Eventually Globalization Comes Back to the US

I loved a Magazine called Business 2.0. Over the last year it folded and many of its writers and editors joined Fortune magazine. One of which is Todd Woody. Well the other day I stumbled across his blog called Green Wombat and an entry called From rustbelt to greenbelt. The premise of the entry is how the alternative energy industry is able to seize upon the availability of skilled manufacturing personnel. Here is a blurb:

Just in the past week, First Solar (FSLR)
announced an expansion of its Ohio plant that makes thin-film solar
panels. German company Flabeg will break ground on a factory outside
Pittsburgh that will manufacture parabolic solar mirrors for
large-scale solar power plants planned for the Southwest. Thin-film
solar company Energy Conversion Devices (ENER), meanwhile, operates three factories in Michigan and is currently doubling the production capacity of one of its plants.

In fact, nearly all the United States’ current solar manufacturing
capacity is in the Midwest, save for Silicon Valley company Ausra’s
factory in Las Vegas. (Thin-film startup Nanosolar is building a
factory in San Jose, Calif.)

processes really require high productivity, so what makes it
competitive here in the Midwest is that we have a great labor force
that is eager to work and well-trained already,” ECD chief executive
Mark Morelli told Green Wombat on Monday.

This is a just a small example of something I’ve written about several times – that eventually, globalization comes back to the US. We are simply in phase one and phase two will see many more opportunities for US workers to sell their expertise in services and products to all over the world rather than just to the US.

Other entries of mine on the subject:
Spinning Globalization the Other Way
Olympic Prediction

S.3335 – What’s the Deal?

Jobs, Energy, Families, and Disaster Relief Act of 2008 or S.3335 is Federal legislation currently getting a lot of press. For example here are three writings I found within a few minutes of looking:

But what is this legislation? The main component is the renewing of several expiring tax credits available to those seeking innovative energy sources. The public wants these credits renewed. It is an incentive for entrepreneurs in this industry to overcome some of the economies of scale problems that plague endeavors like this. The initial cost to the US government increases because it is in one sense subsidizing the innovation. In another sense, the lobbying money used by big oil could dwindle as well.
So if the voting public wants these credits extended then what do Senators do? They add other items to the legislation that may or may not have anything to do with the initial intention of the bill (Alternative Minimum Tax, Railroad Maintenance, Katrina Relief, Mine Safety, and so on). S.3335 suffers from this and is no surprise. It is just sad that something the public wants and is vital to the future of the US is stalled out in the Senate because of deal making.

For more info, please consult http://www.opencongress.org/bill/110-s3335/show

The Six Year Pay Cut

It took six years for wages to recover from the recession in the 2000/2001 time frame as reported by analysis of the IRS reports. Obviously wage growth outpaced productivity returns during the late ’90s so a natural contraction was needed to clear out the waste. But six years is still a lot of time to just get back, especially when you consider the productivity gains made during the last 5 years. Here are some of the stats:

Adjusted Tax Returns:

2000 – $57,289
2001 – $51,870
2006 – $58,029
Percent increase from 2000 to 2006 – 1.2%

Total income increase by $619.2 Billion, an 8.3% increase

All of it went to people earning more than $75,000
$260 Billion of that total went to those making over $1 million

Average Wage:

2000 – $47,097
2003 – $45,956
2006 – $46,996

More information on the subject can be found at this David Cay Johnston article called Average U.S. Income Rose in 2006 in the NY Times

Chinese Hiring of Graduates is Down

Hiring is an obvious reflection of how the economy is going, especially when there is a change in recent college graduate hiring. But that is what is happening in China right now. It is the first time this has happened in quite awhile. And for a country that is supposedly booming economically it really shows how much of an impact a slowing US economy has on the world. Here are a few excerpts from an article on Time.com by Bill Powell called Not-So-Great Expectations:

“I’ve had eight interviews so far,” says Huang, an international-trade
graduate of Anhui University of Finance & Economics, “but I still
don’t have a decent offer. And I just had an export-import company in
Shanghai cancel an interview. They told me, ‘We’re not hiring anymore,
our business is down and we think it’s going to get worse.'”

Huang and her fellow graduates are facing China’s surprisingly grim
economic realities — some new, some chronic. Generating enough jobs for
the masses of newly minted capitalists who emerge from China’s
university system has for years been a challenge. Last year, about
one-third of college grads went jobless for at least six months after
graduation, according to government estimates. This year’s crop of 5.6
million grads — 740,000 more than last year — is the largest ever, and
the tsunami of able bodies is washing into the market just as China’s
economy is faltering

Manufacturing contracted in July for the first time since at least
2005, according to China’s Purchasing Managers’ Index, resulting in
reduced hiring by the sector. Meanwhile, a 50% drop in China’s stock
markets from their peak last October is creating a reverse wealth
effect, some economists believe, leading both consumers and companies
to be more cautious about their outlays.

