Bad news; industrial production is soaring
By Scott Sumner
TravisV sent me to the following graph of industrial production:
That looks like good news. To see why it is bad news, we need to take a brief digression. The recent recession has been rather unusual. RGDP fell sharply between 2008 and 2009, and since bottoming out in mid-2009 has grown at about 2.4% annually, which is below the 3% trend line of the past 100 years. This has led many to conclude that the economy is not recovering at all.
A counterargument is that the unemployment rate has fallen from a peak of 10% to the current 6.7%, and in my view it will fall even further over the next year or two. A counter counterargument is that the employment/population ratio fell sharply in the recession, and has not been recovering. A counter counter counterargument is that this partly represents boomer retirement, as the over 55 year old category is where all the recent population growth has been occurring. This is from a recent Joe Weisenthal post:
The counter counter counter counterargument is that labor force participation has even fallen in the 25-54 demographic. This could go on forever—labor force data will never resolve anything.
Here’s what we need to figure out, is the recovery cyclical or is it secular growth? Suppose it was secular growth, what would it look like? In my view we’d expect roughly 2% to 3% growth in the major components of GDP, as output remained cyclically depressed, but grew at the trend rate (so that the recession wasn’t becoming worse.)
Now suppose the secular growth rate had slowed to say 1%, and the economy was briskly recovering toward that new trend line. What then? In that case I’d expect very rapid growth in highly cyclical sectors, and very slow growth in non-cyclical sectors.
Now let’s return to industrial production. This sector (mostly manufacturing but also mining and utilities) is always much more cyclical than RGDP. Whereas RGDP fell about 4.3% peak to trough, IP plunged 16.9%. Since the trough in early 2009, IP is up 23.3% (although the low base in 2009 means we’ve barely passed the previous 2007 peak.)
That might sound like good news—the economy is recovering! But it’s actually bad news. If the economy is recovering then the trend rate of growth must be much less than the anemic 2.4% rate we’ve seen over the past 4.5 years. I’d guess that 1% to 1.5% is the “new normal.” And not just in the US, but also in other (non-Obama ruled) developing countries, with the possible exception of high-immigration places like Australia and Singapore.
I also wondered where the IP trend line is. The trend growth from the early 2000 peak to the late 2007 peak was 1% annual growth in IP. But this might underestimate trend, as the 2000 boom was an IP-heavy business investment boom, whereas 2007 was more of a housing boom. Even so, manufacturing is a falling share of GDP, so if overall RGDP trend growth is only 1% to 1.5%, I’d guess IP trend growth rate is also pretty low. We are only 2.5% above the November 2007 peak, but IP is up 1.9% in just 2 months. If it keeps growing at 4%/year or so, we’ll quickly close the gap. Believe it or not the US economy will be “recovered” by late next year.
Bonus forecast–the unemployment rate will fall several ticks in April.
Also note that if I’m right about the recovery, it supports the argument that low interest rates are the “new normal.” Short-term rates will rise at some point, but to 2% to 3%, not the usual 5%