March 27, 2013

Who Is Getting Those New Manufacturing Jobs?

     There are many myths about manufacturing in the US and many of them are persistent despite evidence to the contrary. The fascination with the sector is somewhat perplexing given that it accounts for just over 11% of the jobs in the private sector. There are actually more people working for Wal-Mart than there are people working in manufacturing in the US today. Part of the interest stems from the fact that manufacturing jobs are far better paid than most of the service jobs in the US and at one time it was the industrial sector that provided the path to the middle class. That is still the case in many respects as the manufacturing job is paying more than ever due to the technological demands now placed on many workers. That is the good news, the bad news is that there are fewer workers needed all the time as automation and technologies become a bigger factor.

      The shift in the nature of manufacturing work has affected distribution of jobs as well. There are fewer women involved in manufacturing (32.2% in the 1970s and only 27.3% in 2012). There are fewer minorities engaged in manufacturing as well (an average of 20% across various sectors of manufacturing). The average age of the manufacturing employee is now 56. The hourly wage of the manufacturing worker is now at around $24.50 and it is estimated that there are close to 650,000 jobs available today that are not getting filled because there is a shortage of people with the appropriate skills.

     This is different from the situation that existed even twenty years ago and the expectation is that there will be further change in the years to come due to the changing nature of the manufacturer. The jobs that were once held by women and minorities are the ones that are vanishing – everything from the backroom clerical positions that have been taken over by software and outsourcing to the factory floor jobs that have been eliminated by robotics. At the same time there are more opportunities for those with more technical training.


Analysis: The data shows that there are far more women involved in science and technology than in past decades. There is also far more minority group engagement in these sectors but this growth is coming off a small base and for the moment these women and minorities are in demand from many sectors. Most have a high level education in engineering and technology and they are working in the upper levels of industry. The training needed to work in the production sector of manufacturing is still not common within the ranks of female and minority employees.

     The most salient fact is that there is a 600,000 person job shortage in the middle of a period of high unemployment. That suggests that there is a major mismatch. The fact that manufacturing employees have among the highest average ages of any sector is another concern. The industrial community needs people – male and female, minority group member and not. The predictions for the end of the decade are dire when it comes to qualified employees and there is really no time to waste given the length of time it takes to train someone to take these positions. These are still the jobs that build the middle class but it takes more than it used to for people to move into these positions.  The solutions are not easy as they require cooperation between industry, education and the people who would be seeking these opportunities.


The Return of Business Investment

    The fact that business investment has been on the rise for the better part of two quarters comes as a real shock to many. The assumption had been that all the political uncertainty and global financial turmoil would have forced business to curtail their expansion plans and retrench until something was decided. There have been some who have taken that approach but for those who have been watching some of the data over the last few months there were plenty of contrary signs.

      As far back as last November, the Fabricators and Manufacturers Association was reporting that almost every category of manufacturing operation was planning to expand capital expenditure and as it turns out these companies are doing just that. One of the most watched indicators is the “new orders for non-defense capital goods – excluding aircraft”.  This index tripped a little in February but it rose sharply in January and the three month moving average has been as healthy as it has been since the recession started. The data is supporting some of the assumptions that had been made about business in the last quarter or two. The sense is that many business leaders have grown weary of the incessant bickering in Washington and have elected to just get on with it. Over the last several months I have noted this attitude in most of the conferences and meetings and it now seems to be getting data support.



Analysis: The increase in activity is taking place across the board as far as size of the company is concerned. All of the major automakers are engaged in major expansion plans that involve added production, modernization and hiring. The US automakers are leading the charge as far as this expansion is concerned but many of the other automakers from around the world are following right behind. The US consumer continues to demand new vehicles and the demographics are starting to tilt in the direction of the carmaker. The average age of the US fleet is now as old as it has even been at 11.1 years. While it is true that cars last far longer than they once did and model changes are not as radical, the fact remains that hanging on to a car for ten years is not the preferred strategy of the average car owner. The primary reason that car sales fell flat was the impact of the recession on the disposable income of the average consumer and there has been some relief on that score in recent months.

      There are several sectors of the economy that are growing fast enough to stimulate development in a wide variety of manufacturing operations. At the top of the list has been energy. The expansion of the oil and gas operations in the Dakotas, Wyoming and Montana has boosted demand for everything from pipeline to machinery used to extract these commodities. There has also been an ancillary demand for the materials needed to support the building boom that has resulted from the growth. The states that have seen the largest purchases of fire trucks and ambulances have been North and South Dakota. There has been an explosion of housing in this region as well. Another sector that is boosting demand for industrial output has been exports. There has been a slowing of global demand in general and that has worried many in the manufacturing community but at the same time the US has become a great deal more competitive in the global marketplace due to the lower value of the dollar and the improvements that have taken place as far as US productivity is concerned.