Tao Wang, an economist with Bank of America in Beijing, says China’s
GDP growth will slow to 10% this year, down from 11.4% in 2007, and
could drop to 8.8% in 2008.

China’s job-market woes won’t be solved by high economic growth alone.
There are persistent problems within China’s higher-education system
that are of mounting concern. As children from the country’s expanding
middle class come of age, universities are being blitzed with new
students. In fields such as engineering and economics, there simply
aren’t enough high-caliber teachers to go around. “China lacks the
educational infrastructure to keep pace with the frantic demand for
education,” says Tang Min, chief China economist at the Asian
Development Bank. A human-resources executive who helped produce a
report on the subject for the American Chamber of Commerce in China
puts it more bluntly: “the vast majority of [Chinese] kids go to
second- or third-rate schools — diploma mills — and are just unprepared
to enter a very competitive job market. They’re getting ripped off.”

Employers say the incidents illustrate two broader problems in China’s
higher-education system. Education is such a bedrock value that “kids
who really shouldn’t even be in college go anyway, and then expect a
good-paying job when they graduate,” says the human-resources executive.

He Lingyan, who runs a fast-growing industrial pipe – manufacturing
company in Zhejiang province, says that when he needs engineers, “I
look for people who have already worked. A lot of colleges aren’t
producing kids with the skills we need. There needs to be better
communication between companies and educational institutions, and it
will take time to fix this problem.”

The last quote looks like something you’d see in the US as well.

Is the Federal Reserve Taking a Risk?

Inflation was way up in the last report to 5.6%. That isn’t surprising to anyone who has paid for gas over the last 3 months. The question that remains is what triggers are needed to alleviate this economic crunch? Here is where the Federal Reserve is taking a risk as noted in an article called This time, wage slaves can’t revolt by Colin Barr on Fortune.com. Ben Bernanke’s leadership of the Federal Reserve in the recent past is to keep rates where they are. He is gambling that wage pressures are going to be kept in check by a slow economy and globalization. If wages are slow to rise then inflation shouldn’t be impacted by them. This allows natural supply and demand forces to even out inflation forces.

But the US employee has worked very hard over the past decade has seen little in the way of increases over that same time frame. Much of the productivity gains were swallowed up by executives and shareholders with the implied promise that employees would see theirs once the company was on firm footing. That never happened. Now we are looking at an entire decade of wage stagnation. If wages are flat and borrowing is no longer an option then the American consumer has no choice but to resist spending. Which will further the recession. But if productivity gets more attention, as it deserves, then the American worker will start to regain leverage in compensation negotiations.

I don’t fear inflation. I fear the shrinking buying power of the US worker. 

Another Writer Sounding the Heating Oil Alarm

Ben Rooney of CNNMoney.com wrote an article about the impact of heating oil costs that are looming. The article is titled Dreading winter’s bitter bill. Here are some of the lines I agree with and have said something similar.

On average, consumers are expected to pay $1,182 to heat their homes
this year, up 20% from last year, according to recent estimates from
the Energy Information Administration (EIA).

… the outlook for the Northeast, where 8 million households depend on
heating oil, is even more worrisome. Homeowners in the region are
expected to spend an average of $2,725 on heating oil this winter.

Alarm bells have been sounding in Washington but lawmakers have
remained deadlocked on legislation aimed at expanding the help
low-income households need to deal with high energy costs.

“When gas prices go up consumers have options,” he said. They can drive
less or use public transportation. But when it comes to home heating,
“households have fewer options.”

Here are some other posts of mine regarding Heating Oil

Update on Heating Oil and China Growth (8/6/08)
The Fuel Cost Balance (8/4/08)
Oil Attention Too (5/27/08)
Oil Attention (5/14/08)

Small Business Optimism is Down

A quick follow up to yesterdays post – How to Erode the Middle Class

Emily Maltby wrote on CNNMoney.com a piece called Small-business owners’ outlook bleak. Here are some items I liked:

The National Federation of Independent Business’ monthly Index of Small
Business Optimism fell one point to 88.2 in July, continuing one of the
longest strings of recession-level readings in the 22-year history of
the survey.

Spending activity has declined since September and has fallen to early ’80s levels, according to the NFIB’s poll results.

Employment also remains soft: 10% of those polled said they had hired new workers, but 15% reduced employment at their firm.

