Category Archives: impacts of offshoring

gasoline price forecasts, impacts of offshoring, macroeconomic forecasting

What Up? The Trump Years – I

From the standpoint of business forecasting, Donald Trump is important. His challenge to various conventional wisdoms and apparently settled matters raises questions about where things will go in 2017 and beyond. Furthermore, his style of governance is unknown, since as a businessman and minor celebrity, Trump has literally no government experience. He is an Outsider to the political scene, arriving with a portfolio of ideas like mass deportations of illegal immigrants, a massive wall between the United States and its southern neighbor, Mexico, bringing manufacturing jobs back, no further gun controls, and more rigorous screening of immigrants from the Middle East and Muslim countries.

So, with Donald Trump’s Inauguration January 20, a lot seems up in the air. But behind the hoopla, fundamental economic processes and trends are underway. What types of forecasts, therefore, seem reasonable, defensible?

Some Thoughts on Economics

Let’s start with economics.

Donald Trump could be the President who returns inflation and higher interest rates to the equation.

Offshoring and outsourcing have been factors in creating industrial wastelands and hollowed out production in the US – areas where you can drive for miles through abandoned buildings and decaying business centers. At the same time, offshoring and outsourcing bring low-cost electronics and other products to US consumers.

It is a Faustian bargain. If you were a wage-earner with a high school education (or less), supporting a family working in the “fast food sector” or convenience store, maybe holding two jobs to patch together enough income for bills – what you got was a $500 big screen TV and all sorts of gadgets for your kids. You could buy a cheap computer, and cheap clothing, too. Credit cards are available, although less so after 2008.

Oh yeah, another place you could work is in a Big Box store, whose long aisles and vanishing sakes clerks serve as the terminus of global supply chains coursing through ports on the West and East coasts. These are the ports where box-car size containers from China and elsewhere are unloaded, and put on rail cars or moved by truck to stores where consumers can purchase the goods packed in these containers largely on credit.

Is it even possible to slow, stop, or reverse this dynamic?

Let’s see, the plan for bringing manufacturing back to the United States involves deregulation of business, making doing business in the US more profitable. One idea that has been floated is that deregulation would provide incentives for US business to repatriate all that money they are holding overseas back to the US, where it could be invested in America.

Before taking office, President-elect Trump earned points with his supporters by “jawboning” US and foreign companies to keep jobs here, threatening taxes or fees for re-importing stuff to the US from newly relocated operations.

But most of the returning manufacturing would be highly capital intensive (think”robots”) so that only a few more jobs could be garnered from this re-investment in America, right?

Well, before dismissing the idea, note that some of these new jobs would be good-paying, probably requiring higher skills to run more automated production processes.

But this is a different game – producing in the United States, discouraging companies to move operations abroad to lower cost environments, placing taxes, fees, or tariffs on goods manufactured abroad coming into the US. This also involves higher prices.

There is another thread, though, to do with the impact of “deregulation” on the US oil and gas industry, aka “fracking.”

When American ingenuity developed hydraulic fracturing technology (“fracking”) to tap lower yield oil and gas reserves in areas of Texas, South Dakota, and elsewhere, US oil and gas production surged almost to the point of self-sufficiency. But then the Saudi’s lowered the boom, and oil prices dropped, making the higher cost US wells unprofitable, and slowing their expansion.

Before that happened, however, it was apparent fracking in the West and the older oil fields of the Eastern US energized activity up the supply chain, drawing forth significant manufacturing of pipes and equipment. The proverbial boom towns cropped up in the Dakotas and Texas, where hours of work could be long, and pay was good.

Clearly, as oil prices rise again with various global geopolitical instabilities, the US oil and gas industry can rise again, create large numbers of jobs and, also, significant environmental degradation – unless done with high standards for controlling wastes and methane emissions.

But Mr. Trump nominated the former Oklahoma Attorney General to head the US Environmental Protection Agency (EPA) – an agency which Mr. Trump vowed at one point in the campaign to eliminate and which his nominee Scott Pruitt fought tooth and nail in the courts.

So, concern with the environment to the winds, there is a case for a Trump “boom” in 2017 and 2018 – if global oil prices can stay above the breakeven point for US oil and gas production.

Another thread or storyline ties in here  – deportations and stronger controls over illegal immigration.

Again, we have to consider how things are actually made, and we see that, as Anthony Bourdain has noted, many of the restaurant jobs in New York City and other big cities  – in the kitchen especially – are filled by new migrants, many not here legally.

