Which way to recovery?

The recent political donnybrook over the federal debt limit, followed by Standard & Poor’s downgrade of U.S. sovereign debt and wild Wall Street trading swings have mesmerized the country. And, with a vitriolic, 14-month presidential campaign on tap, the U.S. will soon have nonstop media uproar. The wrangling will likely obscure the fact that the coming decade presents some unusual challenges for the U.S. economy and its manufacturing sector.

For one, the recovery ain’t going very well. Housing is still in the dumps, job growth is pathetic and there’s not much middle class consumer power left to drive the economy forward. Inflation-adjusted annual income for the bottom 90 percent of wage earners in the U.S. dropped 1 percent from 1970 to 2008, to $31,344, according to The Washington Post. And that’s before the Great Recession threw a lot of people out of work. (Income increases for those in the top 10 percent ranged from 38 to 385 percent). The housing bubble of the 2000s, which along with credit card debt funded a short-term spending spree, masked the stagnant income of the 137 million people in that bottom 90 percent group.

As noted in this space, manufacturing has been one of the few recent economic bright spots. Its growth led the U.S. out of recession—at least for now—but a major share of that growth has come from exports, not from domestic consumption. In 2010, U.S. exports increased more than 20 percent, according to the Census Bureau, with 85 percent of those exports being manufactured goods. That’s good news for CTE readers. But can it continue, and can it continue to produce more jobs? The answer is probably yes, but U.S. manufacturing will never again be a huge job engine due to automation—the bulk of those jobs will have to come from some other part of the economy. 

The “good news” manufacturing argument was made recently by Harold Sirkin of the Boston Consulting Group in a Bloomberg Business Week article. He said U.S. companies will manufacture more both in the U.S. and in China.

“U.S. manufacturing continues to shift from the highly unionized Rust Belt to the lower-cost South,” Sirkin wrote. Rising manufacturing costs in China, where production worker wages are climbing 15 to 20 percent a year, means productivity-adjusted costs are coming into something approaching parity with the costs in America’s “lowest-overhead” states (all of them in the South). Sirkin noted that China—with a rapidly growing middle class and a population more than four times larger than the U.S.—will remain a top overseas market, a key manufacturing location and a formidable competitor.

Unfortunately, low-wage jobs—whether they are in manufacturing or the service sector—will not do a lot to boost U.S. economic growth. The question is if the U.S. can create jobs that, as they have in the past, allow people to increase their living standards. Jeffrey Sachs of The Earth Institute at Columbia University, writing in the Financial Times, takes the “bad news” view on this question. 

“Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition,” he wrote. “Employment in the U.S. and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless regulation—until the construction bubble collapsed.” 

Sachs argues that true economic recovery must be based on upgraded skills, increased exports and public investment in infrastructure and low-carbon energy. “Instead, the U.S. and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment,” he said.

It’s hard to see the political parties in the U.S. uniting on a plan for economic recovery. And China will pose new and different problems for the U.S. in the years ahead. It’s more likely that we will have a “muddle through” policy for the next few years. Will that be good enough? Your guess is as good as mine.

—Alan Rooks, Editorial Director