The economy–between a rock and a hard place
The latest reports on the economy is due out this week and it doesn’t appear they will contain much good news:
Economists have been insisting for months that the economy is poised to lift off into a self-sustaining orbit, only to be forced to scrub the launch date several times.
Thus the repeated “unexpected”.
The way the economy works is that it takes growth higher than a 3% rate before good things, like a sustained decline in unemployment, even start to happen. Anything in the 2.5%-to-3% range is just treading water.
Growth has averaged 2.8% over the past seven quarters. And at this point, economists would welcome a 2.5% growth rate.
Economists polled by MarketWatch now expect growth to actually decelerate to a 1.6% annual rate in the second quarter from a tepid 1.9% rate in the first quarter.
Those are some pretty shocking numbers when you consider all the political hype that’s been flying around lately about the “vastly improved” economy. I’ve put in bold type the numbers you need to know to be able to analyze the numbers thrown around as these reports come out. As you can tell, we’ve been in the treading water stage for quite some time.
We’ve covered many of the reasons. One is the administration’s war on carbon-based fuels – an sector that could be creating hundreds of thousands of jobs, revenue and growth if not essentially shut down by bureaucratic foot-dragging and stifling regulation. ObamaCare is another reason we see blamed because it has thrown thousands of new regulations about health care at businesses.
Those and other factors have led to extraordinary caution on the part of business about expansion and hiring. So where are the profits these companies are enjoying coming from?
The sluggish pace of hiring may be hobbling the US economy, but it’s not been holding back big US companies’ profits thanks to growth overseas and cost controls at home. And that’s bad news for the more than 14 million Americans without jobs.
Big businesses would normally be desperate for surging job growth as it would feed into domestic demand but these aren’t normal times. Massive growth opportunities overseas, especially in China and other buoyant Asian economies, have some of the largest American companies on track for record profits, even if they’re businesses are mostly treading water in the US.
The message last week from the chief financial officer of one of the nation’s industrial giants couldn’t be clearer.
"We’ve driven all this cost out. Sales have come back, but people have not," said Greg Haynes, chief financial officer at United Technologies Corp. "It’s the structural cost reductions that we have done over the past few years that have allowed us to see strong bottom-line results."
The company, the world’s largest maker of air conditioners and elevators, said second-quarter profit rose 19 percent, and it is doing most of its hiring in emerging markets where demand for its products is growing fastest. It isn’t alone in seeing profits climb in the current earnings reporting season.
They’ve learned to do more with less, thus their cost cutting measures in the really bad times are now beginning to pay off. The easiest and quickest way to cut costs, of course, is reduced headcount. They’ve also identified new markets that aren’t as onerous or unsettled to do business in – so their hiring – what hiring they’re doing – is overseas. And given all that, it’s unlikely to change anytime soon:
Employers added fewer jobs in June than at any time in the past nine months, and the jobless rate rose to 9.2 percent, higher than when the recession ended in early 2009.
"We’ve never seen the kind of shedding of jobs that we saw in this recession. America’s corporations have never been running so efficiently," said Ellen Zentner, senior US economist at Nomura Securities in New York.
An example of that is the car industry:
With the economy still struggling to regain momentum after the financial crisis of 2007-09 and 14 million Americans out of work, the planners at GM and a host of corporations across America are in no rush to make big new investments to ramp up output and hiring.
The world’s second-biggest carmaker has not re-opened its idled plants or built new ones as Americans rein in spending.
Like many US manufacturers, it is squeezing more from existing factories and using time-honoured efficiency boosts such as adding to overtime and eliminating plant bottlenecks.
‘Our manufacturing folks have been tremendous at squeaking out extra units through improving line rates, adding on extra shifts,’ GM’s US sales chief Don Johnson said.
That, of course, means a long recovery period for employment. Here’s a rather startling “did you know” fact for you:
Has anyone in Washington noticed that 20% of American men are not working? That’s right. One out of five men in this country are collecting unemployment, in prison, on disability, operating in the underground economy, or getting by on the paychecks of wives or girlfriends or parents. The equivalent number in 1970, according to the McKinsey Global Institute, was 7%.
That’s neither a good cultural or economic trend and certainly not a trend that we want to see continued into the future. It has a tendency to have a negative effect that can be profound. It also tends to see incidents of criminal activity rise.
So what is government to do? Follow policies that will encourage businesses to expand and hire. Exploit those sectors that have low hanging fruit like the carbon-based energy sector.
Instead, what do we get? Thousands of pages of new regulations and laws. More and more government intrusion. A further and artificial stifling of the economy.
Well read those bold numbers again and ask yourself if that’s what you’re willing to live with – because as it is going now, despite its rhetoric to the contrary, it is that with which this administration seems to be content to live.
And that is unacceptable – or should be.