America's economy

[VCheng]

A rather long article, but interesting enough to share:

from :America

America’s economy
Points of light
Amid the gloom there are unexpected signs of boom, especially in energy
Jul 14th 2012 | HAHNVILLE, LOUISIANA, SHANGHAI AND WASHINGTON, DC | from the print edition

The half-finished Shanghai Tower is a hulking concrete wedding cake, rising out of a dusty building site in the central business district. But when it is finished in 2015 the glittering spiral tower will be China’s tallest building and one of its most striking, with two exterior glass skins enclosing nine different climate zones. It will, the developer boasts, “symbolise the dynamic emergence of modern China.”

Less obviously, it also symbolises modern America. The tower owes its design to an American firm of architects, Gensler. Its structural engineer is another American firm, Thornton Tomasetti. Indeed, American companies have left their mark all over Shanghai’s skyline. Ray Yu, a local supervisor for Thornton Tomasetti, points to the nearby Jin Mao tower and then to the Shanghai World Financial Centre across the street, rattling off the names of their architects and structural engineers. All are American.

China has no shortage of architects and engineers; foreign firms are required to partner them. But they have less experience with super-size high-rise towers, says Mr Yu: “We solve problems for them.” China also solves problems for the Americans. Two decades ago, foreign fees were just a sliver of Thornton Tomasetti’s business; now they make up 15-20%, and are dominated by Asia, a vital source of growth at a time when the market at home and in Europe is moribund.

This is a microcosm of a much larger picture. From 1982 to 2007, America’s consumers were the engine of the country’s economy. Their spending on goods, services and houses rose from 67% of GDP to 74%. The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result.

One of the first imbalances to be corrected was lack of capital in the banks. As the price of being bailed out, they were forced by the Treasury to raise enough capital to deal with exceptionally dire scenarios of recession and loan write-offs. Five of America’s biggest banks wrote off almost $500 billion in the aftermath of the financial crisis and raised $318 billion in fresh capital. As a result, their equity ratios now exceed 10%—above both pre-crisis levels and those of euro-zone banks.

Consumers are now engaged in a long, hard process of shedding debt and learning to live within their means. This is essential, but it has a price: an uncommonly feeble recovery. In the three years since the recession ended, GDP has grown by an average of 2.4%. This year it may not reach even that. On July 6th the government reported that jobs figures, excluding jobs on farms, rose by just 80,000 (less than 0.1%) in June, the third straight month of meagre growth, and unemployment remained at 8.2%. Emerging markets are slowing, Europe remains in crisis, and at home businesses worry that political deadlock will force dramatic tax increases and cuts in federal spending at the end of the year.

Although America’s overall growth may indeed by unimpressive, its components show some intriguing shifts. Consumer spending and housing contributed just 65% of growth. Exports contributed 43%, one of the strongest showings in any recent economic recovery (see chart 1). Other components, such as business investment, imports and government spending, added to or subtracted from growth, roughly offsetting each other.

The sluggishness of consumer spending is mostly the result of weak employment. But the lack of jobs reflects mostly the reversal in household finances. As consumers borrowed heavily either against their houses or to buy houses, their debts rose to 133% of income (see chart 2). House prices have since collapsed, to the point where they are now 19% below fair value: among the world’s cheapest, according to The Economist’s own indices. With many old mortgages defaulted on and written off, and new ones harder to get, debt burdens have shrunk considerably.

The strength of exports is more of a surprise. When Barack Obama in early 2010 set a goal of doubling exports in the next five years, “a number of people said, ‘You’ll never make it’,” says Rebecca Blank, his acting secretary of commerce. “We celebrated the halfway point a couple months ago.” Despite that, the trade deficit, while slimmer than in 2006, remains stuck at about 4% of GDP. Ms Blank points out that it would have narrowed further, but for two things beyond America’s control: the slowing world economy and the rising price of oil, America’s largest import.

At your service

As America shifts from a consumer-focused economy to a more outward-looking one, what businesses sell, and how and where, will change too. And all sectors will be affected: services, manufacturing and commodities. This is most obvious in the geographical pattern of American exports. Sales to traditional markets in the OECD, a rich-world club, have risen 20% since the end of 2007. But they have risen 51% to Latin America and 53% to China, which is now America’s third-largest market after Canada and Mexico.

Services have long been an American strength, consistently making up 30% of its exports. Within that sector, though, the share held by lower-value tourism and travel has slipped, while royalties and so-called private services—such as scientific, engineering and other consulting, plus financial services—have advanced. Exports of such services to Brazil, India and China nearly doubled between 2006 and 2010.

