As the third part of my dissertation project, I am trying to predict in which industries of the US economy we can see a boom-and-bust pattern in the near future given the highly expansionary monetary policy that the Fed has been conducting to boost the recovery from the Great Recession.
Among many US industries, the chemical industry stands out in this respect. Companies in this industry have recently (between 2011 and August 2014) announced the undertaking of at least 196 projects aimed at building new chemical plants or upgrading or restarting old ones with projected investments in the amount of $124 bln. For the purposes of predicting business cycles, the new plants projects are more interesting because it they take more time to complete.
Presumably, the relevant projects are already being reflected in the manufacturing construction figures published by St. Louis Fed (see below). And it is plausible that there is more going on than just the chemical industry.
Manufacturing construction spending has almost reached its peak monthly level of February 2009 (especially given that the chart ends with October). Growth was especially strong in 2014 (from $46 bln. in March to $59 bln. in October, an increase by 28%).
At the same time, the prices of the main intermediate and capital goods used in construction don’t show a similar dynamic.
One can look at the PPI* for iron and steel products, for instance.
Or for construction machinery and equipment.
Those discrepancy between the rising manufacturing construction spending and the dynamics of the prices of the inputs into construction is important because it may reflect the failure of prices of inputs to fully reflect the changed market conditions and thus lead to cost overruns for projects undertaken on borrowed funds. This is, in brief, the mechanism of a boom-and-bust pattern which I offered in the paper on the Austrian Business Cycle Theory which is forthcoming in the New Perspectives on Political Economy.
However, a caveat is in order. This post isn’t a precise forecast of a boom and bust in the US. Even if I am right about the pattern, the power of accumulating innovation may compensate for the potential boom tendency.
*The PPI data are from BLS.