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In a Rush to Fail

I almost never have a problem with someone standing up for their convictions.  I also don’t have a problem with people trying to make a living.  But I do have a problem when somebody is willing to put others in peril in support of either of the above.   This is why I am seriously disappointed with Rush Limbaugh.

For those of you who do not know, Rush Limbaugh has called for a boycott of General Motors.  In general, I am not against boycotts.  Boycotts are a good tool when used to illicit a change in behavior.  Boycotts are a bad thing when the goal is just to have someone else fail.  Unfortunately, Rush Limbaugh called for the boycott because he wants anything associated with President Obama to fail.  As reported by the Detroit Bureau, “the most amazing thing here is that Limbaugh appears to be openly admitting that the purpose of this is economic and political sabotage — to prevent President Obama from succeeding at something.”

Other conservative pundits support the boycott because the government involvement in GM is contrary to their beliefs in having free enterprise.  If Rush and the other conservative pundits are correct, GM will not survive due to the government’s ownership.  I have made similar statements about China’s goal to be a leader in the EV market. While I respect the conservatives trying to support a free market economy, I think that if the intended result of the boycott is achieved it can have a potentially dramatic negative effect on the overall economy.

If the majority of economists are correct, the current state of the economy is not good.  Although the economy is expected to start a recovery soon, it is still in a fragile state.  Any unnecessary negative economic event will have a multiplied effect on the long term stability of our economy.

It is unrealistic to think that a majority of the people boycotting GM will automatically buy a domestically manufactured vehicle.  If only 40 percent of the “boycott buys” are imports, our economy will still lose tens of billions of dollars in lost wages and taxes.    Workers will lose their jobs and benefits adding further strain on the economy.  Consumers will lose confidence in the economy and pull further back on spending. 

We are a long way from the time when “what was good for the country was good for General Motors and vice versa” could be argued, but there still is something to it.  Well at least for now.   With both GM and the economy in a tenuous state, we need to do everything to ensure a strong economy.  Calling a boycott on GM is the opposite of what we should be doing.  In this case a boycott is also opposite to the principles of a free market.

Do I really think that the boycott will cause GM and the economy to crumble? No.  I just do not want to take a chance.  If the people calling for the boycott really care about our economy, our workers and our nation they run the risk of a hollow victory.

Productivity Growth, Who Needs It?

As I look at the revision of Productivity and Costs, First Quarter 2009, I see some good and bad in the numbers.  The good is that the overall manufacturing productivity was revised to -2.7 percent from an initial -3.4 percent.  All of that gain, and more, is due to a change in the nondurable good manufacturing from an initial -0.01 percent to the revise increase of +1.9 percent.  The bad news is that the manufacturing productivity of durable goods, went from -10.0 percent to -10.4 percent.  Overall though, I am not worried about the drop in productivity.

I am not worried about the lost productivity for two reasons.  First, productivity always drops during a recession.  Second, the steep drop means employers are keeping on more employees then they need to manufacture their goods.  Productivity will quickly recover once the economy starts to expand again and production starts to pick up.  The retaining of workers is indicative of employers continuing their research and development, and other future benefit activities, even though they are producing less. 

The recent May 2009 Manufacturing ISM Report On Business had two significant improvements: An above 50, or expanding, index reading in New Orders and a much improved index score in Backlog of Orders.  With a 51.1 index, the New Orders reading is a nice positive, but it is only part of the story.  The real important number is the 7.5 improvement in the Backlog of Orders from 40.5 to 48.  This is a significant change in the rate that the manufacturer’s backlog of orders is shrinking.   

It is critical that companies continue to work on the next generation of, or a better way to manufacture their product.  Not all companies can just shed costs, like GM did with the UAW, to improve their cost competitiveness.  Improvements in productivity are what allow manufacturers to keep product costs down while increasing employee compensation. 

Most economists agree that there will not be a significant increase in demand anytime soon.  In addition, companies will not ramp up production until they see that their orders backlog is increasing for a little while.  Backlogs have been decreasing for 13 months, so manufacturers will want to get a little backlog cushion before they do any significant increase in production.  This leave productivity as the mechanism for maintaining profits.  

Once production starts to ramp up we will see productivity shoot up.  On one hand this is a good thing because it makes American manufacturers more competitive.  On the other hand, higher productivity means it takes less to do more.  In a Clemson University study authored by William Ward, it was argued that due to productivity improvements alone roughly 42.4 percent of the manufacturing jobs that existed in 1990 would have no longer be needed in 2004.