Also, scores of construction jobs in the Rocky Mountain West are filled by Hispanic workers.

Pressure on these working populations to produce their papers can only lead to higher wages and costs, which will be passed along to consumers.

And don’t forget President Trump’s promise to restore US military preparedness. As “cost-plus” contracts, US defense production acts as a conduit for price increases, and may be overpriced (the alternative being to let potential enemies manufacture US weapons).

So what this thought experiment suggests is that, initially, jobs in the Trump era may be boosted by captive or returning manufacturing operations and resumption of the US oil and gas boom – but be accompanied by higher prices. Higher prices also are thematic to limiting the labor pool in US industries, and the cost-overruns are endemic to US defense production.

This is not the end of the economics story, obviously.

The next thing to consider is the US Federal Reserve Bank, which, under Chairman Yellen and other members of the Board of Governors is itching to increase interest rates, as the US economy recovers.

Witnessing a surge of employment from fracking jobs plus a smatter of repatriation of US manufacturing, and the associated higher prices involved with all of this, the Fed should have plenty of excuse to bring interest rates back to historic levels.

Will this truncate the Trump boom?

And what about international response to these developments in the United States?

business trends, impacts of offshoring, macroeconomic forecasting

Walmart and China – Icons of the Age

Here’s a puzzle. Why has the rate of new business creation declined fairly consistently for the past 20 or so years? This contrasts with the idea the US is an entrepreneurial nation, that it is the heartland of the “free market” and place where new jobs are created by myriads of startups.

newbuscreate

This pattern is well-established, and is validated by several sources, including a recent Brookings report and Letter of the Chicago Federal Reserve Bank.

There are a cluster of causes, but two words are iconic – Walmart and China.

The Big Box store is a major factor behind the decline in small business startups, with Walmart being the leading superstore. And, for the most part, Big Box stores act as conduits for Chinese-made consumer goods.

Superstore Community Impact

In 2012, Walmart employed about 1 percent of the American workforce in its nearly 5000 stores, and clocked sales of $444 billion in the $17 trillion US economy overall. Certainly significant.

The story is that a Walmart comes to town and Mainstreet shutters up, becomes a ghost town. Gone are dozens of small proprietors and, many say, the sense of community. Instead we have endless aisles of cheap products from China – aisles where clerical assistance is scanty and the clerks often seem kind of lost in the vastness of it all.

Well, elements of this story are well-documented.

For example, there is a great website maintained by the Kennedy School at Harvard which updates the impact studies, even linking the coming of Walmart to an increase in obsesity somehow (lower wages, cheaper deep fat fried food?).

The first Walmart, Target, and K-Mart stores opened in 1962 with a focus on deep discounts and suburban locations.

In the five decades since, the American retail landscape and built environment have been profoundly altered. At the end of 2013, Wal-Mart had 4,700 stores in the United States and Puerto Rico, while Target operated nearly 1,800 locations and Kmart just over 1,200. Then there are smaller chains — still huge by any measure — as well as “category killers” and all the diverse residents of the shopping-mall ecosystem.

Selling a Cheaper Mousetrap: Wal-Mart’s Effect on Retail Prices shows that Wal-Mart’s price impact is large and can be beneficial to consumers.

The analysis combines data on the opening dates of all US Wal-Mart stores with average city-level retail prices of several narrowly-defined commonly-purchased goods over the period 1982-2002. I focus on 10 specific items likely to be sold at Wal-Mart stores and analyze their price dynamics in 165 US cities before and after Wal-Mart entry. I find price declines of 1.5%-3% for many products in the short run, with the largest price effects occurring for aspirin, laundry detergent, toothpaste and shampoo. Long-run price declines tend to be much larger, and in some specifications range from 7-13%. These effects are driven mostly by relatively small cities, which have high ratios of retail establishments to population.

The redoubtable Jerry Hausman of MIT argues that the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) calculations should be adjusted downward, when full account of Walmart and other superstores’ impact on retail is folded into the calculation.

The jobs impact has been widely studied and is difficult to assess in a controlled framework, but one thing is certain – pay is generally lower (partly since there are no more owner/operators). See also A Downward Push.

One question is whether this is a race to the bottom. But the antidote, should this be true, is not my immediate focus. Rather I want to try to trace the connections between the Big Box stores and other collateral and linked developments.

Big Box Stores as Channels For Chinese Goods

There’s a scrappy website that sends people to check where the goods in Target, K-Mart and Walmart come from – concluding that the vast majority of goods are made in China.

