Economy Better, Not Yet Good

The incremental economic news continues to look a bit brighter, albeit not exactly good.

Most recently, the Fed reported today that industrial production rose 0.5% in July after no sign of improvement during the previous two months. This was ahead of the 0.2% rise expected by Wall Street's sage economists.

Don't jump up and down just yet, however. Compared to year-ago levels, industrial output is still on the decline -- down 1.4% to be precise.

In the same report, the Fed announced capacity utilization for July, which notched a 30-basis point increase from June levels to 74.5%. For context, that's down from 76.4% a year ago and fully 6.8 percentage points below its 1972-2002 average. Sure, a sequential increase is nice, but we're still way below the magic 80% threshold, and have been since early 2001.

When our nation's manufacturing capacity is less than 80% utilized, the economy is considered to be in a state of excess capacity. And when there's too much capacity, businesses have little incentive to invest. This gets to the heart of our economy's #1 problem: a lack of business spending due to the excess capacity built up during the boom years of the late 1990s.

It's this issue of excess capacity that makes interest-rate cuts futile against our economy's woes. To state the obvious, when a business has too much stuff already, there's no interest rate low enough to make it want to buy more!

With the manufacturing sector still nowhere close to a level of utilization that would necessitate new business spending, our economy remains perilously reliant upon a strong consumer. And with unemployment drifting higher and mortgage rates likewise, even the consumer isn't looking quite so hot as was the case earlier this year.

We're not in the business of making economic predictions, but here's our take: To judge from the data, our economy remains vulnerable.

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