U.S. continues to pace world economic growth

BY MORRIS R. BESCHLOSS
PVF and economic analyst

What continues to puzzle professional economists as well as observant laymen alike is the continued growth of America’s world-leading economy despite the lack of an overwhelming U.S. production sector.

In spite of a slowdown from this year’s torrid first quarter growth pace, the U.S. economy had crossed the $13-trillion gross domestic product mark by mid-year -- by far the greatest volume of goods and services ever accumulated by any nation. But 70% of this unprecedented total is accounted for by a bloated consumer sector that far exceeds any comparable achievement elsewhere, currently or before.

Even more incredible is that such unprecedented gross domestic product and services growth is disproportionate when compared with the rest of the world. With less than 5% of global population and 6% of the earth’s surface, America accounts for more than 25% of the world’s gross domestic product.

Th U.S. consumer sector has become the world’s magnet for low-priced imports that have met acceptable quality standards, thereby taking advantage of a myriad of products and facilities that the rest of the world has to offer.

The other members of the world’s big four economies -- Japan, Germany and China -- rely heavily on industrial production and exports to attain their economic global prominence. With the exception of China, the other members of this quartet preside over relatively stagnant consumer sectors. Japan, which trails the U.S. with a $4-trillion gdp, has lately shown new signs of consumer life.

But even that glimmer of recovery, after a near 15-year recession, has currently receded. Germany, beset by domineering trade unions, has seen its domestic economy flat-lined for years. Even Germany’s powerful industrial sector is circumventing the union problem by transferring major production facilities into more cost-effective areas of the world.

Among the world leaders, only China, which is building a massive consumer economy in conjunction with industrialization and exports, is approaching the American penchant for domestic consumption as a dynamic segment of its total economy. To put America’s overpowering dominance in perspective, one must cite the absolute revenues generated by this nation’s exports. With only 10% of its total committed to exports, America tracks only Japan and Germany in outward bound shipments.

Even America’s greatly diminished industrial sector generates over $1.5 trillion, trailing only Japan and Germany, with China closely behind.

Although many economic experts are loath to admit it, the driving force behind America’s enormous growth is the emergence of third world economies as the empowering engine of U.S. economic expansion. Without the cost reduction of industrial as well as consumer products, such expansion would not have been possible. World imports have grown to 20% of America’s consumer sector, a record that continues to be constantly exceeded. The transference of much of America’s productive capacity to the world’s lower cost fabricators has allowed U.S. industry in general to rebound this year. Much of such cost efficiency returns to U.S. shores as components, as well as finished goods.

What continues to perpetuate America’s world economic growth is the recycling of world currency into the U.S., which has kept America’s monetary system liquid, without significant inflationary impact. This is due to the historic stability of America’s financial markets, both economically and politically. The U.S. has never defaulted on its gigantic debt. It is also the only monetary system huge enough to absorb the financial liquidity generated by today’s record global activity.

This accumulation of national wealth has also enabled the U.S. to curb its annual budget deficit this year, due to record tax collections, in face of double digit government expenditures.

Even as large sections of the world join the global economic expansion, U.S. economic dominance is destined to be manifest for years to come.

Canada becomes world energy giant
Canada continues to be on an energy roll. America’s northern neighbor is well on its way to matching the oil equivalent production of opec stalwart Kuwait; and could be reaching the second rung now occupied by Iran, Iraq, Nigeria and the United Arab Emirates by 2010.

The intrepid Canadians are doing this on two fronts. Not only is the oil sands production in the Athabasca region of Northern Alberta growing by leaps and bounds, but Canada has become the key leaseholder of Cuba’s Florida straits energy development. The Castro-controlled Communist republic signed a resource-sharing agreement with the U.S. in 1977, by splitting the deep sea oil-heavy straits down the middle.

Even though oil geologists have estimated the strait’s potential at 20 billion barrels -- enough to supply U.S. oil needs for three years -- not a drop has been recovered by the U.S. as part of its side of the deal.

With Florida’s veto over off-shore drilling, and cooperation with Cuba forbidden by the 46-year-old U.S.-imposed embargo, American-based oil companies are prohibited from exploiting the reserves on the U.S. side of the Florida straits.

No such compunction has stopped the Cubans. Not having the expertise available in their rudimentary state oil company, Cuba appealed to the intrepid Canadians to lend a hand. Canada has not only taken over all the ongoing production off the Cuba coast, but has also become the beneficiary of the natural gas, “flared off” by the ongoing oil production. At this point, the Canadian companies have already made seven major discoveries, and are currently pumping 20,000 barrels a day. Since Canada brought in the equipment to capture the natural gas, this previous “waste” has cost them nothing. In addition they are now providing 15% of the empowerment needs of Cuba’s electric generators.