     In the middle of 2012 there was a retrenchment as far as business investment was concerned. The slowdown was sharp and it dug the economy down far more dramatically than many has expected. To a significant degree it was that slowing that eventually manifested in the weak GDP numbers at the end of the year. At the time the business community at all levels made it clear that political uncertainty was at the top of the list of concerns and most asserted that the fiscal cliff issue was foremost in their minds. They fully expected the tax cuts from the Bush years to be rescinded and they feared that this would create major problems for the consumer as well as for their own operations. Throughout the discussion over the fiscal cliff, analysts sought to point out that the real damage to the economy would take place well before the deadline and that was exactly what happened. The only reasonable course of action was to expect the worst and to prepare for it.

     The fiscal cliff crisis was averted to some extent. The tax rates on the wealthy did rise a little and the consumer lost the advantage of the payroll tax holiday but the brutal return of a massive tax hike did not happen and business took the opportunity to strategize about a recovery in 2013. There have been other issues that have roiled Washington but none have had the potential impact of the fiscal cliff. The debt ceiling crisis was short lived and the next big problem has been the sequestration process. Thus far the budget cuts have been more of an issue for the government than the private sector although there is evidence that business has started to feel some of the reductions in Defense spending. The point is that there is not the impact that was present during the last six months of last year.

     The critical question now is how long all this expansion will last. The expansion that is taking place is still aimed at expected demand and not at the current situation. The consumer has started to fall back into a funk according to the latest polls on confidence. The issues that most concern the average consumer have not really improved much. There is still a higher than normal rate of unemployment, there has been very little improvement in term of household income and there remains a fear of real inflation as triggered by the big spike in gas prices earlier this year. On the positive side there is the rebound in housing. Thus far this had meant growth in construction jobs and expanded demand for everything from structural steel to appliances and carpeting. The housing market is still a shadow of its former glory but it is far healthier than it was at this time last year. With any luck the travails in Europe will not become a burden to the US economy as well.


What to Make of Durable Goods Numbers

    This month’s durable goods reports is a dream come true for the true economic analyst – plenty of opportunity to say “on the other hand”. The report came in better than the analysts had predicted – a 5.75 gain over what it was in the last reading. On the surface that is pretty good news but the caveat is as it always is. The bulk of this growth was from a big selling month from Boeing. Once you strip out the aircraft part of this assessment there was a decline of 2.7%. As pointed out in the piece above this is of less concern than might be expected due to the fact that there has been some pretty consistent growth over the last three months. The sense is that there has been some solid expansion in key sectors but that there are still some areas of weakness that can drag the numbers down from month to month.


Analysis: The data on aircraft sales is not to be ignored. There has been some concern that all the issues affecting Boeing would have an impact on their sales of other aircraft but that has not seemed to be the case. If anything the issues that have delayed the Dreamliner may have sparked some additional sales of the plane maker’s workhorse – the 737. The latest word on the battery issues is that it has been resolved and the airplane may be back in the air sooner than later. The issues now are less technical than they are political and legal as some assertions were made by the head of the Department of Transportation – Ray LaHood – that are proving hard to back away from. He asserted that inspectors would guarantee that these batteries would never fail under any circumstances and that is simply not something that anyone can say.


Investment World Changes Dramatically

    It is probably too dramatic to assert that the investment community has been shattered by the events of the last few years. There are still many ways to make one’s money work but the options that existed in the last decade are considerably less dynamic today. No sector of the investment community has seen more structural change than bonds. The collapse of many of the world’s most robust economies seriously eroded confidence in the bonds that these nations have used to finance their operations for years. The bonds that were once seen as very safe and cautious investments are now seen as some of the riskiest that can be explored. There has been a 60% decline in the number of triple A rated bonds and countries that were on the top of the investment heap have stumbled. The US was downgraded last year and since then they have been joined by France and Great Britain. Most of the nations in Europe have seen serious downgrades and in the southern states that have been fighting massive budget battles the rates have drifted into junk status.