Again, Walmart is iconic.

The Wal-Mart effect claims that Wal-Mart was responsible for $27 billion in U.S. imports from China in 2006 and 11% of the growth of the total U.S. trade deficit with China between 2001 and 2006

Cargo containers are the innovation which makes this possible, and there is no clearer evidence for the supply sources for the Big Box stores than their record of imports with cargo containers.

This chart shows the number of standard-sized containers going to the top ten container importers.

top10

So the supply-chain extends from Guandong Province to Kansas City, using cargo containers which are first shipped on the ocean, then loaded onto rail cars or trucks and moved to distribution centers, then put out on shelves in the Big Box stores.

China and US Manufacturing

It is no secret that Chinese tools, Chinese-made textiles, and Chinese-assembled electronics generally are cheaper than equivalent goods made in the United States. And it is not just China. There are other low wage supply areas, such as the Malquidores along the border with Mexico and in Guadalahara, as well as contract manufacturers in Vietnam and Eastern Europe.

But, again, China-made consumer goods are iconic, and they have displaced US-made products across a swath of markets.

The Economic Policy Institute (EPI) estimated in 2007 that Chinese-made goods for Walmart alone displaced 200,000 US jobs.

Altogether over the period 2001 to 2006 the US trade deficit with China is estimated to have eliminated 1.8 million US jobs.

Interestingly, this estimate, developed by a left-leaning research institute in the middle of the last decade, is now more-or-less echoed by mainstream economics – or at least by recent research published in the American Economic Review.

The China Syndrome: Local Labor Market Effects of Import Competition in the United States

Chinabad1

We find that local labor markets that are exposed to rising low-income-country imports due to China’s rising competitiveness experience increased unemployment, decreased labor-force participation, and increased use of disability and other transfer benefits, as well as lower wages.

Just to be clear, here is a chart showing the dynamics of US manufacturing employment over the last 60 or so years.

Manuemp

US employment in manufacturing has fallen to the level it was in the late 1940’s.

Additionally, about 4 million of the 12 million persons currently employed in manufacturing are administrative and support personnel.

The US Trade Deficit

While we are viewing a collage of graphs on the US condition, let’s not forget this memorable chart of the US trade deficit.

tradedeficit

Interestingly, the US balance of trade went south in synch with the activities of the World Trade Organization and agreements on opening trade around the world.

Of course, Walmart is not exclusively or even entirely responsible for these developments, but is part of the story.

Summing Up

Well, I began with the puzzle of the decline in new business formation in the US, focusing on Walmart and then Chinese products. Along the way, I highlight other possible connections, such as decline of US manufacturing employment and lower wages as well as prices.

Any exploration along these lines is bound to seem anecdotal, but at least there are numbers and charts to speak for themselves, to an extent.

On the one hand, we have new shopping centers with Big Box stores springing up all over the place, limiting opportunities for smaller businesses in the community. On the other hand, there is decline of US manufacturing, and loss of jobs accessible to persons without college education or special skills, jobs that can pay about double or triple what standard fast food sector jobs pay.

These twin trends clearly drive polarization of the US economy and society, mitigated to a degree by the lower cost of consumer goods supplied under this new system.

Looking ahead, can the magic of cheap imports can go on indefinitely?  There are bottlenecks of workers with certain skills now emerging in China, and wages are rising there.

Possibly, contract manufacturers and joint ventures can move on to other locales, like Vietnam or Bangladesh.

But at some point, geopolitical risk and problems of infrastructure may slow outsourcing.

One thing – the rejoicing about “in-sourcing” – factories coming back state-side – seems premature, almost an example of wishful thinking.  There are few numbers to back up the happy talk.

In the meanwhile, the slack thinking of American elites to the effect that it’s not necessary and may even be counterproductive to really educate a workforce that will predominately occupy low-paying service sectors jobs may come back to haunt us.

Investments in infrastructure are lagging. Federal spending on medical research has been cut back. Expenditures on R&D are flat to declining in many fields.

Practically the only “deal” available to many younger people without pedigrees or family resources is the US military. And production of defense goods is one area of US manufacturing where high performance activity continues – although offshore contracts there could, in my opinion, sap or even sabotage the ultimate performance of the equipment and material.

I’m working on companion pieces in coming weeks. I want to develop a big picture of the US economy and society at this moment, although I will continue to focus on business forecasting per se in the posts.

impacts of offshoring, macroeconomic forecasting, predictive analytics, technology forecasting, wealth and income distribution

The “Hollowing Out” of Middle Class America

Two charts in a 2013 American Economic Review (AER) article put numbers to the “hollowing out” of middle class America – a topic celebrated with profuse anecdotes in the media.