To make the arrangement even sweeter for the Canadians, they are being given the negotiating privilege to develop Cuba’s nickel and cobalt deposits, which have become hot properties due to their indispensability in the manufacture of stainless steel, which is in short supply worldwide. Canada is already the world’s leader in nickel production, with inco and Falconbridge, the world’s leading producers, located in the Dominion.

Canada is also overcoming the immense infrastructural problems posed by the rapid development of its innovative tar sands initiative. The Canadian government has established a guest-worker program that is bringing thousands of workers into the Fort McMurray region, where most of the present oil conversion activity is taking place. With no permanent housing available, these workers are being housed in tent cities. This year alone guest worker permits will exceed 15,000.

Although this tar sands activity should have been an exclusive boon to the U.S., the billion dollars worth of new tar sands leases awarded in early February went to China, Japan, India and others interest in staking a claim to this expanding project. There were no bids on behalf of U.S. interests. China is already commissioning an oil pipeline that will make crude oil derivatives available from a port on the Pacific Ocean.

This is part of an aggressive worldwide program whereby China will be locking up sources committed to that nation’s year 2050 energy targets.

While much of the oil will continue to flow south of Canadian borders, the new lease holders will make sure that their reserves will be exploited by Canada’s production growth.

While the U.S. continues to hope for “pie in the sky” energy alternatives, Canada, with 32 million inhabitants will enjoy the riches that such fruitful natural resource attraction will bring to the Dominion. The shrinking gap between the U.S. and Canadian dollars is the current markets’ indication of how consistently higher Canada’s “looney” has been valued by the world’s currency investors.

Small business benefits from Ee-Im Bank loans
With America’s exports tracking record revenues this year, it’s generally accepted that this economic sector primarily benefits big business. Unquestionably multi-billion-dollar titans like Boeing, Caterpillar, Archer Daniels Midland and Harley Davidson are the prime beneficiaries.

However the U.S. Export-Import Bank is revealing a major focus on backing the multiplicity of small businesses who have traditionally taken a back seat in getting a significant share of this dynamic economic U.S. growth component. Small businesses, especially those privately held, have frequently complained of being shut out of expanding export opportunities. These complaints have increasingly been leveled at government agencies whose main responsibility is the promotion of exports by U.S. industry in general.

According to Export-Import Bank chairman James H. Lambright, more than 80% of the bank’s financing transactions are now made on behalf of small businesses. He adds that many of these small firms are sub-suppliers in large export sales, and cites the upgrading of Mexico’s Minatitlan refinery as a prime example.

Forty-three small businesses -- from such disparate states as Pennsylvania, Texas, Florida and Minnesota -- are participating in a $216.8-million export sale to enable Mexico’s pemex oil monopoly to upgrade its major refinery, backed by a $200-million guarantee from America’s Ex-Im Bank. Previously, such involvement and financing has depended on subcontracting by major contractors, which tended to exclude these companies wishing to get directly involved.

The bank focus on this project is timely, since this $216.8-million export sale dwells on the updating of a desperately needed North American refining capability. This is especially significant since U.S. backed refineries are barely able to handle this nation’s surging gasoline demand. The refining of Mexico’s huge crude oil production could substantially facilitate America’s automotive and trucking industry’s increasingly demanding needs for gasoline and other derivatives.

With four dozen American small businesses involved, this project has reversed the job hemorrhaging to foreign nations. Much of America’s overseas job losses have been the result of the relocation of major corporate facilities to China, India, etc. The flood of industrial orders are now looking for domestic fabricators due to the accelerated delivery schedule, especially in the energy sector.

FS-Elliott Company llc of Export, Pa., is a good example. It’s providing $1.5 million of custom built air compressors for the Minatitlan Project. Currently employing 170 personnel, it’s expecting to add up to 20 sales and engineering staff working in the field for both domestic and global projects.

He calls the pemex project a landmark opportunity to take advantage of involvement in the booming oil industry.

FS-Elliot ceo Ronald Stewart believes that such Ex-Im Bank export projects also reopen the door to other U.S.-based companies, that have previously switched to foreign manufacturers. He is confident his company will become better known, both in the energy sector and internationally, due to this initial order.

Ex-Im Bank’s term loan guarantees support pemex’s purchase of U.S. goods and services to build more new process units at its General Lazaro Cardenas Refinery, Mexico’s major refinery. The upgrade will enable Minatitlan to refine additional heavy high-sulfur oil and increase production of gasoline and middle distillates with reduced sulfur levels.

Other small businesses have attested to the fact that participation in the Pemex project and others like it would have been impossible without Ex-Im bank financing.

Ex-Im Bank this year marks its 72nd anniversary of helping finance the sale of U.S. exports, primarily to emerging markets throughout the world. In fiscal year 2005, Ex-Im Bank authorized $14 billion in transactions, supporting almost $18 billion in U.S. exports, and i still growing.

 

Morris R. Beschloss, a 50-year veteran of the pipe, valve and fitting industry, is pvf and economic analyst for The Wholesaler.