The coming rust-belt recovery
Manufacturing will play a surprise lead role in the turnaround of the resilient U.S. economy
Barrie McKenna
Saturday, January 26, 2008
WASHINGTON ? The natural state of an economy is to grow. We work more, we earn more, we spend more and we produce more.
Occasionally, however, economies stall and go into recession. And, for a stretch, perhaps a few months, everything goes into retreat.
Wages, spending and output shrink.
That's what appears to be happening to the mighty U.S. economy.
Thankfully, recessions are a rare and brief event in this country.
Since the Second World War, the United States has experienced just 10 recessions, lasting an average of 10 months each.
Amid the financial gyrations of the past few weeks, it's comforting to know that the foundation of the next growth phase is already being laid. And it could come from the most unlikely of places: the dirty business of manufacturing, and trade.
You can thank the remarkable resilience of the American economy, the largest, most diverse and open economy on the planet.
It isn't easy to keep the United States down for long. The same, often reckless, dynamism that causes this country to repetitively binge ? on real estate, technology stocks or some other bauble du jour ? is precisely what will pull the economy out the other side.
It's far too early to write an obituary for the U.S. economy.
Just remember: This isn't Japan, which suffered three recessions during its "lost decade" of the 1990s.
Japan's economy was red-hot. And no one thought the boom would ever end. The price of everything from stocks and real estate to a cup of coffee was badly out of whack. So much so, that by 1990 the Imperial Palace in central Tokyo was estimated to be worth more than the entire continental U.S.
When the bubble inevitably burst, Japanese banks and policy-makers were ploddingly slow to acknowledge they even had a problem
And so, during the decade that it took all the bad debts to work their way through Japan's hide-bound corporate structure, worthy borrowers couldn't get loans and the economy stagnated.
Americans are far too impatient to ever let that happen.
They got into their current mess by letting the housing industry run amok. Too much money was pumped into one sector with predictable consequences: overbuilding, loans to people who couldn't afford them and grossly inflated prices.
Brutal and wrenching as it is, the unwinding process is already well under way. Homeowners can't pay their mortgages, so banks foreclose and homes are auctioned off at fire-sale prices. Falling prices make loans turn bad, which causes losses for lenders and their shareholders.
In just a few months, American banks have written off tens of billions' worth of investments. They have also sought out big Asian and Middle Eastern investors to repair their tattered balance sheets.
The light at the end of the tunnel is the U.S. dollar. A steady five-year decline in its value against most other currencies, including the Canadian dollar, is rapidly restoring the United States' competitive place in the world. It has made American products look cheap again, along with American workers.
The United States already has what is arguably the most efficient service economy in the world, an impressive transportation infrastructure and sophisticated financial markets.
Now, the country is poised to reassert itself as a manufacturing powerhouse.
EXPORTING TO CHINA
Consider Richards Industries of Cincinnati, Ohio. It makes valves ? pressure valves, control valves, temperature valves. These little machine-tooled devices are what keep modern factories humming and in perfect balance.
The company's business has never been in better shape, thanks to a thriving export business, insists Bruce Broxterman, president and part owner. When he joined the company in 1980, exports accounted for about 2 per cent of sales. Now, with thriving sales to China and other Asian countries, exports make up nearly 40 per cent of its $30-million (U.S.) a year business. And the cheaper U.S. dollar is enabling the company to make big inroads in Europe, too.
"We're doing all the right things operationally," Mr. Broxterman says. "I'm pretty optimistic."
Within five years, more than half its sales will be outside the United States. The company has been aggressively hiring salespeople in key overseas markets to tap the growth.
And even more remarkably, with roughly the same number of employees (125) it had a decade ago, Richards Industries is cranking out more valves than ever.
The company isn't alone. The Merrill Lynch economist David Rosenberg recently predicted a revival of the U.S. rust belt as part of a "renaissance" in U.S. manufacturing. "Dollar depreciation is already redistributing growth back to the United States," he said.
Many experts had given up on manufacturing in states such as Ohio, Pennsylvania and Michigan. In a world of cheap labour, there was very little that you could produce competitively there any more, skeptics argued.
LEARNING TO BE NIMBLE
Well, something remarkable has happened. Overvalued for so long, the U.S. dollar has forced companies to become a lot more productive to survive in the global economy. Manufacturers such as Richards Industries learned to become nimble and agile, rather than just big.
Now, with the lower dollar, they are poised to reap rich rewards.
Suddenly, foreign companies want to put their factories here, not the other way around. The European aircraft-maker Airbus, Craftsman Tools of Britain, the German chainsaw maker Stihl AG & Co. and the German tire-maker Continental AG have all announced U.S. plant expansions in recent months.
In the home market, too, American manufacturers are discovering that they can compete again. A 30 per cent drop in the dollar in the past five years is huge. A European buyer looking at buying a U.S. product priced at $100 needs to come up with just 67 euros, compared to nearly 100 euros before.
Surprisingly to some, the United States makes more manufactured goods today than at any time in its history ? three times more than it did in the mid-1950s boom. And since 1980, the value of U.S. manufacturing has tripled to roughly $5-trillion.
Here's a newsflash: The entire manufacturing sector has not up and moved to China or Mexico. With less than 5 per cent of the world's population, the United States accounts for nearly 25 per cent of all manufacturing ? No. 1 in the world. Japan, No. 2, has lost ground and is fading. Fast-growing China still accounts for less than 10 per cent.
The catch is that American companies have learned to produce more with fewer, better-skilled workers. The country's factory work force peaked at about 19 million before the 1980-81 recession. It has since shrunk to about 14 million.
And yet the overall unemployment rate, now at 5 per cent, has fallen as factories have shed jobs. This suggests that surplus workers are being absorbed into the rest of the economy.
And manufacturers are successfully selling to the rest of the world.
American exports grew in double digits in 2005 and 2006, and are on track to grow by 13 per cent in 2007. Manufactured exports are at a record high.
Even the embattled U.S. auto industry is showing signs of turning the corner. The Detroit Three auto makers have shown impressive productivity gains. Over the past five years, General Motors has reduced the hours needed to build a car by 15 per cent. Ditto for Ford and Chrysler.
The United States is quietly becoming an attractive place to build cars again ? significantly cheaper than in Ontario, it turns out. With the Canadian and U.S. dollars near parity, Canada has become the high-priced location to assemble cars. Experts predict Ontario could lose 600,000 cars of production by 2012, as U.S. production is ramped up.
It's the same for a lot of the other products that the U.S. makes in abundance, including aircraft, steel, power equipment, machinery, food products and pharmaceuticals. Production is rising; exports are up.
Even in Ohio ? the centre of the rust belt ? there's a bit of a manufacturing revival under way. Since 2000, more than 200,000 manufacturing jobs have disappeared in the state. And yet it's the only state that has increased exports in each of the past eight years.
"The lower dollar has really changed the game, particularly in Europe," agrees Bruce Broxterman of Richards Industries. "I strongly believe in U.S. manufacturing."
Just like the company's valves, other sectors of the economy are now poised to pick up the slack and return the U.S. to its natural growth equilibrium.
There are a lot of people in this country who would not have thought this renaissance possible. All three leading Democratic presidential candidates ? Hillary Clinton, Barack Obama and John Edwards ? have spoken skeptically about the benefits of trade, while lamenting the "decline" of manufacturing.
And yet to choke off trade, by moving the United States down a more protectionist path, would snuff out one of the key strengths of the economy, based on a badly flawed premise.
© The Globe and Mail
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