturing, but mining and utilities. Capacity is how much we could make, and utilization is the ratio of these two. It tells us how much slack there is in the industrial side of our economy. Note that in practical terms 90% is about as close as we come to "full" capacity.
So what's interesting about these charts? What struck me most was how the country's productive capacity (the top two lines) has been essentially flat since 2002. This is not an effect of the logarithmic scaling. Though the line is flat, it represents a dynamic process. We have been losing capacity as fast as we have been adding to it, and we have been doing this for 9 years, far longer than our more recent crises. So what caused this flatlining in industrial capacity? Free trade agreements like NAFTA and outsourcing of production to countries, like China.
On top of this, our utilization of the capacity we have (the bottom chart) has sucked since 2000. This is a double whammy of industrial weakness. Utilization in 2010 is still slightly below 2002 levels (74.2 vs.74.7) a year and a half into the supposed recovery and 13-15 points off what it was in the 1960s.
What is needed to soak up that excess capacity is demand, and not just any demand but one targeted to American made goods, especially semi-finished and finished ones (73.2% and 74.3% utilization for December 2010). It is only as that excess capacity is reduced that jobs will be created in the industrial production side of our economy and perhaps along with them new capacity growth.
For where we are now, the only realistic way for industrial demand to increase is through government spending. But this is not on the table. Indeed the talk in Washington is on spending reductions. What is on the table and what Obama is likely to offer tonight in the SOTU are incentives for business investment. But as we have pointed out before, corporations have chalked up record profits. Yet despite this, they have not been creating new jobs here at home. Throwing more money at them will not change this. On the industrial side, the problem is even more complicated. Because of outsourcing, even after 9 years of zero capacity growth, there is still a lot of excess capacity around that would have to be worked through before hiring could really take off, that is if corporations didn't just outsource the new work too.
So when I look at these charts, what I see is not just a bad recession we haven't recovered from but a hollowed out industrial base. And I have heard nothing from Obama that will significantly stop or reverse this trend.