     The deterioration of the bond values in the traditionally robust economies has forced some migration to other markets but these are seen as risky in their own right. The European bond market is moribund outside those of Germany and some of the other northern states. The risks involved with the southern states have made them anathema to all but the most adventuresome and patient. The expectation was once that the bond holders would be rescued by intervention from the ECB and the Eurozone but it has since been made quite clear that the bondholders are essentially on their own. The US bonds are still very popular but they aren’t making anybody much money with yields as low as they have been for the past few years. This is still the market one turns to for cautious investment but that is not what many investors are seeking.

     The nations that are getting more attention than usual are in Latin America and to some extent in Asia. The emerging markets are getting popular again but there are plenty of caveats. Brazil has been attracting a lot of attention but this is also a nation that has seen growth in the GDP drop from as high as 8% to just over 1% and there are some major concerns about the next wave of government intervention. The Uruguayan economy has been doing very well and that has made their bonds popular but this is a country that is extremely sensitive to what happens to its neighbors. If Brazil falters Uruguay is in trouble and quickly as they are not getting much help from the Argentinians these days.


Analysis: The volatility of the global bond market has been having an impact on the equity markets as well. The US has been enjoying a pretty spectacular run-up in the stock market and most analysts have been a little puzzled given the fact that economic data would not seem to justify the levels of enthusiasm in the markets. Part of the reason for all this enthusiasm has been the fact that bonds are not the attractive option they once were and that has forced investment in riskier options. If one is going to run risks anyway –one might as well focus on the equities where the returns can be swifter.

     The ratings agencies have stripped many of the global bonds of their status but there has been some pushback on the part of the countries that have been downgraded. It has been pointed out that the ratings agencies made extremely serious errors in the boom years – ratings that were foolish and inaccurate. There now seems to be a pattern of overcompensation – a determination not to overvalue bonds and that has led to undervaluing them. On the other hand it is hard to look at the US or France and have much confidence in the budget process these nations are engaged in.


Didn’t Think You Would Get an Issue with Cyprus Did You?

     The next wave of response from the Cypriot meltdown has been from some of the other smaller nations in Europe as they hasten to point out that they are not facing anything that compares to the situation that provoked the destruction of the island nation’s banking system. The two that have been doing the most explaining have been Luxembourg and Malta as they are both states that have built their economies on the back of their financial sector. Luxembourg is one of the most well-used tax havens in Europe and their banks have roughly 22 times the nation’s GDP in assets. Malta has assets in its banks that are at least eight times that of the country’s GDP. The difference according to these leaders is that there have been far fewer grievous mistakes made by their banks.


Analysis: There was a lot that went wrong with the Cypriot banks – everything from a heavy investment in Greek bonds to establishing a very weak banking culture that tended to attract the most volatile of depositors. The banks in Luxembourg and Malta have stricter regulations and they tend to draw more reliable deposits. The Russians went to Cyprus precisely because the rules in the other nations were tougher and they wanted to avoid them. Malta attracts a lot of the Middle Eastern money that seeks to escape the strictures of Islamic law and Luxembourg is essentially following in the footsteps of the Swiss. Both of these states have been working hard to ensure that investors do not equate the weakness of Cyprus with their systems and thus far it appears to be working as there has not been a flood out of these nations.


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The Weird World of Las Vegas

    I am back in good old Lost Wages and by now most readers know that this is not generally my favorite town. I am not a gambler (too much German in me and after all – I am an economist). I am not all that fond of having to navigate through crowds of people who have been enjoying themselves just a little too much. But that is not the point of this little commentary. There is something that I am struck by in Las Vegas – the friendliness of the people that pretty much get ignored in the frenzy of the city. I am talking about the people who clean the rooms, deliver the room service, and water the plants. I have taken to chatting with as many of these folks as I can – in part to get a sense of where the city’s economy is and partly because they are really nice people.

     I was passing a woman who was cleaning the airport terminal and stopped to thank her for her efforts – before asking what she thought about the size of the crowds and all that. She was not altogether comfortable with English but when she realized that I was not in a hurry she started to talk more. She was very observant and noticed the difference between crowds that were coming for meetings and those coming for pleasure. She also made certain that I knew where to find good food that the local population enjoys. She was originally from Guatemala and moved here six years ago. Her son is serving his third tour in Afghanistan as a Marine

     Later that evening I got into a conversation with the woman who brought me dinner and she was also determined to steer me to a good place to eat. She was from the Philippines and arrived here almost ten years ago. Her daughter is a med student in Utah and her son became an accountant – something she still finds hysterical. I got lots of intelligence on the status of the city as she is also very observant and noted that more and more people lately have looked like me – working in their rooms and ordering in.


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