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Risk-Aversion Keeps Economy from Growing Faster

Risk-Aversion Keeps Economy from Growing Faster

August 25, 2014

The U.S. economy is well positioned for growth, as many of the economic indicators have recovered what was lost during the recession and more people are re-entering the labor force with better prospects for employment than just a few months ago.

Confidence is high, on both the consumer and business sides, but there’s still strong aversion to risk after this last recession, according to Dan Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, in MAPI’s quarterly U.S. Economic and Manufacturing Outlook webinar.

"Consumer spending is consistently growing," Meckstroth says, which is a good sign for the overall economy, as consumer spending is 70 percent of final demand in the U.S. But they’re being cautious about spending because they don’t want to return to the debt-based growth model seen prior to the Great Recession.

Business investment is also consistently growing, according to Meckstroth, both in structures and equipment. But, he says, there’s a case to be made for increasing investment. "Conditions are ripe for a capital spending boom," he says, "but we haven’t gotten a capital spending boom" because companies are also more risk-averse than they were in the past.

Capacity utilization in most industries is near or has exceeded the levels of December 2007. For motor vehicles and parts, current capacity utilization is at 89 percent, compared to 78 percent in December 2007. This is primarily a result of plants being shut down during the auto industry crisis, Meckstroth says, but there is already a need to expand manufacturing capacity in this area.

The one area that continues to lag is residential construction and housing activity. "Multifamily starts have basically recovered, but single family starts have lagged substantially," Meckstroth says. MAPI is forecasting 1 million starts – including both multi- and single family starts – for 2014, well below the peak of 2.2 million and below the "normal" level of 1.5 million to 1.7 million starts.

But that too will likely change in the next two years, with MAPI forecasting 1.3 million starts in 2015 and 1.5 million starts in 2016.

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