Productivity numbers are funny.  A drop in productivity means a loss of competitiveness due to higher unit costs, a bad thing.  A large drop in productivity late in a recession can be seen as an indicator of business investment in future productivity gains, which is a good thing.  An increase in productivity makes a company more competitive, a good thing.  If a company’s productivity increase is greater than the company’s gain in market share and market expansion then job losses are inevitable.  This is a bad thing for the overall economy.

In the end, judging productivity numbers is a hard thing to do accurately.  I guess an old saying is good way to look at them.  Nothing is as good as it looks or as bad as it seems.

Lets Face It, We Were Buying Too Many Autos

In a recent New York Time article, Industry Fears Americans May Quit New Car Habit, the subject is the concern in the auto industry that once the economy starts to improve total vehicle sales will not return to the pre-recession levels.  The article talks about changing habits and that people are starting to realize that they just cannot afford to own a car, or at least keep buying new cars. 

At the sales high point, Americans were buying over 17 million new vehicles a year.  This is in stark contrast to this past April when the rate was about 9.3 million a year.  Some analysts estimate that the current level is about four million vehicles below an appropriate demand, about 14.5 million vehicles a year. 

In the U.S. today there are over 250 million vehicles registered.  At the current rate of sale, it would take almost 27 years to replace the current vehicles on the road.  Using the higher demand estimate, it would take a little less than 19 years to replace the vehicles. 

I am not sure if I agree with the 19 year replacement cycle, but I definitely think the 27 year cycle is too long.  With everything going on in the economy, the 19 year replacement cycle seems too short.

The problem is that people have lost the perception of wealth that they once had.  Even people with relatively secure jobs are cutting back and saving.  One of the ways they are doing that is by holding onto vehicles longer.  Add to this the fact that most Americans are driving less and you have a longer replacement cycle.  Some people are giving up owning cars altogether.  The push by the government to improve public transportation can potentially remove the need for a car by many more people.  At a minimum, improved public transportation options will lead to a reduction in automobile usage and increasing their lifespan.

There are signs of life in the auto industry.  May sales inched up to a yearly rate of about 9.9 million vehicles from a 9.3 rate in April.  Although Ford sales are down 24% from May 2008, it is less of a decline then the other big six manufacturers leading to an increase of market share to a three year high.  In addition, Ford has outsold Toyota for the past two months.  This has led Ford to plan to raise production 6% over the next several months. Other positive signs for U.S. automobile manufacturing are the recent agreement, by GM, to sell the Hummer brand and the large number of bidders for Saturn.   If both units do get sold it will mean, for the short term, less U.S. job loses in the manufacturing sector.  Both the Ford production increase and the saving of one or two domestic nameplates help the general economy.

For the auto industry specific issues, the pessimists say that the industry needs a substantial recovery of demand to become profitable again.  The optimists argue that sales will rebound strongly and there is a great deal of pent up demand.  Even though the sales might not match their recent highs, the shedding of costs that are occurring, as we have seen at GM, may allow the automakers to be profitable at a much lower overall sales level. 

If some auto companies, or nameplates, do not survive, the auto demand will be satisfied from somewhere. I just hope that when the new “normal” sales level gets established, a majority of the domestic market is satisfied by quality vehicles manufactured in America.  Just remember that you cannot always tell where a vehicle is manufactured by the company name. 

Cap and Trade Needs Quality Green Manufacturing Jobs

So we know that there are already “green” jobs and more and more of these jobs are being created everyday.  The problem is that I am not really sure what a green job is.  I read one internet story where livable wage “green” jobs were being created in Washington State.  I was surprised to learn that the jobs being created were to weatherize houses.  According to the Apollo Alliance, these jobs would be “green collar” jobs.

Weatherizing a house is a green thing to do, but I would not call doing it a “green collar” job.  Would anyone ever say that the gas station mechanic who gave their car a tune-up and then checked the air pressure in the tires was a “green collar” worker?  I surely would hope not.

Maybe I am a purist, but when people talk about “green collar” jobs I think about someone manufacturing or installing solar panels, or a worker at a wind turbine tower manufacturer, or even a worker at a materials company that creates that high-tech materials used for the solar panels.  I definitely don’t see auto mechanics and replacement window installers as “green collar” jobs.  The real issue is that when advocacy groups, like the Apollo Alliance, tout the number of “green collar” jobs that will be created do they count these jobs?

