IP data shows the recovery is continuing
The America business cycle is not entirely an industrial production story, but it’s the dominant factor (with construction next most important.) It’s not a very big share of GDP, but it’s far more volatile than services. IP fell 17% in the recession, RGDP fell 4%. In that context, it’s worth looking at IP data to see where we are in the business cycle. In January I did a post that I thought was kind of important, but no one else seemed interested in, where I argued the behavior of IP was a sort of smoking gun that we were recovering from a recession, not that the weak economy was simply a “stagnation story.” In other words, if:
1. We simply had supply-side problems; you’d expect to see weak growth in both GDP and IP.
2. If we had a deep demand-side recession that we were still recovering from, and also a big drop in the trend growth rate, you’d see disappointing RGDP growth and fast IP growth, as that highly cyclical indicator recovered from the demand slump. We’d be recovering to a trend line that had slowed.
By January we were seeing signs of #2, and with today’s data the evidence is overwhelming:
IP is up 5.0% in the past 12 months, vs. 1.8% in the previous 12, and 4.3% in the 12 before that, and 2.5% in the 12 before that, and 8.1% in the 12 before that (the early stages of recovery).
It’s normal for IP to snap back quickly in the first year of recovery, and then slow as the recovery matures. But 5% growth in IP is actually pretty fast for a recovery entering its sixth year. We are still getting a cyclical recovery. The bad news is that when the recovery matures and we hit the natural rate, RGDP growth will slow even further, to below the recent 2% to 2.5% trend.
BTW, IP includes manufacturing, mining, and utilities. You get the same story if you just look at manufacturing (up 5.3%), so it’s not just data distortion due to swings in volatile utilities and mining (oil) data. I suppose there is also a glimmer of hope for those who hope for a natural gas-led manufacturing renaissance (just don’t expect many jobs.)
PS. IP is now 12.6% above the peak of the 2000 tech boom and manufacturing is up 13.3%. (IP is a real number.) Don’t get me wrong, that’s not an impressive growth rate, but it’s also not exactly a collapse of manufacturing in America. Especially given that both series are now rising rapidly. Check out IP in other developed countries. Since their 2000 peaks, IP is down 14.8% in Britain, 15.4% in France, and 24.3% in both Italy and Spain. That’s “de-industrialization.” I was tempted to say America = Germany (which is up 16.1%), but Germany’s even further ahead if you do it in per capita terms. Still, America is more similar to Germany than to the rest of Europe.
The “problem” is jobs.
PPS. For the entire EU (not just the eurozone), the change in IP from the 2000 peak to today is 0.0%.
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15. August 2014 at 16:51
Interesting post. IP up more than 5 percent in last year but wages sodden and little chatter about shortages of any kind. That says to me we have weak demand. Actually, with global supply lines I think supply constraints are…well, hard to come by.
Print more money and keep printing jntil we see 4 percent inflation for two years running—it may take a lot of prosperity to get there, but I think we can do it.
15. August 2014 at 18:16
The idea that the problem is “jobs” is invariably subsidiary to the problem of capital allocation. Jobs are needed where capital is allocated. To work is to utilize scarce means to achieve desired ends.
Sumner makes an important observation:
“The America business cycle is not entirely an industrial production story, but it’s the dominant factor (with construction next most important.) It’s not a very big share of GDP, but it’s far more volatile than services.”
http://research.stlouisfed.org/fred2/graph/?g=HPp
It is true that “industry” is not the entire story. The entire story is economic calculation. The dominant consequence of policies that hamper economic calculation is intertemporal capital misallocation. Too many scarce means were invested into longer term, more heavily capitalized industries, stages in the intertemporal order that are more sensitive to artifically reduced interest rates. Not enough resources were invested in the other stages.
This is why we saw, as per the above chart, construction and durable goods employment suffered relatively more than retail and service. It is because of the capital misallocation. Since the capital structure temporal stages are inter-dependent, since none exist in a production vacuum, when the construction and durable goods industries suffer, the whole production system is negatively affected. This is why we tend to see “aggregate” output, employment, and spending declines during slumps. The cause isn’t spending declines. The cause is the disjointed, unbalanced capital structure.
More inflation cannot cure this dominant problem because it is precisely inflation that has hampered economic calculation and lead to the distorted capital structure to begin with.
15. August 2014 at 22:13
MF: Why weren’t the capitalists as smart as Austrian Business Cycle Theorists? Why didn’t they know that interest rates were “artificially low” in the earlier part of the cycle, and thus not throw their money down the drain into long term investment projects that would get found out later?
15. August 2014 at 22:53
Benjamin, I don’t disagree with your comments on demand, but I’m not sure wages are so stagnant. Here is a post I have that should be up by morning, with a graph or two on the issue:
http://idiosyncraticwhisk.blogspot.com/2014/08/eui-homeownership-and-wages.html
15. August 2014 at 23:56
Kevin– happy to look…just read that truckers’ wages are down 6 percent since 2008….unit labor costs have been flat…we would need annual wage growth of 6 percent to hit 4 percent inflation…
16. August 2014 at 03:11
James,
Because the gub’mint has special mind ray emitters which scramble people’s brains.
