Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

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-- Brad Delong

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Tuesday, September 10, 2013

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 of his graphs.   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 - Personal Consumption Expenditures - Services

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, 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


I'd really like to be wrong about this.

But I can't think of any reason to suspect that I am.


The Arthurian said...

Strong argument! Good evidence. I especially like those color bands on the graphs, Mark's second order polynomial channel and your pink-on-blue in Graph 8.

Nothing has changed, really, except things got so bad that people started noticing. So it should not be surprising if all the trends continue downhill.

I like the post title, too.

Jazzbumpa said...


Graph 8 is Mark's, too.

I've made some editorial changes for clarity.


Stagflationary Mark said...

As you know, I'm a chart junkie on my blog. As of this moment, I've done 1,261 posts with charts in them since the fall of 2007. I will no doubt be adding to that total today.

It was very interesting to see which charts of mine you would use to help sum up our shared long-term rational nonexuberance.

For what it is worth, I tried to sum it up in 5 charts back in 2012.

The 5 Charts I Shared with My Tax Preparer

So many exponential trend failures, so little time. Sigh.