US Economy -- Outlook Sketchy

In terms of physical capital, the US now stands at levels seen after a garden variety
recession. Both capacity utilization and the unemployment rate have recovered significantly
from very depressed levels. So has banking balance sheet liquidity and capital bounced
back from deep lows. As all know, housing and construction activity remain depressed.
The Fed is providing ample monetary liquidity and interest rates remain low.

Viewed long term against its potential, business sales, although at an all time high, remain
about 20% below trend reflecting not only slow domestic demand growth since 2001, but
a significant loss of market share to imports. Profits, however, are around record levels
reflecting both stronger offshore growth as well as a surge in the price / cost ratio as wages
have remained painfully tame and productivity growth has been strong. So, profit margins
have been exceptional.

The economy has been recovering for about 3 1/2 years, and since the US has moved up from
a very deep bottom to levels that are normal for recession lows based on physical capital, the
economy has the potential to grow for about another 4 years if it can maintain decent balance.

Per worker real income has remained weak during the recovery from 2009, and to develop
a moderate growth scenario, demand for goods and services must accelerate to foster sales
and production rapid enough to generate at least 2% annual employment growth going
forward. The stronger level of jobs growth is needed to provide aggregate income growth
to support demand. With individual wages growing slowly, the void between income and
demand must be filled by credit growth and, perhaps, the further drawdown of household
savings.This is not an unusual challenge. After all, home and auto purchases as well as
sending kids to college are all funded with liberal amounts of borrowing. But do not forget
that confidence has recovered very slowly.

The sketchiness in the outlook reflects several factors. Wage increases of 1 - 2% are very
low and are not conducive to confidence. Individuals have also been delevering and
using debt more sparingly. Because strongly accomodative monetary policy can drive
commodities speculation, modest incomes can be punished further by even mild bouts
of accelerated inflation. And, let's not forget the banks. Lenders remain very conservative
and are clipping consumers especially with loan rates that are high relative to the cost of
funds.

Let consumers get concerned about rising gasoline prices or a stall out in the recovery of
housing prices and still low confidence levels could erode further, damaging the economy.

And let me say that collectively, business continues to act stupidly. With much better
earnings and low dividend payout ratios, CEOs are buying in stock at elevated prices but
are still accumulating far more cash than they need, which suppresses the returns earned
on assets and leads to a mal - distribution of money within the economy as shareholders and
employees do not share in the rakeoff of profits as top management does. Fat cats get but
fatter.

It remains a hard grind to keep balance between income and demand reasonable enough
to generate the demand that will fill more purses and spread the return to prosperity. And,
wouldn't much stronger income growth boost tax revenues to better cope with US budget
issues.