Fortunately, tinfoil hats give you immunity.
16. August 2014 at 03:22
I saw that trucker wage data too, I believe Tim Duy linked to a piece by Neil Irwin about it in this excellent post on what we can expect from Jackson Hole:
http://economistsview.typepad.com/timduy/2014/08/heading-into-jackson-hole.html
Also, recently we’ve seen about a month and a half of weakness in the s+p industrial sector after years of relative outperformance. I know it’s not the biggest deal in the world, but market participants seem to agree that money is driving IP in America and they SEEM to be thinking that, even with rates very low, IP will suffer as the fed becomes relatively ‘tighter’ than the ECB.
16. August 2014 at 04:41
MF,
you haven’t actually explained anything, you’ve just repeated some slogans you think sound sort of meaningful.
16. August 2014 at 05:55
It would be interesting to see some state by state or regional data on the US to see if any state or region here has done as well or poorly to our average as Germany or Spain.
16. August 2014 at 05:55
Kevin, Very interesting paper on homeownership and unemployment
16. August 2014 at 06:56
Philippe:
I actually have explained something, but if you don’t want to understand it, or accept it, that’s your problem, not mine.
16. August 2014 at 07:12
No, you haven’t explained anything, just made your usual assertions.
16. August 2014 at 07:14
James in London:
“Why weren’t the capitalists as smart as Austrian Business Cycle Theorists? Why didn’t they know that interest rates were “artificially low” in the earlier part of the cycle, and thus not throw their money down the drain into long term investment projects that would get found out later?”
It is not necessary that we assume investors are stupid, or less knowledgeable, or anything in terms of disparaging remarks about their intellectual/entrepreneurial ability.
Think of a radio being jammed. No matter how many languages you are fluent in, no matter how large your vocabulary is, no matter how excellent of a listener you are, if that radio is being jammed, then you are physically unable to know exactly what is being said by the other radio participants.
Too often I see this belief among Austrian critics that ABCT somehow suggests that investors are required to have sub-standard intelligence, or be less intelligent than Austrian theorists, in order for ABCT to “make sense.” Interestingly, we are somewhat disparaged by the Austrian critics presenting EMH as a theory that suggests radio participants can STILL communicate properly even with the jamming. “Let the market sort it out”, etc. But that isn’t possible. It is not possible for people to know what they cannot possibly know because the information isn’t being realized in observable market prices, relative spending, and interest rates. What we observe are jammed signals.
Austrian theorists are equally as “ignorant” of what free market prices, spending and interest rates would have been. Sure, you might find the occasional Austrian whose guess is better than a critic, or it could be vice versa. It really doesn’t matter whose guess is better, because everyone are subjected to distorted prices and interest rates. We are all in the same jammed radio session. It’s just that some of the participants have developed, or learned, or are currently learning, a theory on a connection between those jammed signals, and the usual “macro” statistics studied by economists.
Having said all that, your question is a valid one. The answer as to why investors don’t all just go on as if interest rates “should be” higher than they are, then saying rates “should be” higher doesn’t tell us how much higher they should be. It is a counterfactual. Business cycles can still occur even if every investor knows Austrian theory and guesses that rates “should” be higher. If investors guess a mean of 8% with a 2 factor of kurtosis, with prevailing mean rate of 2% with a normal distribution, then it is possible that rates really “should be” 10%. Nobody can know, because the knowledge depends on observations, and free market prices and interest rates cannot be observed.
But it goes deeper. The profit motive. Even if an investor is fully aware of Austrian theory, and has the best guess out of everyone else, there is still an incentive present to invest in what they know is a bubble, by investing, making profits, and then getting out before other investors choose to do it. You can make money by investing in what you know is unsustainable, just as long as you get out before the music stops. That is a risk even many Austrians take, myself included. I believe the bond market has been in a bubble for many years, but I still invested in bonds because I wanted to profit from doing so. I have some guesses as to when I should get out again, but I can’t know for sure because it depends in large part (but ultimately on physical reality of capital) on what other investors think and believe and do. After all, I intend to sell my bonds to other investors at some point.
Hope that helps explains things a little.
16. August 2014 at 07:15
Philippe:
Yes, I have explained things, and nothing you can say or think will change that.
16. August 2014 at 09:03
Shorter Austro-babble – “at some point, something bad will happen, and we will be proven right. just wait for it”
Nevermind that they’ve been predicting hyperinflation, not deflation.
Nevermind that printing money INCREASES interest rates.
Nevermind that money isn’t credit.
Nevermind that, on fiat money, monetary expansion can go on forever.
Every possible event fits Austro-babble, nothing can possibly falsify it.
If that seems like pseudo-scientific bullshit, it’s because you’re not wearing your tinfoil hat.