This trend has been pushed on by digital technology, which makes effortless the sale of many services across borders. Michael Mandel of the Progressive Policy Institute, a think-tank, reckons there are now 311,000 people employed making applications, games and so forth for smart devices such as Apple’s iPhone, and for Facebook. Zynga, one of the largest makers of online games and mobile entertainment applications, recorded $1.1 billion in revenue last year, largely from the sales of virtual goods in its games. A third of this came from players who live outside America.

As recently as a few years ago, American manufacturing was in full retreat. It had shed jobs almost continuously from 1998 to 2010, first because of outsourcing to places like China, then because of collapsing sales of cars, appliances, furniture and houses during the recession.

Car sales have since rebounded nicely, and house sales are crawling off the bottom. Meanwhile, a falling dollar and restrained pay-scales in America have combined with rising wages in China to make outsourcing less attractive. A few companies have even brought jobs back to America. Manufacturing employment has risen steadily for two years now.

Ethan Allen, a company based in Connecticut that makes and sells upmarket furniture, was deeply battered by the recession, closing several stores and factories and eliminating 1,500 jobs. It has since sought to remake itself as “a vertically integrated interior-design company,” says Farooq Kathwari, the company’s boss: it has added back 800 jobs, including 200 interior decorators who help customers choose furniture, which is then made to order in small production runs at its six American and two overseas factories.

In hopes of replicating the model abroad, Ethan Allen has changed its chairs, beds and tables to give them international appeal, in particular in China, where it has opened 25 stores in the past year (to make 69 in all). Chinese customers, the company thinks, will be willing to pay a premium for American style and quality.

Visitors to the flagship store in a fashionable district of Shanghai are greeted by videos of workers in Ethan Allen’s factories in North Carolina and Vermont turning out furniture. On a recent afternoon the store drew a Chinese couple who recognised the Ethan Allen name from their home town of Chongqing. They liked the style, and thought they would buy pieces for the flat they hoped to get in Shanghai. The Chinese-brand furniture available nearby, the man confided, wasn’t his style; it was the sort of thing people over 40, such as his parents, would buy. “I’m still young,” he said.

Traditionally, America’s largest companies, such as Boeing and Caterpillar, have dominated exports. Small companies find distribution, regulation and language barriers overwhelming in foreign countries. But with a big prod from the federal Export-Import Bank, more are trying to sell goods there. According to the Census Bureau, 293,000 companies exported in 2010, up 19% from 2006. Small companies (with fewer than 500 employees) accounted for 34% of exports in 2010, up from 29% in 2006.

A decade ago Air Tractor sold almost all its crop-dusting and fire-fighting aircraft in the United States, leaving it vulnerable both to America’s business cycle and its weather. Now, helped by federal financing, it has increased foreign sales to about half its total. Employment has more than doubled, to 270. From its home in Olney, Texas (population 3,285), Air Tractor this year will sell 40 aircraft, a fifth of its annual total, to Brazil, which needs bigger crop-dusters to expand grain sales worldwide. “If we can do it from a town that has three stop-lights and one Dairy Queen, it can be done by anyone,” says David Ickert, the chief financial officer.

Gushers of output

Emerging markets have also revived America’s role as a big commodity producer. Soaring grain exports have raised farmers’ incomes to record levels, and regulators fret about incipient bubbles in agricultural land. At the same time, surging oil prices have triggered a gusher of new output. In 2011 crude-oil production reached its highest level since 2003, of 5.7m barrels a day (b/d). Production in the Gulf of Mexico is almost back to the levels reached before the Deepwater Horizon oil spill of 2010.

In recent years, techniques have been discovered to release gas from densely layered rock formations known as shale. These techniques—horizontal drilling and hydraulic fracturing, or fracking—have released so much shale gas that its price has tumbled. Now the same methods are being applied to race after oil.

In 1999 North Dakota’s rig-count stood at zero after small pockets of conventional oil had run out. Now the Bakken oilfield is pumping out more than 550,000 b/d of shale oil, and Williston, the town at the centre of the field, is booming. It used to take five minutes to cross town; now the weight of oil traffic means it takes 20, according to one resident of this remote corner of a thinly populated state. At Walmart, crowds of shoppers have pressed all the trolleys into service; and its vast car park, like many other similar sites in town, provides a temporary home for fleets of camper vans housing workers flooding to the region’s oilfields. New homes, hotels and “man camps”—row upon row of workers’ huts—are springing up all around.

