Slow
growth, high unemployment, political gridlock, European fallout, Chinese
tension, and a bright spot in manufacturing.
Caution, volatility and uncertainty are three key words we
will continue to hear in 2012. Due to slow economic growth, which is projected
to hover around 2 percent, the unemployment rate likely will continue to remain
in the 8 to 9 percent range this year. Prior to the Great Recession, the United
States had not experienced similar unemployment levels since 1983. When
including those who have stopped looking for work or have reluctantly accepted
part-time jobs, the rate could be as high as 16 percent, analysts say.
Several factors will continue to put a drag on growth. For
example, some estimates indicate one in five homeowners owe more on their
mortgages than their homes are worth. Until home values stabilize and consumers
feel more confident about their future, consumer demand, which typically
represents 70 percent of gross domestic product, will continue to lag.
In addition, declining U.S. federal and state government
spending will depress U.S. growth in 2012. And with the presidential election
this November, we can expect continued gridlock and an inability of our
policymakers to come together to execute necessary reforms, restructure
entitlement programs, increase investment in education, research and
infrastructure, and improve immigration laws and the tax code.
Gerrymandering, the redrawing of congressional districts to
assure dominance by one party over the other, shares some responsibility. It
has enabled politicians to stake out extreme positions and no longer seek
approval of the moderate-voting public. This makes compromise difficult.
European Fallout
A major factor impacting U.S. growth this year will be the
European debt crisis. Although this was a big story in 2011, its impact
certainly will be felt in 2012.
On a cumulative basis, Europe is the source of 72 percent of
foreign direct investment in the United States. It‘s also the destination of 22
percent of our exports. A disruption in U.S.-European trade and investment, as
well as major European defaults, can have serious consequences on this side of
the Atlantic.
The 27 members of the European Union (EU) have different
economies, fiscal disciplines, democracies, histories, values, and languages.
Holding together a group this diverse is difficult in the best of times. Now,
due to its debt crisis, many are wondering if the eurozone, the 17 EU member
countries using the euro, will survive.
An underlying problem with many EU members has been their
inability to adapt to globalization. When a country recognizes the rules of the
free market and globalization, and decides to abide by them, it puts on what
author and New York Times columnist, Thomas Friedman, in
1999 called the “Golden Straitjacket.” But to fit, Friedman said, countries
must adhere to various policies to enhance national competitiveness.
The United States began squeezing into the Golden
Straitjacket in the 1980s. However, one could argue that Greece, and perhaps
Spain and Italy, haven’t donned the straitjacket or, in some ways, adapted as
well to globalization as the United States or several northern European
countries like Germany, Austria and the Netherlands.
Stronger American Manufacturing
According to the Institute for Supply Chain Management,
economic activity in the manufacturing sector expanded in December for the 29th
consecutive month. Output will continue to rise as it has for decades.
Surprising to many, American manufacturing value-added output has tripled since
1980, rising from $558 billion to $1.7 trillion in 2010.
However, due to new technologies and automation, fewer
employees can produce much more in less time. Consequently, manufacturing
employment has fallen from its high of 19.5 million in 1979 to 11.7 million
last November. In December, Americans were reminded of this fact by President
Obama, who said “Steel mills that needed 1,000 employees are now able to do the
same work with 100 employees, so layoffs too often became permanent, not just a
temporary part of the business cycle.”
In turn, labor as a percentage of a product’s total costs has
decreased to approximately 10 to 30 percent, on average, analysts say. As the
labor component continues to shrink, and Chinese labor rates, fuel costs and
expenses related to long distance supply chain logistics continue to rise, it
makes sense for some U.S. producers to “backshore” or return previously
offshored manufacturing from China to the United States.
Rising U.S.-Chinese Tensions
Due to upcoming U.S. elections and the selection of new
Chinese Central Committee members, including China’s presidency, expect harsh
rhetoric on both sides this year to escalate as political candidates pander to
their constituents. Plus, difficult issues, including piracy of American
intellectual property, the protection of certain Chinese strategic sectors, and
the Chinese military buildup, will continue to fuel the fire. But the currency
issue will continue to remain a primary irritant.
Since July 2005, when the Chinese yuan, also known as the
renminbi, was allowed to climb in value, it has risen from about 8.28 to nearly
6.36 per U.S. dollar. Nevertheless, most economists agree that it still is
considerably undervalued giving Chinese exporters an unfair advantage that’s
boosting the U.S. trade deficit. But much of the tension here is caused by
misinformation. Why? The true U.S. trade deficit with China is not accurately
reflected in conventional trade statistics. Thus, Chinese value-added, as a
component of Chinese exports to the United States, is about 50 percent,
according to the U.S. International Trade Commission. Others put this figure
much lower.
Consider Apple’s Ipod. When imported into the United States
from China, the iPod‘s value is identified at approximately $150. Yet, only
about $4 of this is Chinese value-added derived from Chinese labor and
components, according to the University of California. The remaining $146
represents the value of components produced in the United States, Japan,
Singapore, Taiwan, and Korea. Nevertheless, $150, not $4, is added to U.S.
import statistics, artificially increasing the U.S.-China trade deficit.
Long-Term Optimism
Although our economy will remain weak this year, American
optimism, free market capitalism, acceptance of immigrants and a brilliant
Constitution will propel the United States forward for generations to come.
John Manzella is a frequent speaker, author of "Grasping
Globalization," and president of Manzella Trade Communications (www.ManzellaTrade.com), a strategic
communications firm focusing on global business and today’s leading economic
issues. His firm provides insight and analysis, and crafts communications
programs to help clients educate stakeholders and decision makers. Services
include custom publishing, public affairs, public relations, marketing,
consulting, and speaking engagements.
