The US economy is still in a sorry state

By Edward Luce

The Financial Times
September 23, 2012

http://www.ft.com/cms/s/0/48da980c-03dd-11e2-9322-00144feabdc0.html#ixzz27QKpm0gJ

In a waning presidential first term nothing compares to the
importance of securing another one. In Barack Obama’s case,
there is an added spur to his drive for re-election. The
president believes the American economy will spring back to
life over the next four years and cannot abide the thought of
Mitt Romney reaping the credit.

Mr Obama’s impulse is more than understandable. However
unearned, an economic revival that coincided with a Romney
first term would easily be marketed as a "Romney boom". But
even if - as many expect - Mr Obama wins on 6 November, he
should be wary of the growing belief in America’s impending
manufacturing renaissance. Too much of it is based on hope.
America’s pallid - and again waning - economic recovery is
already into its fourth year. The typical length of the
business cycle is about seven years. It requires optimism at
this stage to believe the patient is about to arise and go
for a jog. Here is the case for America’s coming
manufacturing boom. First, the US is in the early stages of
an energy windfall that will transform its attractiveness as
a location to do business. In addition to the unfolding
energy supply shock, which will lower the cost of electricity
and the feed-in stock for many kinds of production, the cost
of American labour looks increasingly attractive next to wage
inflation in China and other emerging market economies.

According to the Boston Consulting Group the US could create
between 2m and 5m new direct and indirect manufacturing jobs
between now and 2020. That would make up for about one-third
of what it has lost in the past decade.

On top of that, the US housing market has finally bottomed
out and is likely once again to become a net plus to US
growth. Finally, as Roger Altman recently argued in the FT,
Washington could surprise us all by skirting the cliff and
striking a fiscal deal that would rekindle America’s animal
spirits.

Much of this is indisputable; the US is well on the way to a
new era of energy abundance. Estimates of its impact range
from mildly positive to something far bigger. Much of it is
also probable: it would take a huge shock to push the US
housing market back into free fall.

Some of it is less so: it would be a surprise if Congress
struck an intelligent fiscal bargain in the coming months.
Should the Republican "fever break" - as some Democrats
describe the anticipated Republican change of heart - it
would certainly qualify as a positive shock to the economy.
Both Moody’s and Standard & Poor’s, the two biggest credit
rating agencies, cite political risk as America’s chief
vulnerability.

Yet it is hard to get excited about a revival based on so
many ifs and buts. Even if the rosiest forecasts prove
correct, they are based on sobering assumptions. First, the
boom would be based on the continued decline in US unit
labour costs. By 2016, according to Boston Consulting Group,
the gap with China would have narrowed to just seven cents an
hour. These would be neither the high-tech jobs of the future
nor the golden middle class jobs of the past.

Rising US labour productivity growth will play its part. So
too will declining US wages. Hourly pay for new "two-tier"
hires in US auto assembly plants and elsewhere is roughly
half that of the original tier (and with a fraction of the
benefits). None of this would alter the calculus for the
higher-tech manufacturers, such as semiconductors and
robotics. At a typical Intel plant, whether in China or
America, labour costs amount to just a tenth of total
overheads. Tax rates, market access and the cost of land are
far more important factors.

Second, the hollowing out of America’s middle class- still
politely described as median income stagnation rather than
"decline" - is accelerating rather than slowing. According to
the US Census last week, the US median household is 4.8 per
cent poorer now than at the start of the recovery in 2009.
Median incomes have now fallen to the pre-internet level of
1993. All of the gains of the Clinton years have been lost.
The decline in the past three years follows a 3.2 per cent
drop during the recession, which itself followed a shrinkage
during the 2000-2007 cycle. Far from a new dawn of broad-
based growth, America’s middle class decline is getting
worse.

Recent days will chiefly be remembered for Mr Romney’s
decision to stand by his disparaging comments about the 47
per cent of Americans who pay no federal income tax. They
will also be remembered for the release of his full 2011 tax
return, which showed that the former Bain Capital executive
pays a lower overall rate than the poorest fifth of
Americans. In an era of increasing economic insecurity, Mr
Romney has made a hash of his campaign.

Were he a better politician, Mr Romney would have seized on a
report earlier this month that showed a sharp fall in US
competitiveness. In 2007, the US was ranked first by the
World Economic Forum, which published the report. By 2011 it
had fallen to fifth. This year it dropped to seventh. The
chief culprits are bad governance, macroeconomic instability
and declining infrastructure. Here, too, the American trend
points the wrong way.

Should he still pull off a victory, Mr Romney’s tax plans
would skew the fiscal system even further towards the
wealthiest. If, as Mr Romney says, Mr Obama is a
"redistributionist", then he is clearly not a very effective
one.

Whoever wins the 2012 election, America can certainly rely on
a coming energy boom - in fact it is already well under way.
Most of the rest looks like either hype or hope.

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Copyright The Financial Times Limited 2012.

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