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Check out these rapid growth sectors

The U.S. economy may be languishing with lots of unused capacity and still-high unemployment, but there are sectors which are growing quite rapidly. Here are 10 charts that directly belie the popular notion that the U.S. economy is struggling to survive.


Who says banks aren't lending? Banks are lending by the bushel. Commercial & Industrial Loans are a good proxy for bank lending to small and medium-sized businesses. These types of loans are up 13% over the past year, and have now posted a net increase of over $300 billion in just the past two years.


Money is in plentiful supply. The M2 measure of money is up over 8% in the past year, and has jumped at a 12.8% annualized rate in just the past 3 months. On a nominal basis, the M2 money supply has increased by over $3 trillion in the past 5 years. That works out to $1.6 billion per day.


Most of the increase in M2 has come from bank savings deposits. Despite the fact that they pay almost nothing in interest, the public has added almost $3 trillion to their bank savings accounts in the past four years. That translates into growth of over 10% per year. The huge increase in savings deposits is the flip side of the public's confidence in the future: low confidence and extreme risk aversion have persuaded households to sock away massive amounts of money in bank deposits. This is money that could be turned loose to fuel a significant boom in growth and prices once the public begins to regain its confidence in the future.


Car sales are up at a 13% annualized pace since their recession low. This is now the most incredible recovery in auto sales on record.


U.S. crude oil production is up 40% in the past four years, and up 20% in just the past year, thanks to new fracking technology. And the boom is just getting underway.



These two charts could be the most bullish of all. Natural gas production (top chart) is up by one-third in the past six years. The huge increase in natural gas production has caused the price of natural gas to decline by about two-thirds relative to crude prices (bottom chart). The U.S. now enjoys a huge advantage over other countries because it has easy access to the world's cheapest source of energy (natural gas). The huge change in relative prices is almost certain to cause monumental changes throughout all the industries that are energy intensive, as companies switch from crude to natural gas. This dramatic change in the type of energy we use and its price could have a major impact on U.S. growth in the coming years.


After four years of a devastating collapse, housing starts are now up 58% in just the past two years!


Housing starts were so low for so long that the housing stock shrunk significantly relative to demand. As this chart shows, housing prices are up almost 10% in the past year. Demand and supply have come back into balance, and demand—fueled by the lowest mortgage rates in history and abundant cash—threatens to push prices higher still.


These are all impressive charts, but this last is the most impressive of all. Thanks to three rounds of Quantitative Easing, the Federal Reserve has purchased a net $1.5 trillion of MBS and Treasuries, and has created a similar amount of bank reserves in the process. Almost all of the increase in reserves is still sitting idle at the Fed, which means that banks are content to hold a huge portion of their balance sheets in reserves paying only 0.25%. As is the case with consumers who love savings deposits for their safety rather than their yield, this reflects a banking system that is still very risk averse. Should that change, however, and should banks become more willing to lend, they have an almost unlimited potential to do so. If the Fed fails to manage this huge excess mountain of reserves properly, it could quickly turn into an Everest of extra liquidity washing through the economy, boosting growth and boosting prices in the process.

All of this bears close attention, since it runs directly counter to the popular meme that the U.S. economy is struggling and possibly on the verge of another recession. Where there's a lot of smoke, as these charts show, there is bound to be some unexpected fire.

As a supply sider, I am as gloomy as anyone when it comes to the outlook for the economy at this juncture. The fiscal cliff deal will cause taxes to rise on almost everyone, especially risk-takers and small businesses, and that adds up to a drag on growth. Regulatory burdens and costs associated with the implementation of Obamacare are just beginning to have an impact, with much more to come. Higher taxes are in effect validating a higher level of government spending, and that reduces the economy's overall efficiency, and that in turn translates into slower growth than could otherwise be possible.

But when I look at these charts and realize the enormous changes that are occurring beneath the surface of what most believe is a very sluggish and calm economy, I come away thinking that optimism is more likely to be rewarded than pessimism, even though the drumbeat of news is depressing.

Service sector looks healthy


The December ISM service sector business activity index looks pretty healthy.


The employment index is particularly encouraging, since this bodes well for future growth.


As with manufacturing, the US service sector is doing much better than the Eurozone's service sector. The Eurozone economy is still in a rut, but at least there are no signs of things getting worse.

