The NYT business section had a column today urging cautious optimism about the economy's future. While the case for pessimism is clear enough (crashing housing market leads to continued declines in housing related sectors, which are soon amplifed by falling consumption, as consumers lose the ability to borrow against homes that have lost value) the article does not make much of a case for optimism. The article notes that capacity utilization has been falling for the last three months. I thought this was going to be an argument for pessimism, since firms are less likely to invest when they have considerable excess capacity. Instead, this is cited as a basis for optimism (room for expansion -- no inflation). In fact, the story on utlization is even worse than the data in the article suggest. The recent increase in utilization has been mostly in the mining sector, utliization in the manufacturing sector is just 1.3 pp higher than its year ago level and down 0.7 pp from its August peak. The article also provides reassurances that consumers will continue to support the economy. This is a nice thing to say, but where do they get the money when they can no longer borrow against their homes? Job growth is slowing, and even if gas prices level off, real wage growth will only be in the 1 percent range. Less borrowing means a rising savings rate, which means that consumption growth trails income growth. Add this to a collapsing housing market and weak investment and you get sustained growth? Not where I come from.
--Dean Baker