Investors Face Slow Economic Growth Caused by Structural Factors

The investment environment in the U.S. for the next couple of years is going to be OK but not great.

Economic growth in the past quarter showed a 1.5% rate of change, year over year.

This is up from a 1.3% rate of growth in the second quarter of 2016, a 1.6% rate of growth in the first quarter and a 1.9% rate of growth in the last quarter of last year.

This trajectory parallels the growth path of industrial production.

Officials at the Federal Reserve have predicted that the rate of growth for the economy in 2016 will be 1.8% and that it will increase slightly to 2% in 2017 and 2018.

Not much bounce at all.

If there is not much bounce in the aggregate economy, there will not be much incentive for business capital investment, and there will not be much room for growth in corporate profits.

The push is on for more governmental stimulus, especially more spending from the federal government. The two major candidates are both in favor of more infrastructure spending on the part of Washington.

The basic problem, however, is not just a lack of aggregate demand on the part of government. There are some real structural problems in the economy, problems that must be looked into if we hope to experience faster economic growth.

What are the structural problems?

For one, capital utilization in the U.S. is only modestly above 75%. This doesn't seem to be a cyclical thing, especially since we are in the eighth year of the current economic recovery.

In the latter part of the 1970s, capital utilization in industry peaked around 87%.

The other thing is that the labor force participation rate is now around 63%. 

It seems that there is something structurally amiss in the economy when there are so many people and so much capital not being used, and seemingly, not even being considered a part of the capital structure.

If there is so much unused capital in the country, what incentive is there for businesses to invest in new equipment or in training the workforce?

If there is so much unused capital in the country, where are corporate profits coming from?

If you liked this article you might like

Manufacturing Jobs Will Continue to Decline, and There's No Quick Solution

Amid Rising Stock Market Uncertainty, Equities Must Price in Risk

European Union Must Get Its Act Together, as Time Is Running Out

Quantitative Easing Is Not the Long-Term Answer for Europe's Economy

Morgan Stanley Continues to Approach Its Return on Equity Target