Thursday, April 24, 2014

Business investment still lackluster



New orders in March for capital goods, a proxy for business investment, beat expectations (+2.2% vs. +1.5%) but have managed only lackluster growth over the past year. In real terms, orders are still about 20% below the levels of 2000, and still 10% below their pre-recession high of 2006. Without more robust business investment—which provides the wherewithal for increasing worker productivity—it will be difficult for the economy to do much better than 2-3% growth.


We can only speculate as to why businesses have been so modest in their investments for the future, but likely candidates for explanations include excessive regulatory burdens (e.g., Obamacare, Dodd-Frank), very high corporate tax rates compared to many other countries, anti-business sentiment in Washington, and a general unwillingness to take risk. Lackluster business investment has nothing to do with a lack of profits, since corporate profits after tax are at all-time record highs (see chart above). 

It's disappointing, to say the least, to see so much potential new investment being held back for reasons that could be addressed by smarter public policy. But the mountain of corporate profits being stashed away both here and overseas is like a bright beacon lighting the way—for those politicians who understand how to lower the barriers to new investment—to a more productive and prosperous economy in the years to come.

Wednesday, April 23, 2014

Amazing increase in US oil production


In the span of a mere four years, U.S. production of crude oil has surged by 67%, according to the Dept. of Energy, reaching levels not seen since the late 1980s. Crude production is up 14% in just the past year. This is the fruit of new fracking technology and it is nothing short of astonishing. Natural gas production is up almost 40% over this same period, and—since natural gas is not easily exportable—this has resulted in a two-thirds decline in the price of natural gas, which in turn gives our energy-intensive industries a big competitive advantage. All of this adds up to a huge boost for the U.S. economy, and it has nothing to do with any government initiatives or infrastructure investment. Indeed, it comes despite Obama's reluctance to approve the Keystone pipeline.

Mark Perry has been doing a terrific job of covering this story. In his most recent post on the subject, he points out that "the U.S. was the world's largest petroleum producer in December for the 14th straight month."

It's hard to be bearish about the economy's prospects when you see big changes like this in a key industry.

Drinking Age Is Past Its Prime

That's the title of Camille Paglia's latest op-ed in Time. As I mentioned a few years ago, she must be one of the last critical thinkers left in the Democratic Party. She correctly identified many of the fatal flaws of the Obama administration in 2009, and she has now lifted from obscurity what should be a priority national issue: repealing the National Minimum Age Drinking Act which was passed 30 years ago. As she notes, "This tyrannical infantilizing of young Americans must stop!" Read the whole thing, it's not too long. The Nanny State is out of control.

Tuesday, April 22, 2014

The amazing energy efficiency of the US economy

Mark Perry today has a nice post celebrating Earth Day from an economist's perspective, including a chart showing how the U.S. economy today uses far less energy per unit of output than it did in 1950. To complement his post, I offer the following charts which focus on oil consumption.



These charts offer powerful proof that people and economies respond to price incentives. Since 1970 the inflation-adjusted price of crude oil has increased by a factor of 10. Faced with the problem of increasingly expensive oil and oil by-products, the U.S. economy responded by reducing its reliance on oil and becoming more energy efficient. As the second chart shows, the U.S. economy today uses over 60% less oil than it did in 1970 to generate a unit of output.


As the chart above shows, the U.S. economy now consumes about 19 million barrels of oil per day. That is the same as it consumed in 1978, despite the fact that the economy today is two and a half times larger than it was in 1978. It's a remarkable achievement.

Monday, April 21, 2014

Enduring strength in leading indicators


The Index of Leading Economic Indicators doesn't get much respect these days (it's often maligned as the Index of Mis-Leading Indicators), but its track record is nothing to scoff at, as the chart above shows. The growth of the index typically picks up in the early stages of a recovery, and slows dramatically in advance of and during a recession. In addition, the growth of the index typically slows during the latter half of each business cycle. But not this time. At the very least, the LEI is telling us that there is no recession on the horizon and at best, that the economy may in fact be improving somewhat.

In any event, the economy doesn't need to improve to justify an investment in risk assets, it just needs to avoid a recession, since the alternative to risk assets is cash that yields almost nothing.