The NFIB’s chief economist, Bill Dunkelberg, thinks the outlook is glum
for the economy for the next six months. “That said, we should remind
everyone that the U.S. is never uniformly in a boom or a recession,” he
said. “You really have to analyze what’s happening in your market where
you are and how it ties in to the fortunes of the larger economy.”

Not all owners are pessimistic; some treat the recession as a creative
challenge. Even in the hard-hit construction industry, 19% of owners
polled by the NFIB said plan to expand their workforce, while just 12%
intend to cut back – and while 13% have cut their selling prices, 48%
said they hiked them.

Borrowing activity has stayed on pace with typical trends, and few owners say loans are hard to get.

How to Erode the US Middle Class

I’m on a prediction kick right now. I predict the survival of the middle class in the US is dependent on small business. I say this for several reasons. Here’s the list:

  • More and more corporations are hollowing out their innards to foreign outsourcing. It is the constant chase for cheaper labor. However, places like India are moving up the labor stack. It used to be simple call centers, but now, as noted in this article by Heather Timmons called Cost-Cutting in New York, but a Boom in India, it is now research assignments that newly hired MBA graduates used to do. I don’t see this trend reversing, maybe slowing at times. And as I’ve noted in another entry called Are Indian Companies Expanding Too Quickly? these same Indian companies will outsource part of the work that can be done cheaper elsewhere (say Mexico). And the cycle will continue based on quality products/services and the underlining education that accompanies it.
  • The wealth in the US is like the universe, it is expanding at the top end faster and faster, leaving everyone else behind. With the focus on the bottom line being self fulfilling, many companies are starting to ignore the social contract (Eastman Kodak for example) with the workers. This results in the rich getting richer and the rest getting downward trending purchase power because now they have to buy their own health insurance, life insurance, and other benefits.
  • Business patriotism is gone. Being a US based company no longer resonates with corporate leaders. At one point being a US branded company meant something – maybe it was greater quality or superior technology. It is now sentimental like lemonade stands and baseball cards.

Now here are the reasons I think small business is the only way to save the middle class in the US:

Bullet 1 – With outsourcing becoming so prevalent, it makes the gears of business easier to access for everyone, especially those in small business. Now small business owners can either be an outsourcer or an outsourcee.
Bullet 2 – With the social contact once offered by big business being disbanded it no longer motivates the everyday Joe to work for corporations. If a worker has to pay for their expensive insurance situations then they might as well increase their benefit from the profits. The risk associated with being a small business owner doesn’t become riskier. It becomes riskier to be an employee of big business.
Bullet 3 – Lemonade stands and baseball cards still exist. That means there will always be a place for niche opportunities. Some will be sentimental while others will be proximity or relationship based.

Small business owners will adapt a smaller nimbler strategy where they tap many other small businesses. They will financially benefit from it and increase their buying power again. They will market themselves as someone just like you, well because… they are just like you.

Individualism and Collectivism

David Brooks of the NY Times wrote a great Op-Ed piece yesterday called Harmony and the Dream. It reminded me of the age old comparison of individualism and collectivism. He writes mainly because the Olympics made him think about it. But everyone used to think about it in the eighties and early nineties – it was the obsession with Japan. The number two economy got that way some how. Now it is the sheer strength of China that has everyone considering the Ying and Yang of individualism and collectivism again. But what is hard, and David Brooks points this out, is truly considering the opposing views as you would your own. It is more than just the operations of the business. It is to change how you see yourself in the world and what fills your self worth.

I still see India as the greater business threat to the US over the long run (mainly because the type of education they have installed) but there is much to gain from adopting the strengths of collectivism. It is happening already.

Cost of Living Driving Executives

The cost of living is driving upward compensation trends. This is a line you are probably expecting to see about China or India and that might still be true but I’m talking about the South and Southeast. According to the 2008 Executive Job Market Intelligence Report the South and Southeast rank #1 as the place where senior level job growth is most happening. The West was next followed by the Southwest. The Northeast and New England placed fifth. And the reason given for the first place rank and the fifth place rank is the cost of labor.

The South and Southeast are not traditional wealth centers. Agriculture and textiles are two economical basics of the area. However, industries like industrial manufacturing, finance, and biotech are now making inroads into the area and their influence creates waves. These waves result in the need for executive management.

The Northeast and New England area are traditional wealth centers. The cost of land reflects the compensation levels associated with the area. The industries of the area are many, but the service industry is king.

So I guess it just depends on where you want your opportunity to reside – in a place where the path isn’t established so new solutions are required or a place where capital and a known path of success are determined?