Manufacturing/construction reflect U.S.
economic extremes

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

“It was the best of times — it was the worst of times." This opening line from Charles Dickens’s A Tale of Two Cities is particularly apropos when summarizing the outlook of America’s overall production economy. Manufacturing and construction form the extreme bookends of today’s U.S. economic scenario.

The manufacturing sector, which had been hammered by the implosion of its major sub-sectors (automotive, steel, fabricated metals, textiles, electronics, etc.), caused by mounting foreign competition, jobless production technology and the accelerating pace of obsolescence, since reaching its peak in the 1970s, had been given up for lost, even before the September 2008 recessionary crash.

Construction, on the other hand, seemed to be headed for the proverbial stratosphere at that time, as residential, commercial and industrial construction vied for the attention of thousands of developers, who saw no end to this giddy expansion from the 1980s and well into this century’s first decade.

With the rapid growth of America’s population during this period and a government encouraged tax-advantage belief that every family should own a home, the residential component kept setting new records, with no end in sight. This eventually created the destructive financial underpinnings resulting in the all-encompassing “great recession.”

“Flipping” became a national pastime, as home prices seemed to double every five years and money could be made by house buying and selling.

The current construction depression impacting the residential market and, to a lesser extent, the commercial and industrial markets, has degenerated into a vast wasteland, exacerbated by a nationwide shift to renting over owning.

In addition to America’s manufacturing leadership in heavy construction machinery (Caterpillar), commercial and military aircraft (Boeing) and materials-handling equipment (United Technologies), the renaissance of manufacturing has also been driven by exports, especially the unprecedented expansion in the Southeast Asian quadrant and the world’s unquenchable thirst for armaments, of which the U.S. provides more than the rest of the world combined.

This has also led to a reverse in manufacturing job hemorrhaging, which had been a decades-long phenomenon. The manufacturing sector now finds itself in the unique position of steady hiring, despite its ability to generate record jobless productivity. This has tripled production effectiveness in the last forty years.

Capital goods expenditures reflect industrial muscle-flexing

Capital goods expenditures, a major indicator of the industrial sector’s outlook for the U.S. future manufacturing growth, continued their upward climb in March, as a broad range of sub-sectors such as machinery, metals, computer software and chip makers expanded their outlays substantially.

This surge has come close to reaching the monthly capital expenditure output of non-defense revenue spending, which reached its all-time peak of $70 billion in December 2007. Shortly thereafter a steady decline set in, heralding the subsequent recession in the overall economy as well.

But where the previous pre-recession years saw the topping out of heavy industry capital spending in particular, the huge amounts of cash accumulated since 2008 have given corporations the wherewithal for a resilient capital rebound.

These growing capital expenditures not only signal America’s manufacturing industries’ growing optimism but they also negate the expectation that personnel hiring will be an automatic side effect of the sub-sectors anticipating a substantial growth potential. As the post-recession manufacturing arena is already displaying indications of better than expected strength from the industrial sector, the incubus of unemployment will continue to hover heavily over the slowly expanding recovery.

In attempting to project the potential employment recovery, the current post-recession environment provides little indication of absorbing the approximate 26 million personnel now out of work, working part-time or those that have just given up. The ongoing technological revolution actually militates against the type of employment recovery that has accompanied the aftermath of previous recession recovery comebacks during the last 60 years.

Best estimates of personnel availability for nationwide job openings indicate that little improvement has taken place to remedy the 5 to 1 ratio of job seekers to work openings that existed a year ago. At its lowest ebb, the ratio was 6 to 1 in late 2008. The accelerated expenditures made possible by improved manufacturing technology are actually eliminating the need for hands-on employees on both the shop floor and back office support services.

Rental switch continues to gather steam

The embryonic switch from home owning to rental, which I first tapped into last December, is starting to gather steam in all parts of the country.

Although this is creating further headaches for the moribund housing industry, which reported a further drop in construction, sales and pricing last month, it’s proving a bonanza for overall rental demand. The major sea change from home ownership to rental across the broad spectrum of the American population is already signaling shortages of rental units, whether they are high-rise buildings in the major cities or individual housing sites in suburban or rural areas.

Even such government-sponsored house-holding gimmicks as reverse mortgages are turning out to be much more costly for participants than anticipated, due to interest rates and extraneous costs embedded in these transactions. Although these costs are not borne by the current owner, they greatly diminish the residual value of the home, either as an estate asset or for future liquidation.

The measurable percentage of those opting for home ownership in the foreseeable future has dropped precipitously. The fascination of residential ownership as the core asset of the bulk of America’s population seems to be decreasing permanently. This is so despite the more favorable tax treatment of mortgage interest rates and the $500,000 exclusion of capital gains on resale. Residential rental payments receive no tax benefits for the individual taxpayer.

It seems that the current ongoing economic fragility will continue to impact a much greater fiscal prudence on the spending habits of the average American. A savings rate back in the 5% range, where a deficit existed for the past decade, and even back to the mid-nineties, indicates a realization of stormy times ahead. Securing the future has risen to the top of the list of concerns by the vast majority interviewed by responsible poll takers.

Much justification for this traumatic impact is the fear of collapsing, or increasing restrictions on, such programs as Medicaid, Medicare, Social Security and pension benefits. No one is more concerned about the future viability of the American state of affairs than the income tax-paying American, who is eagerly looking forward to having their voices heard in the upcoming presidential election in November 2012.

Biofuels diversion proves globally catastrophic to food prices

With oil and food prices continuing their upward climb, the administration’s increasing commitment to biofuels, especially ethanol, is proving a catastrophic alternative economically, both in the U.S. and around the world. Biofuels are the main culprit for the food cost explosion.

To put this ill-timed choice into perspective, the use of biofuels had reached 6% of the global grain consumption in 2010, from early in the last decade, when it took off from a less than one percent base. It’s expected that this acceleration will reach as high as 30% of the world’s total grain crop by 2025. Oil prices are expected to increase in tandem with expanding demand, decreasing reserves and the attendant costs necessary to excavate the diminishing residue of the black gold.

It isn’t only the Obama-led EPA hysteria that is causing such a swing to biofuels. While Congress has mandated that U.S. biofuels use must reach 36 billion gallons by 2022, the European Union stipulates that 10% of transportation fuel must come from renewable energy sources by 2020. Even China, India, Indonesia and Thailand have adopted biofuel targets.

Even though worldwide grain production has also grown impressively in the past decade, it cannot begin to keep up with the world population explosion and the vast numbers, in Southeast Asia especially, that have entered the middle class and its subsequent consumption demand. It must be remembered that the current unrest in the Mideast and North African nations emanated from Tunisian food riots earlier in the year, when government subsidies for foodstuffs were greatly reduced.

Although the mainstream media credits the subsequent revolutionary outbursts on a yearning for democracy, or alternatively on the imposition of strict Shariah law, as advocated by the Moslem Brotherhood, the threat of starvation has been the specter dangling dangerously over the Third World. Paradoxically, this is the area that has seen its population double in the last 20 years, with 90% of the population in Islamic North Africa and the Middle East averaging under 25 years of age. This is dolefully accompanied by a 50% or more unemployment rate, unleashing firebrand youths who have nothing to lose.

In historical terms, ethanol and its ancillary gasoline blends may prove to be the catalyst that makes food prices the breaking point in a world struggling to climb out of the Great Recession. It’s the ultimate irony that the pollution dangers of fossil fuel energy production in the U.S. will be overwhelmed by out-of-control food prices beckoning just around the corner.

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