NEMA's Chief Economist says Manufacturing Leads Expansion, Future Still Uncertain

April 22, 2011
Donald Leavens, PhD., VP for National Electrical Manufacturers Association, told an ABB Power and Automation audience that inflation is his biggest fear.
We are beyond recovery and actually into an expansion period, said Don Leavens, and manufacturing is leading the way.  The U.S. is at its highest level of GDP in history, and that’s without some 5 million workers who are still unemployed.   This means productivity is real (and automation is critical).   Housing typically leads a recovery, with manufacturing coming at a later stage, which has surprised many economists. Inventory rebuilding provided the initial bump after 2007 and 2008, but now manufacturing has become self-sustainable. Why?  Because the U.S. is not the only driver.  India, China and parts of Russia are buying “high value” tech products from us.  So while we do see the demise of U.S. manufacturing based on employment (the usual metric in the popular press) the real story is our productivity. The world’s most advanced economies are experiencing relatively small growth, while the highest growth rates are coming from emerging nations such as China, India, Brazil and Mexico, as well as sub-Saharan Africa. Unfortunately, here in the U.S., construction and the employment that goes along with it, are “languishing” according to Leavens, and won’t improve for some time. Stimulus money is largely spent, and local spending is tied to property taxes.  With real estate values low, the picture is not good. The stock market has recovered half the wealth lost in the recession, not real estate, and the top 10% of income earners account for 50% of spending, and these folks are buying again, also contributing to sustained expansion. One bright spot, with income coming back and higher taxes, state revenues have actually increased 9% in the last report issued. Two-thirds of our economy is based on retail sales and spending is shifting more to energy.  While gas prices may ebb and flow, they are headed up not down.  200,000 new jobs a month, especially factoring in graduates, is not going to cut it.  We would need 450,000 new jobs created per month to make a serious dent in unemployment, said Leavens. Leavens is not that worried about the deficit, despite all the talk in the press.  This can be resolved in a few years with major tax reform after the next election, but not with the current bi-partisan Congress. Leavens also dismisses any Tsunami Effect.  While what happened in Japan is a real tragedy, less than 5% of what we make goes to Japan.  In fact, in a few years the rebuilding efforts may have a positive effect.  Expect maybe two quarters of this disaster holding back the Asian economy. A global implication, however, could result from Germany and France turning off obsolete reactors and shifting to more oil and coal, which could add volatility to oil prices. Oil shock is a little harder to discuss in general, said Leavens.  Every $10 increase in a barrel of oil shaves a quarter percent off our GDP growth. And if unrest comes to Saudi Arabia, all bets are off. In fact, the biggest visible threat to our current economic expansion comes from monetary tightening to fight emerging inflation.  Leavens predict the Fed will have to raise interest rates by Q1 2012. Regarding U.S. jobs and housing, which are totally linked together, Leavens predicts “late in career layoffs” will become the permanently unemployed.   There are still 7 to 8 million homes not on the market as banks do not want to release them all at once.  Leavens referred to this as the “shadow mortgage crisis.” Even when housing comes back, three to five years from now, growth will only come where the jobs are.  Many empty homes in places like Arizona and Florida will be plowed under and written off. As for commercial real estate, there are just too many stores, offices and hotels. The metals markets are particularly hard to read, with a lot of speculative hoarding going on. So where does NEMA see strong growth in manufacturing in 2011 and 2012?  The strongest drivers include trucking (with the oldest fleet we’ve ever had), construction equipment (for export), industrial and electronic equipment, appliances and communications. Motors and controls have rebounded, but not quite back to their previous highs. Natural Gas will be a real winner, according to Leavens, with prices remaining relatively stable.  Wind energy, in his view, is not self-sustainable without government subsidies. An audience member asked Leavens what keeps him awake at night.  Inflation was the answer.  The problem is, once you realize rampant inflation is a problem, it’s often too late to stop it.

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