Autor1

The top figure shows the change in employment 1980-2005 by skill level, based on Census IPUMS and American Community Survey (ACS) data. Occupations are ranked by skill level, approximated by wages in each occupation in 1980.

The lower figure documents the changes in wages of these skill levels 1980-2005.

These charts are from David Autor and David Dorn – The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market – who write that,

Consistent with the conventional view of skill-biased technological change, employment growth is differentially rapid in occupations in the upper two skill quartiles. More surprising in light of the canonical model are the employment shifts seen below the median skill level. While occupations in the second skill quartile fell as a share of employment, those in the lowest skill quartile expanded sharply. In net, employment changes in the United States during this period were strongly U-shaped in skill level, with relative employment declines in the middle of the distribution and relative gains at the tails. Notably, this pattern of employment polarization is not unique to the United States. Although not recognized until recently, a similar “polarization” of employment by skill level has been underway in numerous industrialized economies in the last 20 to 30 years.

So, employment and wage growth has been fastest in the past three or so decades (extrapolating to the present) in low skill and high skill occupations.

Among lower skill occupations, such as food service workers, security guards, janitors and gardeners, cleaners, home health aides, child care workers, hairdressers and beauticians, and recreational workers, employment grew 30 percent 1980-2005.

Among the highest paid occupations – classified as managers, professionals, technicians, and workers in finance, and public safety – the share of employment also grew by about 30 percent, but so did wages – which increased at about double the pace of the lower skill occupations over this period.

Professor Autor is in the MIT economics department, and seems to be the nexus of a lot of interesting research casting light on changes in US labor markets.

DavidAutor

In addition to “doing Big Data” as the above charts suggest, David Autor is closely associated with a new, common sense model of production activities, based on tasks and skills.

This model of the production process, enables Autor and his coresearchers to conclude that,

…recent technological developments have enabled information and communication technologies to either directly perform or permit the offshoring of a subset of the core job tasks previously performed by middle skill workers, thus causing a substantial change in the returns to certain types of skills and a measurable shift in the assignment of skills to tasks.

So it’s either a computer (robot) or a Chinaman who gets the middle-class bloke’s job these days.

And to drive that point home – (and, please, I consider the achievements of the PRC in lifting hundreds of millions out of extreme poverty to be of truly historic dimension) Autor with David Dorn and Gordon Hansen publihsed another 2013 article in the AER titled The China Syndrome: Local Labor Market Effects of Import Competition in the United States.

This study analyzes local labor markets and trade shocks to these markets, according to initial patterns of industry specialization.

The findings are truly staggering – or at least have been equivocated or obfuscated for years by special pleaders and lobbyists.

Dorn et al write,

The value of annual US goods imports from China increased by a staggering 1,156 percent from 1991 to 2007, whereas US exports to China grew by much less…. 

Our analysis finds that exposure to Chinese import competition affects local labor markets not just through manufacturing employment, which unsurprisingly is adversely affected, but also along numerous other margins. Import shocks trigger a decline in wages that is primarily observed outside of the manufacturing sector. Reductions in both employment and wage levels lead to a steep drop in the average earnings of households. These changes contribute to rising transfer payments through multiple federal and state programs, revealing an important margin of adjustment to trade that the literature has largely overlooked,

This research – conducted in terms of ordinary least squares (OLS), two stage least squares (2SLS) as well as “instrumental” regressions – is definitely not something a former trade unionist is going to ponder in the easy chair after work at the convenience store. So it’s kind of safe in terms of arousing the ire of the masses.

But I digress.

For my purposes here, Autor and his co-researchers put pieces of the puzzle in place so we can see the picture.

The US occupational environment has changed profoundly since the 1980’s. Middle class jobs have simply vanished over large parts of the landscape. More specifically, good-paying production jobs, along with a lot of other more highly paid, but routinized work, has been the target of outsourcing, often to China it seems it can be demonstrated. Higher paid work by professionals in business and finance benefits from complementarities with the advances in data processing and information technology (IT) generally. In addition, there are a small number of highly paid production workers whose job skills have been updated to run more automated assembly operations which seem to be the chief beneficiaries of new investment in production in the US these days.

There you have it.

Market away, and include these facts in any forecasts you develop for the US market.

Of course, there are issues of dynamics.