This year shale oil should contribute some 720,000 b/d to America’s total production. And shale-oil deposits in Texas, Ohio, Nebraska, Colorado and Kansas could eventually contribute as much as 5m b/d, according to the most optimistic forecasts. The Bakken field may well hold more than people think, and Ohio’s Utica shale has barely been tapped.

Not so long ago, terminals were still being built in America to import liquefied natural gas (LNG). Now the country is enjoying a bonanza of domestic gas. Americans pay less than $3 for 1m British thermal units, where Europeans and Asians often pay more than $10. Accordingly, America is now planning to send the stuff abroad. Michael Levi of the Council on Foreign Relations thinks that exports of 60 billion cubic metres a year would yield revenue of $20 billion, though higher imports of other goods would offset the benefit to the trade balance.

Downstream benefits

The biggest beneficiaries of the fibre-optic boom a decade ago were not the sellers of cheap bandwidth, but its users. In the same way, the biggest impact of the shale-gas boom will be felt downstream. It is a primary feedstock for ethylene, the building block of countless other products, such as plastics and tyres. Surging gas prices in the early 2000s prompted petrochemical manufacturers to move capacity from America to the Middle East, contributing to the loss of roughly 140,000 jobs in the American industry, according to the American Chemistry Council, a trade group.

In 2009 Dow Chemical announced plans to close an ethylene “cracker” (as the facilities that crack gas molecules are called) on the banks of the Mississippi just outside New Orleans. Last year it announced that the plant would be reactivated. Now blue-helmeted construction workers, some of roughly 2,500 contractors, crawl over the scaffolding that covers its two towering boilers and rusted red funnels, labouring to get the cracker back into full production by the end of this year. It will eventually employ 40 Dow workers and 20 contractors full-time. The reopening is “a huge morale-booster for employees and for the community”, says Laura Ambrose, the site manager.

Dow recently announced that it would build a brand-new ethylene cracker in Freeport, Texas, one of several dozen expansions or new facilities along the Gulf coast. Most of the new output will be turned into more refined products at other Dow plants in North America and, eventually, Latin America as well, making its own useful contribution to the trade balance.

The industry is also moving inland. Shell plans to build a petrochemical refinery near Pittsburgh to process gas from the nearby Marcellus shale. The American Chemistry Council has counted $30 billion-worth of new investments that will boost ethylene capacity by a third. It reckons this could generate, at a conservative estimate, 17,000 permanent jobs directly and many more indirectly. Such jobs pay well: Ms Ambrose reckons her new hires will start at around $50,000 and, with overtime, could earn up to $100,000.

Petrochemicals are only the start. Industries as diverse as glass, fertiliser and plastic bags could all benefit from cheap, plentiful natural gas. Nucor, a steelmaker, is building a plant to make iron from natural gas and iron-ore pellets in Louisiana.

These trends have yet to result in an improved trade balance, because the volume of net imports has been swamped by the rising price of petroleum. Assuming, however, that oil prices do not continue to rise so rapidly, energy is likely to exercise less and less drag on America. Last year, for the first time in decades, America became a net exporter of refined products such as petrol. By early next decade, according to projections by the Energy Information Administration, it will be a net exporter of natural gas. BCA Research, a financial-analysis firm, reckons these factors could slash America’s trade deficit by $100 billion by 2020, and boost total economic output by 0.2%-0.3%.

Still seeking work

Promising though this rebalancing of the American economy is, it will bring problems of its own. One is inequality, which is already at a troubling level. America’s most successful exporters employ relatively few people. The Commerce Department reckons that even though exports last year were 14% higher than in 2008, the number of jobs supported by those exports was slightly lower.

More than ever before, too, America will depend on the health of the rest of the world. The euro crisis is an obvious danger. But troubles lie farther afield. Emerging markets may have survived the 2008 crisis largely unscathed, but their growth is now succumbing to their own financial excesses. Nor are they an easy place to make money. China’s government, in particular, often forces foreign companies to share with local partners the ideas that give them their competitive advantage.

Shanghai has been a gold-rush town for Western architects and engineers. Now the commercial-property market is slowing, and the local partners of eager Western firms will soon be their competitors. “Eventually they will be as good as we are,” says Dennis Poon, the vice-chairman of Thornton Tomasetti. “We’ll have to reinvent ourselves.”