A study by the Rand Corporation and the University of Tennessee claims that if America were to produce 25% of its energy from renewable sources it would create 5 million new green jobs by 2025.  Does this number count the gas station attendant that is pumping the bio-fuel into the car?  How many of these jobs are lasting manufacturing jobs?

I think it important to understand what type of jobs will be created for two important reasons: First, a great many jobs were lost in the current recession, second, the chance of their being cap and trade legislation enacted.

In this current economic downturn the U.S. shed over 5 million jobs.  Many of those lost jobs were good manufacturing jobs.  I just want to get a handle on whether the “green” economy created jobs have the same economic impact as the jobs they replaced.

Cap and trade is more of an issue.   If you believe the numbers from the conservative organizations, such as The Heritage Foundation, cap and trade will mean a loss of jobs. The Heritage Foundation report “The Economic Cost of the Lieberman-Warner Climate Change Legislation” projects that the “annual job losses exceed 500,000 before 2030 and could approach 1,000,000.”

A more middle of the road analysis was given by Howard Gruenspecht, Deputy Administrator Energy Information Administration U.S. Department of Energy before the Committee on Energy and Natural Resources United States Senate on September 20, 2005.  In the testimony, Mr. Gruenspecht stated that “the average petroleum price to all users (including the price of emissions permits) is 2.2 percent higher in 2015 and 1.4 percent higher in 2025”.  He goes on to state that the projected affect of the cap and trade policy on the projected level of real gross domestic product (GDP) by 2025 ‘…will be 0.13 percent ($27 billion dollars) below the reference case levels. These changes do not materially affect average economic growth rates for the 2003 to 2025 period.”  This does not mean that the overall GDP will be negative, only that there will be a slight drag on the economy.

Although I am for “green” energy and I support cap and trade on an environmental level, I am not sure I can support it on an economic level.  As I have mentioned in a previous post, dollar for dollar manufacturing jobs do more to stimulate the economy then other sector jobs.  I would feel much better if I had a better understanding of what the “green collar” jobs really are.   

It is going to be hard enough to get back the manufacturing jobs lost due to the recession.  I am not sure that the economy can recover if cap and trade causes any significant loss of manufacturing jobs.  We need more manufacturing jobs in this country not less.

Consumption

 We all know that Americans over consume.   Well, at least they did until this current recession started.  As stated in a previous post, I also think that we will return to our past consumption habits when the economy gets better.  I just hope that when we return to our past consumption levels we won’t use artificial equity in our homes or expensive credit cards debt to finance it.

American over consumption is one of the main reasons touted as the cause of our trade imbalance with China.  If you compare the percentage of gross domestic product (GDP) due to household spending of the United States verse other areas, the numbers do support American over consumption.   Currently, about 70 percent of the U.S. GDP is due to household spending.  In Europe, the number is around 57 percent.  In India it is a little less at 54 percent.  China, by stark contrast, has a relatively minimal number of 35 percent.  The numbers show us that not only does the U.S. over consume, but China greatly under consumes. 

I am not implying that Europe and India are the gold standard, but they do represent a good yardstick to compare to.  If you compare the U.S. to the European zone you get a 13 percent differential between the two areas.  Comparing China to India shows a relatively high 19 percent difference.   This does not mean that China’s under consumption is a bigger cause of the trade imbalance then American over consumption, but it is still a problem.  Other contributors like the artificial manipulation of currency have a large role in the trade imbalance.

So why is the lack of consumption in China a bad thing?  The main problem with such low levels of consumption is because that any significant growth of China’s GDP has to be export driven.  This is the underlying reason why the Chinese government can not let the renminbi appreciate naturally.  A more expensive renminbi translates into slower growth and less jobs and social unrest.  Already in this global recession the Chinese government has estimated that over 20 million jobs have been lost in the manufacturing regions of the country.  The good thing is that it seems that the Chinese government now recognizes the need to stimulate domestic consumption. 

One of the reasons that the Chinese do not consume as much as they could is that they feel they need to have money saved as a form of insurance.  If an average Chinese citizen gets sick or is hurt and needs to go to a hospital, they must first pay for the service.  To help alleviate this problem, the government now plans to provide health insurance to hundreds of millions of people over the next few years.

Another area where China is improving involves automobiles.  China recently cut the tax rate on fuel-efficient vehicles.  The tax cut led to a surge in the number of vehicles being sold in China.

As the Chinese consumer starts consuming more they will not only help China’s economy.  The world economy can no longer survive on the U.S. consumer alone.