Lies, Damn Lies, and the Real Estate Recovery, Part 2
If April saw a false bottom, a slow recovery won't begin until an actual one.
This week we further explore why this recovery will be a statistical recovery, or one that only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle.
Capacity Utilization Set to Rise
Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.
The chart below shows that capacity utilization in the US is at an all-time low -- around 68%. That means that with the equipment we already have in place, we could produce almost 50% more goods than we're now producing. However, most analysts think that 80% capacity utilization is a very good number.
If you look very closely at the bottom-right-hand detail, you can see that there's a small uptick in last month's data. Whether or not this is the "bottom" remains to be seen. But if it's not the bottom, it's close. You can only shut down so much production before inventories fall to levels that require restocking. And we're getting close to that level in many industries.
Before we wander too far away from the graph, I want you to notice that past dips (circa the recessions of 1968, 1974, and 1980-1982) had V-shaped recoveries in capacity utilization. But in the 1990-1991 recession it took longer than it did in past ones, and in the most recent recession (2000-2002) the recovery took longer; we didn't actually "recover" for 4 years.
Again, most analysts feel that a capacity utilization of 80% or more is pretty indicative of solid growth. To get back to that level, we'd have to see an almost 20% rise in manufacturing. That's unlikely to happen all that fast, for several reasons.
First, consumers are retrenching and saving. We just simply aren't going to need or want as much stuff. Second, unemployment, as I noted last week, is crimping the ability of consumers to spend. The recovery we're likely to see is going to be sluggish and not produce new jobs for quite some time. Again, that stifles demand.
The country (and the world) is adjusting to the New Normal. It's some level of overall economic activity that's different from what we've enjoyed during the reigning paradigm of the last 30 years.
Manufacturers are going to ramp up more slowly than in the past, especially as many companies have the ability to tailor their production to consumer demand much faster now, due to automation.
As I've repeatedly said, the world is awash in excess capacity. We simply built too much productive capacity to be utilized in the New Normal. One way of dealing with too much capacity is to simply close the plants. That's what's happening in the paper and memory-chip industries. Other industries are engaging in mergers to reduce or "rationalize" capacity. While that process is a good thing, it does mean that unemployment rises or stays higher longer
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter