Is the Economic News Bad, and Is It Obama's Fault?

The following was written some six months ago by a large mutual-fund management company, T. Rowe Price:

For the better part of the past two years. equity [translation: stock] investors have tended to downplay good news—such as the impressive recovery in corporate earnings—and fret over bad news, such as Europe's debt crisis, stubbornly high U.S. employment, and a host of other perceived risks.

This was written specifically with reference to stock market and investment concerns; but it strikes me that it's not only investors who seem to focus on the negative, on the bad news (and not just financial/economic/investment news).

It's often been said that the media tend to showcase the bad news; to my mind that may or may not be true. But certainly politicians like to seize on the negative aspects of the current domestic financial and economic picture. After all, they want to unseat an incumbent president and to do so, they will do everything they can to argue that things are not good, that they have not been good for three years (never mind that some of the current problems could more accurately be said to have originated under the previous administration), and that Obama is to blame.

The Price article continues, "So far this year, good news appears to be winning." And then they quote stock market indexes, which are measures of aggregate stock-market prices. The article goes on,

The market rally has been powered by stronger monthly U.S. employment reports, better economic news from China, and the significant liquidity boost to European banks from the European Central Bank's refinancing operation.

Yet, even as economic risks appear to be receding. . . the outlook for corporate earnings' growth is becoming less favorable. . . .[G]lobal earnings growth should slow to a still healthy mid-single-digit growth rate this year. . . .[T]he earnings slowdown is a natural result of the economic cycle. . . .We've now reached the point of the cycle where you would expect to see slower earnings growth.

The slowdown has been exacerbated by several things which include "an economic soft patch in the U.S. tied to a fiscal stalemate in Washington. . . ." So the very politicians who are criticizing Obama and blaming him for economic bad news are themselves contributing to that which they're blaming Obama for. And--maybe most importantly--things are not as bad as some politicians would have us believe.

Copyright © 2012 by Richard Stein

American Manufacturing: The Picture Is Really Not So Bleak

Republicans and others who wish to impugn President Barack Obama and blame him for everything claim that he is responsible for loss of American jobs, especially manufacturing jobs. We see pictures of shuttered factories and impoverished areas in "Rust Belt" cities, and hear much about the rate of unemployment.

The peak year for employment in American manufacturing was 1979. Jobs declined continually since then—up until 2009, when they actually began to increase--and this turnaround point was, of course, during Obama's presidency.

Not that Obama gets all the credit for any increase, any more than he deserves the blame for 30 years of decline.

But let's look at some facts. The current number manufacturing jobs is quite a bit below its all-time peak; but, on the other hand, the value of American manufacturing has increased.

It's not simply a story of outsourcing of American jobs to China, Mexico, and other countries where labor is cheaper (although I have tended to feel that the American worker has priced himself out of the world labor market). Greater efficiency—automation, use of industrial robots, and so forth—has meant that the production of American factories can be achieved with fewer workers. So, if you want to, blame the robots for declining unemployment in American manufacturing.

But this means that American ingenuity has permitted goods to be produced with less labor—and thus lower labor cost, which of course is important in world competitiveness.

So, the situation of American manufacturing is much more salubrious than some people would have us believe.

Copyright © 2012 by Richard Stein

The "Buy American" Campaign and the Age of Global Trade

I was recently having a little dialog, via email, with a friend about Americans' buying products made in other countries. The ultimate inspiration behind this was a series on ABC TV news called "Made in America," which aims to make us Americans aware of how much imported merchandise we are buying and, presumably, stimulate us to look for domestically produced alternatives; that is, "buy American" and help the American economy.

There are a lot of reasons why so much of what Americans are buying and consuming is not domestically produced. Much of it comes from China these days, so we talk about the value of China's currency, which the government of China keeps artificially low, and low wages in China—both of which result in China being able to produce and sell its goods very cheaply.

But there is one reason that's possibly overlooked. At least I do not hear it mentioned. But I have occasion to see evidence of it.

If you look at freight trains, freight yards, or those yards where shipping containers are transferred from trains to trucks, you see just how wide-spread containerized shipping is these days. And the names on many of the containers show they're involved in the China trade.

Here is a quote from a Wikipedia article on "containerization":

The system, developed after World War II, led to greatly reduced transport costs, and supported a vast increase in international trade.

Therefore, items made in China (or in many other countries) can be shipped cheaply. Thus, starting with the items' original low cost and adding (as businesses must do) the cost of shipping and any tariffs, the items can still be sold cheaply because per-item shipping costs are low. Without this cheap means of shipping, it might not be profitable to sell much of the imported merchandise that we buy.

So a revolution in shipping has caused much more globalization and internationalization. No doubt it's not only Americans who are buying a lot of imported stuff of all kinds. In Europe, there is now more international trade: trade moves more freely within the "Eurozone" because of the removal of tariffs and other trade barriers, plus improved highways, tunnels, and bridges.

But to get back to the "Made in America" campaign: Actually, the whole idea that consumers need to go out of their way to support domestic manufacturing because American manufacturing has declined or is threatened is false. In fact, American manufacturing is thriving.* The value of American manufactures currently is greater than it ever has been, and is greater than that of any other country.
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*This information and the statements in the following sentence are based on assertions in an installment of the PBS television series "America Revealed."

Copyright © 2012 by Richard Stein

Should You "Buy American"?

The television network ABC has been carrying on a year-long "Made in America" campaign, to point out to its viewers what products are made in America, with the idea that, if consumers are aware of what brand names are of American manufacture, they will (hopefully) prefer to buy those products.

In Seattle, a local organization tried to get a buy-American advertising campaign onto the sides of public buses; but the Seattle transit authority declined the ads, saying that they were espousing a politically and economically controversial position.

There was considerable outcry over this, and the transit authority reversed its position. In this instance I think I agree with the "buy American" organization and not the transit authority: I don't see anything particularly controversial about the advertising or its aims.

Nowadays, practically everything one buys in the US seems to be made in China; and to some degree—probably a considerable degree—that represents manufacturing jobs lost to American workers. And we currently have a rate of unemployment in the US that is unacceptably high.

Entire industries in the US have been pretty much destroyed—for example clothing manufacturing (as of quite a while ago) and more recently, shoe manufacturing.

Who is to blame? I want to look at several parties and maybe assign some blame to each.

First, China does not play fair. They keep the exchange rate for their currency relative to the dollar very low. Thus Chinese-made merchandise can be sold ridiculously cheaply—even after the wholesalers and retailers involved add on shipping and import duties to the items' cost. (It might surprise you that the shipping and duty really don't come to that much.) So American producers simply can't compete.

Second, look at merchandisers like Walmart. It's in the nature of capitalism that a retailer which can sell something more cheaply than its competitors has a competitive advantage. Chances are, the customer does not look to see where the item was made (which of course is what the campaigns are all about) but simply goes with the low price. And the cheaper item these days, is usually Chinese made.

So now, third, the consumer: A lot of consumers not only like to save money, they need to save money. This is the situation of some families, particularly lower income families with several children: if they can get their purchases more cheaply, that may mean that they can buy shoes or winter jackets for all of their children, instead of for only one or two. Even if they don't pay attention to where those items are made, and maybe don't care, I think they deserve some sympathy.

I think yet another party should get some of the blame. I'm pretty sure that a $60 or more Tommy Hilfiger or Polo Ralph Lauren shirt, which is made in a third-world country, does not have to be made in that third-world country to be profitable for Hilfiger or Polo--or for the retailer. When the item is on sale and its price is reduced to half, I promise you the store is still making a profit.

Now one exception to all this is cars. I had a neighbor who, when I was extolling the reliability of the Honda I owned at the time, said, "I think that if you're American, you should buy an American car." Well, nowadays, in this age of the global economy, it's not so simple. Did you realize that the price stickers on cars in the showroom are required to show the percentage of "domestic [parts] content"? I saw a Ford Taurus where the domestic content was only 65%. It's not too uncommon for an "American" car to have its major parts, like transmissions, made in Canada or Mexico or an Asian country.

And look at the cars with Japanese brands which are assembled in US plants. Assembly in the US means US workers have employment when you buy that vehicle. And the domestic content might actually be higher than that Ford Taurus: a lot of parts like windshields, headlights, batteries, tires, and power-window controllers probably come from domestic suppliers, and major components may be made at the assembly plant.

The same ABC network did a little study in which they tried to determine which car purchases would produce the most jobs for American workers; and they found that buying a Toyota Camry would actually produce more jobs than a certain car with an "American" nameplate.

So, if you want to "buy American" when you are car shopping, don't pay the main attention to the name: you can look at where the vehicle was assembled—that's on the sticker, too—or, more importantly, look at that "domestic content" number.

Update, July 4, 2012.
Here is an article on this subject from AOL Autos:
http://autos.aol.com/gallery/the-most-american-cars/?icid=maing-grid7|main5|dl7|sec1_lnk2%26pLid%3D175630

Update, June 8, 2013
An interesting little sidebar in the July, 2013 issue of Car and Driver:

Globalization means that even domestic automakers are importers, bringing Buicks from South Korea, Fords from Turkey, and all manner of Chrysler models from both north and south of the border. In fact, only one volume brand is solely American-made: Jeep. All Jeep vehicles are assembled in either Detroit; Toledo, Ohio; or Belvidere, Illinois.

Two comments on this: First, it is to be hoped that this news about Jeep does not impel lots of people to go buy Jeeps because recent news has it that Jeep has a serious design defect which makes the gas tank likely to explode in rear-end collisions, and the NHTSB has been pressuring Chrysler to recall Jeeps to fix the problem
Second, as I have often said, the people who are trying to "buy American" and go buy Fords, Chevrolets, and Buicks are misguided.

Copyright © 2011 by Richard Stein