Calculated Risk on Bernanke's testimony.

Fed Chairman Ben Bernanke was asked today why he thought companies with significant cash weren't investing. His answer was that most companies currently have excess capacity.

Bernanke was also asked about small companies having trouble getting financing, and he pointed out that small companies reported their number one problem is "lack of customers", not difficulties in obtaining financing.

This excess capacity or lack of demand - and therefore lack of new investment - is a key reason why the recovery is sluggish.

 ...

 There is some good news:

• Homebuilders are on track to deliver the fewest housing units this year since the Census Bureau started tracking housing starts in 1959 (¹see analysis below). 
• The U.S. population is still growing and new households are being formed. Based on normal household formation to population ratios, there would usually be over 1.1 million net new households formed per year. Because of financial distress, the number of households formed in 2010 will probably be lower then normal. But this is real pent up demand - people don't want to double up with friends or live in their parent's basement forever! 

However the bad news is

• There are still a substantial number of excess housing units (my estimate is around 1.7 million as of Q1).
  
• Eventually this excess supply will be absorbed, and new residential investment will increase - but that will not happen until the excess inventory is reduced significantly. 

Usually the key sector for job creation and household formation in the early stages of a recovery is residential investment. But this sector isn't participating (as expected), and this weakness is contributing to the sluggish labor market.

¹Analysis: Housing Units added to stock in 2010

Yesterday the Census Bureau reported housing starts fell in June to a 549 thousand seasonally adjusted annual rate. As I noted yesterday, this is good news for the housing market longer term (because of the excess housing units), but bad news for the economy and employment short term.

If I understand this correctly, the estimate of excess housing units is 1.7 million units for Q1. This year around 550,000 new units in total will be built if the pace remains steady (maybe it will slow down?).

So that's 1,700,000 units excess plus 337,500 new units for Q2-Q4 equals 1,925,000 in total.

1,100,000 new households a year means 825,000 units bought up Q2-Q4 which means the total excess for 2010 is 1,925,000 minus 825,000 equals 1,100,000.

Next year if 550,000 units are built plus the 1.1 million excess , the new total is 1.65 million minus 1.1 million new households which equals 550k excess at the end of 2011.

For 2012, 550k new plus 550k excess equals 1.1 million total minus 1.1 million new households equals ZERO excess at the end of 2012.  Then employment in the economy should then pick up with 1.1 million new units need to be built to keep up with demand. Add in the mulitplier effect and private demand should rise. (In the mean time, other sectors should pick up with moderate growth in the economy.) If there are less new housing starts each year, of course the excess will be used up more quickly but the economy and employment will hurt more short term.

Again I wonder how this compares with Japan's experience during its lost decade and beyond.