Scott Bigelow | 910.521.6351 | firstname.lastname@example.org
University Communications and Marketing
Wednesday, January 5, 2011
UNC Pembroke economist Dr. Mohammad Ashraf is distilling economic data in preparation for the release of his next forecast.
Dr. Ashraf publishes a quarterly economic report at www.uncp.edu/business/research/. His latest report was completed on January 1 and will be online soon.
During a mid-December interview, he was reviewing reports on capacity utilization, production, compensation and saving rates.
“Certain things are improving but not at the rate I would like to see,” Dr. Ashraf said. “For ‘Total Industry,’ there is excess capacity.”
The latest report showed the nation’s production at 74.8 percent of capacity compared with 74.9 percent in August. “Manufacturing” capacity utilization is even lower at 73 percent.
This number has bearing on the success of any investment tax credit offered by the federal government to producers.
“We are well below historic capacity utilization levels,” Dr. Ashraf said. “If manufacturing capacity is idle, what is the incentive to invest in plant and equipment?
“‘Hours Worked’ increased recently, but then fell back,” he continued. “Producers are increasing hours before hiring new workers.”
While output has not returned to pre-recession levels, but it is close to what it was when the Great Recession began. Producers are working current employees longer rather than hiring new workers, he said. Pay is another problem area for the economy.
“Real compensation has not changed,” Dr. Ashraf said. “If we say compensation was at 100 in 2005, it is at 104 in 2010.
“(Consumers) ability to spend has not increased as a result,” he said.
Unit labor cost is declining because compensation is not keeping up, Dr. Ashraf said. Using 2005 as a base of 100 units, unit labor costs reached 106.5 in 2009 but fell back to 103.4 so far in 2010.
“The crux of the matter is that output is increasing but not fast enough,” he said. “The unemployment picture in the near future is not very bright.”
That brings Dr. Ashraf to the tax package currently under consideration by Congress. Will it stimulate the economy?
“Keeping tax rates the same as they have been for the last 10 years is not a stimulous,” Dr. Ashraf notes. “With capacity utilization low, expensing investment may not help either.”
The payroll tax breaks in the proposed legislation offer some hope. This economist has reservations.
“It is expected that consumers will spend it,” he said. “Probably because of past indulgences, the recent trend is people are saving more.”
Call it the fear factor but the personal savings rate, which was 0.8 percent in April 2005, stands at 5.7 percent in the latest report in October 2010. That is down from 8.2 percent in May 2009 when the economy was at the bottom of the recession.
“We’ve all gotten scared,” Dr. Ashraf said. “Savings are a good thing at the individual level, but it has an unfortunate effect on the overall economy.
“The key is to find a happy balance (between saving and spending). This is where the role of government comes in. When consumers are pulling back the government steps in to fill the gap in aggregate demand,” he said.
The balance of trade numbers, which had a strong showing for U.S. exports in the last report, are influenced by spending too.
“Exports are increasing a little bit,” Dr. Ashraf said. “But our lack of recovery has hurt our ability to consume imports. As a result the trade balance seems favorable.”
And this takes us back to lagging compensation, employers not hiring and higher saving rate. It is not the rosiest of scenarios.
© The University of North Carolina at Pembroke
PO Box 1510 Pembroke, NC 28372-1510 • 910.521.6000