Economy Can Grow by Addressing Key Issues
December 28, 2011
If the U.S. addresses “in a coherent manner” four key issues that impact the economy – employment, consumer behavior, global economic strain, and the role of politicians – the country can expect growth of around 3 percent in 2012, forecasts an economist for a leading manufacturing industry trade group.
“If not, the U.S. will wallow in the 1 to 1.5 percent territory—with all that implies,” says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (FMA). “The four areas are the ones most people pay close attention to, and are in great flux. Permanent changes in the following four areas will have a significant long-term impact that extends beyond 2012.”
“Joblessness is really what most people care about when it comes to the economy,” Kuehl says. “The average person couldn’t give a hoot about the GDP or trade deficits or the Fed’s interest rate unless it affects jobs. The U.S. economy is now sitting with some 16 million to 25 million people out of work or underemployed.
“Will this improve in 2012? It will, but only marginally. The rate of joblessness will likely be between 8 and 9.2 percent for the year. The bigger question is whether those 25 million people will become essentially a permanent underclass.”
According to Kuehl, three aspects make this challenging: many job seekers lack the skills needed to return to the workforce; those who have the skills find it difficult to get to where the work is; and employers that are expanding would rather invest in machines than people.
“Unfortunately, the education system has largely failed to train people for the available jobs,” he explains. “Also, people who were encouraged to ‘specialize’ in their jobs now find their specific talents are no longer needed. In addition, people who do find jobs in other cities can’t relocate because they can’t sell their home. The regulatory environment hurts hiring, and so does the uncertainty over health care reforms. This list can go on, but the point is that it will take far more than economic recovery to boost hiring.”
Suddenly U.S. residents are saving more and deleveraging, Kuehl notes. He says credit card use is down somewhat and so are the bigger loans. “It’s true some of this has been involuntary,” he says. “The majority of the newfound frugality, however, is voluntary, as consumers are now saving at a rate of around 3.2 percent, a sharp drop from this summer’s 6 percent – but still respectable for a nation that was engaged in dissaving as recently as 2006.
“The majority of analysts do not expect this frugality to last much longer. Even now there are signs of consumers coming back to life as evidenced by some pretty solid preholiday numbers,” Kuehl adds. “As soon as the pressures of unemployment recede somewhat and there is hope of rebound in the housing sector, the consumer may start to return to near normal. This is the key—near normal—not the crazed consumer of the last decade gobbling up every tiny luxury he could find. The ‘normal’ consumer is the one we saw in the 1980s and 1990s.”
“The adage used to be, ‘When the U.S. sneezes, the world catches cold.’ Now it seems when the world catches cold, the U.S. gets pneumonia,” observes Kuehl. “The crisis in Europe has affected the U.S. for more than a year. The earthquake in Japan slammed the supply chain, which affected the U.S. to the tune of 1 percent of GDP growth. That disaster cost the Japanese almost 5 percent, and the world economy lost close to 2 percent of GDP growth.”
The U.S. has become a more aggressive export nation as the dollar has weakened, and that is generally a good thing, according to the economist. The downside: the U.S. is far more sensitive to the economic activity in other nations than in the past, and when Europe stops importing because it is circling the Greek drain, the U.S. is affected as well.
“It goes beyond trade, of course,” he adds. “The crisis in Greece threatens to take down the Greek banks because they hold Greek bonds. The European banks hold those bonds and are invested in the Greek banks, so they go down, too. The U.S. banks are tied to the European banks, so they go down. It is like a bunch of climbers on a rope sliding into a crevasse, hoping that the last guy can get anchored. “The U.S. economic recovery is also tied to what happens in China, Korea, India, and Japan. It is one big interconnected mass.”
“The role of political players may be the most pressing issue of all,” says Kuehl. “The world’s central banks have been trying to carry out the economic rescue on their own for more than three years. They have done all they can with interest rates, quantitative easing, and the like. They desperately need fiscal partners that are nowhere to be found. The politicians are trying to stimulate the economy at the same time they address debt and deficit.
“The problem is that fixing one makes the other worse,” he says. “To get out of a recession, a government lowers taxes and increases spending. To get out of debt, it raises taxes and cuts spending. Rather than make a choice, the leaders in Europe and the U.S. try to do both simultaneously and the whole system stalls.”
A Rueful Look Back
After this look ahead, Kuehl did look back, admitting, “Almost everyone in the analysis business, including me, thought 2011 would be the emergent year, but that was before being battered by a series of ‘black swan events’: the earthquake and tsunami that wrecked the global supply chain for months; the Arab Spring that forced the price of oil into the $130 range for two quarters of the year when the price should have been almost $40 lower; and the weather-related disruptions in the U.S. throughout the spring and summer.
“So assuming similar events don’t occur in 2012, we can say with some certainty that yes, an economic recovery beckons. Stay tuned.”