2011 post-recession take-off looks brighter than ever
BY MORRIS R. BESCHLOSS
PVF and economic analyst
With the stock market’s near-8% December improvement fulfilling its role of economic prognosticator, a perfect storm of simultaneous events are combining to provide the thrust behind the long-awaited post-recession comeback.
Unexpectedly, the Lame Duck Congress provided the spark that makes 2011 a near certainty for a major recovery. By maximizing available cash in consumer hands, retaining the Bush-era tax cuts, cutting the Social Security payroll tax contribution by 331/3%, and extending the compensation for the unemployed, expanded spending by the consumer is practically guaranteed.
But just as important is the 180° turn in the sentiment of privately held businesses — which comprise the backbone of America’s 150-million employables. Even though the record percentage of unemployed will continue to hover over an otherwise brightening economic landscape, it’s hoped that a major national infrastructure initiative, ignited by a more realistically oriented Congress, will absorb hundreds of thousands of this seemingly unabsorbable mass early in the year.
Barring the negatives of employment absorption inability and an explosive national debt, the following factors point to the best economic year since 2007:
• As previously reported, the American consumer seems to have found a balance between debt-cutting and continued expenditures. This is bound to continue into the year.
• Businesses large and small are piling up inventories in unanticipated quantities. Much of this is due to price increases coming down the pike. Also, expansion projects in commercial/industrial construction, power generation, oil and gas development, and renewable energy initiatives are on the verge of a previously held-back breakthrough.
• The expectation that the new Congress and legal challenges will defang much of the business and consumer-hostile tax aspects of the Obamacare Health Act, which was due to collect taxes as of January 2011, although not ready for full implementation until 2014.
These and other positive economic elements will help to overcome the pessimistic sentiment inspired by governmental fiat.
Emerging copper, coal booms defy current U.S. demand
Although global material as well as agricultural commodities have recently surged upwards, what’s most surprising is that the once moribund copper and coal entities seem to be leading this unexpected emergence.
It’s still difficult for most raw material observers to put commodities in a global context, especially when they are digressing from domestic U.S. trends. In past recession recoveries, all eyes were peeled on the overwhelming appetite of America’s business and consumer demand. No more. For the first time ever, the Southeast Asian quadrant and such other developing nations as Brazil, Russia and Turkey are setting the pace.
Coal had been literally given up for dead as the Environmental Protection Agency has been given free rein by the White House to forbid use of coal in the construction of additional utility facilities, and pressing existing power stations to convert to natural gas or even “renewables” wherever possible.
However, U.S. coal companies have never been busier, finding no dearth of demand from around the world. The rising common stock prices of such coal giants as Patriot Coal and Peabody Energy reflect this worldwide demand for U.S. coal, representing the globe’s largest reserves of this raw material.
The advent of the current copper boom is caused by a demand/supply inversion, which seems out of sync with what’s happening in the U.S. With America’s housing market in deep depression, this overwhelming user of the red metal would normally signal a copper demand implosion. But like coal, the demand push for copper is now emanating from the world’s emerging nations like never before.
China, which used to brag about building cities the size of Indianapolis every month, is now building them the size of New York with equal frequency. Other emerging nations are also generating new construction in varying expanded degrees.
But new supplies are more difficult to find than ever in recent past, leading to price increases registered well over $4 per pound. During most of the second half of the 20th century, this price range teetered between 75 cents and $1. Most of the world’s commodity exchanges are putting copper at the top of the list of future scarce commodities, with price increases the inevitable outcome.
Manufacturing comeback not major employment facilitator
As a blizzard of overwhelming statistics pointed to a major manufacturing comeback in December, it would be natural to assume that such good news would serve as a magnet for substantial employment additions.
Unfortunately, the current surge is not being joined by a back-to-work movement by the vast mass of those looking for gainful employment. In an ironic twist, businesses large and small turned to production and back office technology to reach record 2010 production, while reducing costs. Fear of Obamacare taxes and anticipation of excruciating financial regulations scared the business community into divesting employees and strengthening its mechanical capabilities by generating more revenues, and greater profits, with reduced headcounts.
To put the manufacturing sector’s traditional employment approach into historical perspective, 50 years ago the production of goods generated the nation’s highest number of workers, with the construction sector not too far behind. At that time, 15 million people were employed in such major industries as automotive, steel, machinery, mill supplies, electronics, and thousands of parts suppliers, etc.
Currently, with a U.S. population almost twice as large as in 1960, only about 8 million personnel are now involved in a variety of manufacturing establishments. Despite the historical reduction of the major traditional employers, such as the once-mighty, world-leading automotive producers, that sector is turning to ever greater conversions toward automation, mechanization and upgrading.
During November, the manufacturing sector as a whole reached the highest capacity utilization since mid-2008 at 75.2%, but this is still a far cry from the average mid-80s average generated in the first part of the last decade.
With the current utilization growth not expected to come even near the previous traditional figures, machinery and technology power — rather than hands-on personnel productivity — will set the pace for America’s manufacturing future. Paramount in such recovery will be the global admiration for American brand names, and the greater thrust recently evidenced in “Made in America.”
Increased consumer spending fuels
2011 hopes for business optimism
Despite record-high post-recession unemployment, a continuing reduction in consumer debt, and growing anxiety over increasing national debt and decreasing public services, consumer spending last year was increasing at a rate not seen since 2006.
What is most mystifying about this trend is that the national savings rate returned to a solid plus 5%, after wallowing in deficits during the first decade of this century.
In fact, consumer spending as a percentage of gross domestic product has not digressed from the upper 60% component of the nation’s $14.3-trillion GDP despite the weak post-recession rebound, the reduction in credit card borrowing, and the increasing tendency to put more money away for a rainy day.
A major reason may well be the retention of the Bush-era tax cuts, and the unprecedented continuation of unemployment payments that has been legally extended for 99 weeks from the traditional 26. Although these factors face the U.S. with a national debt that is escalating toward 100% of the annual gross domestic product, they are keeping the nation’s consumer activities at a world-leading demand level, little different from that which existed before the recession.
After legislation passed during the most lively Lame Duck session ever, due to the concentration of unfinished business before the election, consumer optimism is a sure bet to improve even further.
With the continuation of the previous tax rates, the cut in the employee portion of the payroll tax, and the confidence of private businesses that further government encroachment will be restricted, the year 2011 will see business in general join the consumer in opening up their pocket books.
My constant contact with over 100 of these businesses in the last month has ascertained that almost all of them enjoyed the strongest December activity they had ever seen. And this is true of manufacturers, distributors, retailers, and fabricators getting notification that held-up projects are being readied for release.
Unfortunately, jobs for the unemployed and those entering the job market on a continuing basis will not put a dent in the current 26-plus million looking for full-time work on company payrolls. Since most of the long-term job seekers are concentrated on the lower end of the unemployment pyramid, openings for the unskilled are not expected to open up under present circumstances.
With hope for 2011 emanating from more understanding government decision-makers, the best year since the start of the recession in 2008 seems to be on the way in 2011.
To get the financial and economic news on my daily blog, please log on to www.theworldreport.org, then click the link to “Morrie’s Page” at mydesert.com. Please recommend the blog if you find it informative.
Morris R. Beschoss, a 54-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.