March 2004
Let the race begin! John Kerry has won the honor to be the Democratic candidate for the 2004 presidential race. With the polls showing that President Bush is now vulnerable to being a one-term president like his father, this should be a highly emotional and nasty contest. We will see a new definition of attack ads from both sides. Besides the mudslinging, it is obvious that the number one campaign issue will be JOBS! This economic recovery has achieved respectable growth over the past year, especially during the second half of 2003. However, businesses have been able to meet rising demand for their products and services with little need for additional workers. Job creation has been severely lacking. The political candidates have been pointing their fingers at "unfair" trade agreements and the greediness of corporate America to outsource or move jobs to lower wage countries. While this makes for an excellent campaign rally cry, it is a rather simplistic explanation that leaves out critical information about a trend that gained momentum with the help of the Internet and other technological advances. Certain jobs are being lost in the transition to a more highly technology-oriented, global economy. It is a painful but necessary adjustment that must be made if we want to achieve higher standards of living for future generations.
It is understandable that politicians would grab onto this hot-button issue, especially during a presidential race. Plant closings can be devastating for individuals, families and communities. However, the exodus of manufacturing jobs is not a new phenomenon. This has been a long-term trend for more than 25 years. There were times in our past when foreign competition was thought to be the culprit and it was not just because of price. Foreign companies could sometimes just do it better. Back in the 1970's and 80's the Japanese shook up the big 3 U.S. automakers by selling better quality cars for less. There were many business analysts and consultants who thought the days were numbered for General Motors, Ford, and Chrysler. As it turned out, the projected demise of the domestic auto manufacturers was premature although it did take a government bailout to save Chrysler. The companies learned from their mistakes and the competition to dramatically improve quality and design new cars, vans, and trucks that more Americans wanted to buy. Technological innovation in computer design and manufacturing were key elements to the turnaround.
The truth is technological innovation is a primary factor in the decline in manufacturing jobs as well as many sales and administrative positions. U.S. companies can now make or do more with fewer people. Productivity is soaring. The prognostications that were made back in the 1960's and 70's of computers and robots taking American jobs actually came true. Those of us old enough to remember secretarial "typing pools" in companies appreciate the time and cost savings of word processing even though it has meant the substantial decline in the number of secretaries (now referred to as administrative assistants) that are needed in the average business. Offices like ours are now able to hire one assistant to do the same amount of work that it took three to do 15 years ago.
Productivity is also soaring in manufacturing. According to Martin Wolfe in the London Financial Times, employment in U.S. manufacturing has declined by 17% since June 2000, which was the peak for manufactured output before the last recession. During this period, there was a 17% rise in worker productivity so there was only a 3% decline in output. U.S. manufacturers are making about the same amount of goods with a significantly fewer number of workers. Could it be we are just too productive for our own good? Is it possible that in the future there will not be enough jobs to go around so we will have to shorten work weeks and increase the number of vacation days to absorb additional workers? Not likely. Our economy transitioned successfully through the disruptions to the labor force caused by the industrial revolution. We can do it again.
The transition to a global economy continues and jobs are being permanently lost as U. S. companies move production or outsource to countries like China and India where wages are a fraction of what they are here. A few years ago the job migration was primarily contained to low-skilled work that can be done with little training. Those job losses were a concern but more on a local basis. Many of the people who lost those jobs could be trained for more value-added work. However, now a number of the jobs being exported are for more skilled positions that even require a college education or other formal training. The Internet has allowed a lot of the more labor intensive jobs in the computer software and accounting industries to be done more cheaply overseas. Finding new positions for these displaced professionals is much more challenging.
Looking On The Bright Side
The politicians and the media are not talking about all of the jobs coming into this country from foreign companies that are interested in our highly skilled labor force and our propensity to spend. Almost all of the major automobile manufacturing companies headquartered in other countries have manufacturing plants in the United States and hire American workers. Foreign chemical and steel companies have production capacity within our borders. With the dollar weakening against many Asian and European currencies we would expect to see more foreign interest in our assets and labor pool because their stronger money now buys more than it did a year ago.
The U.S. economy is probably the most efficient in the world but it is far from perfect. Some rules and regulations are required to protect certain workers rights, to safeguard the environment and to ensure and foster competition. We also believe that the U.S. must continue to negotiate fairer trade agreements with our trading partners to better level the playing field. The Internet has been very instrumental in enhancing competition around the world because consumers have much more information concerning price and quality to make more informed purchasing decisions. By being a major player in the global economy and investing in plants or outsourcing overseas, the U.S. is helping to raise the standard of living in many developing countries, sometimes at the expense of our own workers. This is a very important part of the transition to a global economy because it is creating more wealth than it is destroying, especially over time. That will benefit us directly 5-10 years from now when the consumers in these countries are allocating more of their rising income to purchase American goods and services.
If Americans want a higher standard of living for their children and grandchildren, we must continue to support and promote global trade. Closed societies and economies do not flourish as witnessed by most communist countries before they opened their borders to trade. Twenty years ago China was a third world economy despite having over a billion potential consumers. After 10 years of slowly opening their borders to foreign trade and investment, they are creating a dynamic economy that has been the engine of growth for most economies around the world.
We think the U.S. economy will continue to grow and the employment picture will steadily improve in the months to come. We have recently seen indications that manufacturing jobs are on the rise. However, there will be jobs that will continue to relocate overseas despite the campaign promises to the contrary that might be used to get votes. It just makes economic sense for it to happen. At the same time foreign companies will continue to look for opportunities to expand and invest in new business ventures in this country. If history is a guide, we will continue to discover, innovate, and create new and better products and services that the world needs and wants so that we can help the transition process along to ensure new and better jobs in the future.
John W. Gudritz, CFA
john@frontstreet.com