16. August 2014 at 09:30
The folks at VoxEU have a free e-book available for download;
http://www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf
Contributions by Krugman, Gordon, Glaeser, Summers, Eichengreen…. No Market Monetarists needed apply, I guess;
‘Monetary Policy Cannot Solve Secular Stagnation Alone
‘Guntram B. Wolff
‘The persistence of low Eurozone inflation undermines private and public debt sustainability – especially in the periphery where the overhang is greatest. However, since bubbles and unsustainable borrowing supported demand before the Global Crisis, this chapter argues that higher inflation cannot be a permanent cure for secular stagnation. Instead, a targeted quantitative easing programme and increased public
investment would help rebalance Eurozone demand. At the global level, population growth in Asia and Africa will provide ample investment opportunities if they can be
fully integrated into the world economy.’
Oh well.
16. August 2014 at 10:28
Daniel:
“Shorter Austro-babble – “at some point, something bad will happen, and we will be proven right. just wait for it”
Austrian theory does not make predictions.
“Nevermind that they’ve been predicting hyperinflation, not deflation.”
There is no one monolithic predictions being made by those who make you scared of yourself. Some predicted high inflation, some predicted low inflation. But those predictions are not from Austrian theory.
“Nevermind that printing money INCREASES interest rates.”
Yes, eventually.
But if the newly created money enters the loan market first, then interest rates can fall for a time. That is how the Fed for example reduces the fed funds rate. They increase bank reserves until the banks agree to a lower rate. Your understanding of economics is shallow.
“Nevermind that money isn’t credit.”
No Austrian passage claims money is credit. The claim is that credit expansion adds to the money supply, which is true. You don’t even understand the theory you criticize.
“Nevermind that, on fiat money, monetary expansion can go on forever.”
That is your faith. History and theory suggest the opposite.
“Every possible event fits Austro-babble, nothing can possibly falsify it.”
Better logic and self-reflective argumentation can refute it. You of course lack that, so you pretend the problem is the theory, and not you.
“If that seems like pseudo-scientific bullshit, it’s because you’re not wearing your tinfoil hat.”
No, it is because those statements are coming from the land of ignorance. You’re a voluntary citizen.
Daniel, your posts are always so full of wrong I sometimes wonder if you are an insider working for the Austrian camp whose task is to spread the opinion that the criticisms against Austrian theory are largely from a bunch of nincumpoops. Keep up the good fight? I’ll consider you an ally from now on.
16. August 2014 at 12:51
Austrian theory does not make predictions.
Better logic and self-reflective argumentation can refute it.
Thank you for proving my point.
16. August 2014 at 13:15
Daniel:
Hahaha, all your points were exposed as wrong. There is nothing anyone can say to prove your point correct.
16. August 2014 at 13:26
mf,
no, it’s just your usual unfounded assertions and gobbledegook, some garbage you read on mises.org and felt had some truthiness to it.
Everything you write is garbage. You’re a genuinely delusional person.
16. August 2014 at 13:26
You are a total retard.
Your pet theory doesn’t make any sort of predictions and doesn’t take into account any sort of actual fact. That is by your own admission.
Only a total retard (that is to say, you) would fail to realise he’s worshipping pseudoscience.
Damn you’re stupid.
16. August 2014 at 17:28
Philippe and Daniel:
It’s like I’m watching tweedle dumb and tweedle dumber.
Philippe:
You’re still wrong. I am explaining things and nothing you can ever say will change that fact. You’re engaging in a fruitless intellectual endeavor. All you’re doing is seeking a psychological/emotional “fix”.
Daniel:
According to your premises, every university and college in the world that places mathematics in their science departments are all unaware that mathematics is actually a “pseudo-science” because it doesn’t make predictions. Or, you know, you’re wrong.
No, economics is not my “pet theory”. It arose and developed before I was born. Economics is not a predictive science based on reasoning from constancies in relations. The quantitative economics “researchers” are of course presupposing that their own knowledge is not constant, or else they would not even engage in such “research” in the first place.
Ever wonder why no economist has ever discovered any constant akin to physics and chemistry constants such as the gravitational constant, or Avogadro’s number? It is because knowledge and actions are categorically distinct from material cause and effect phenomena. This is over your head at this point. You’re too full of hate and anger and mental trauma to understand. Your rational faculty is being overpowered by your more primitive amygdala/emotional faculty.
Your and Philippe’s beliefs are intellectually bankrupt. You have nothing left except substanceless antagonism. It is cleat you LACK the education and knowledge to even grasp what you’re fumbling over yourselves trying to refute.
You got nothing. Hate all you want. I’m happy, intelligent, and better than you. Deal with it.
17. August 2014 at 00:48
I’m happy, intelligent, and better than you.
It’s amazing you’re still able to breathe, let alone type.
17. August 2014 at 03:54
As I said, a genuinely delusional person.
Go see a psychiatrist rather than acting out your psychological problems on this site.
17. August 2014 at 05:18
Thanks Patrick, I’ll do a post.