Jobs and the economy continue to grow

December's jobs report provides yet more evidence that the economy continues to grow, probably at a 2-2.5% pace. That's a only little less than its long-term normal growth rate of 3%. The private sector has increased the number of jobs by about 2% over the past year, and that is similar to the growth we saw during the the growth phase of the last economic cycle (2004-2007). The problem with the economy is not a lack of growth, but a lack of recovery to previous levels of activity. It should have been growing much faster.


The chart above compares the level of real economic activity with its long-term trend. By my calculations, the economy is about 13% below where it should be. In every other recession/recovery cycle, growth has rebound rapidly after the end of the recession; this time it has not. 


For the past three years, most observers have lamented the pitiful growth of jobs. But as the chart above shows, private sector jobs (according to both the household and establishment surveys) have been growing steadily, and at a reasonable pace. In fact, the establishment survey has found 5.3 million new private sector jobs since the post-recession low in early 2010, which works out to about 155K per month on average. This is more than enough to keep up with the natural growth of the population.


As this next chart shows, public sector jobs have suffered the most in the current recovery, having declined by about 675K from their recession-era peak. That's held back overall jobs growth, but it's a healthy development since the public sector was arguably way too big going into the recession, having grown much more than the private sector in the previous decade. Municipal defaults and widespread budget problems at the state and local levels in recent years attest to that.

As the chart above shows, the pace of private sector jobs growth is similar today to what it was in the last business cycle expansion. Not terrific, but not miserable either, and there is no sign of any deterioration: unemployment claims are very near their post-recession lows.


The main reason for the economy's relatively low level of growth is the lack of growth in the labor force. Over 5 million people have "dropped out" of the labor force, having decided either to retire or just stop looking for a job.



Generous unemployment benefits (which began in 2008 with the creation of Emergency Unemployment benefits) likely explain much of the lack of growth in the workforce, as does the relaxation of food stamp eligibility in early 2009, and the strong growth in the ranks of the disabled. In short, government policies have made a significant contribution to slowing the economy's recovery, because the government has been paying people to not work.

Fortunately, the labor force is beginning to grow again, rising almost 1% in the past year, which is roughly equivalent to its long-term average growth rate. This recovery coincides with a 50% decline in those receiving emergency unemployment benefits over the past two years. Unfortunately, Congress' decision to once again extend unemployment benefits for another year will probably act to slow the growth in the labor force and retard overall economic growth going forward.  When you pay people to not work, you ought to expect to find fewer people willing to go back to work. Another source of headwinds this year will be the increase in taxes on high-income earners, the increase in payroll tax deductions for nearly everyone.

Taken in isolation, today's jobs report would be considered to be only slightly weaker than normal. That people continue to complain about miserable jobs growth is only because we would all like jobs growth to be much stronger, in order to "catch back up" to where the economy could or should be. Until government policies become more jobs- and growth-friendly, however, that's not likely to happen. But there's no reason the economy can't continue to grow, in spite of all the headwinds. It's been my experience that you can never underestimate the ability of the U.S. economy to overcome adversity.

Things could be better, but they could also be a whole lot worse.

ISM indices point to moderate growth

The December ISM manufacturing indices point to an economy that continues to grow at a moderate pace. Given the prevailing mood of pessimism, they provide some encouragement, at least in so far as they showed no signs of any deterioration.

The December ISM manufacturing index was a bit stronger than expected (50.7 vs. 50.5), and as the chart above shows, it is consistent with overall economic growth of about 2-3%, which is roughly the speed at which the economy is probably growing currently.


The U.S. economy continues to do better than the Eurozone economy, as this chart comparing ISM indices for the U.S. and Eurozone manufacturing sectors suggests. The Eurozone is in a recession, but it is comforting to see that conditions there are not deteriorating.


December export orders strengthened, after a period of weakness that lasted from June through November. This provides some confirmation for the thesis that overseas economies are not deteriorating further and suggests that they may even be recovering.


The December employment index improved somewhat, in a mildly encouraging sign.

Beach photos



It's amazing how much and how fast things can change at the beach. These two photos were taken (with my iPhone 5) about one hour apart last Sunday, while walking along the beach in San Clemente.

UPDATE: Here's a shot taken this morning in the same spot as the other day—slightly different angle but totally different light. Note Catalina Island in the right-hand part of the horizon, about 30-35 miles away.