Wednesday, May 4, 2011

Is Detroit leading the recovery?

For as long as I can recall the Detroit economy has been a sort of bellwether for the US economy.   We would be in recession before anyone else even saw it coming.  That same derivative function applies on the way out of the recession as well, so this is good news.  Financial Times: America’s ‘rust belt’ states lead recovery

Traditional “rust belt” states have seen the largest gains in American manufacturing jobs over the past year, official figures show, as the upturn in US industry revives what have been some of the most depressed regions in the country.
Michigan, the centre of the US motor industry, has been the success story, creating a seasonally adjusted 29,800 net new factory jobs in the past 12 months. It accounts for about 4 per cent of US manufacturing employment but about 15 per cent of the net job creation in industry over the past year.
Contrary to Tea Bag wisdom, a strong manufacturing sector is crucial for the US economy. And after a brutal period of massive transition to a global marketplace, American based manufacturers are poised to compete and maybe even dominate.  There is enormous potential for growth as the dollar loses value, the BRIC economies emerge, Japan reels from infrastructure meltdown and pent-up demand kicks in.  This all combines to give domestic manufacturers a unique opportunity to regain market share and lead the US economy out of the recession. 

As for the impact of high oil costs, if the prices continue skyrocketing, all bets are off for the manufacturing recovery and the US economic recovery in general.  Like it or not, petroleum is the lifeblood of the economy, and every dollar that leaves our shores to buy foreign oil can't bounce around inside the US, promoting economic growth.  But maybe there is a silver lining in the recent higher oil prices that will lead to long term lower prices.

Higher concern for fuel efficiency has prompted domestic manufacturers to align their portfolios for strong offerings in the long-neglected subcompact category and even dive into electrification of the automobile led by the very impressive Chevy Volt.  More people are trading in SUV's and pickups for passenger cars and more passenger cars have 4-cylinder engines than ever.  There are natural gas vehicles being offered for fleets and fuel efficient hybrid vehicles from all manufacturers.  

Meanwhile oil production is still chugging along and new sources are continually coming online to increase production.  Some of that development can only be justified by the current high market price,  but once the infrastructure is in place, production will continue even after oil prices fall.  And they will.  The price of petroleum has a perfect self-correction function.  The more it costs, the less the demand will be.  Eventually this leads to a glut which will lead to a price correction.  And as we saw with the housing market crash, a glut in supply tends to make prices fall off the table not just creep downward.

And a shout out to all those rational people who still think education matters to economic strength.  This nugget from the story..
Industry executives say the advantages of northern states, such as established infrastructure and often superior levels of educational attainment can be enough to outweigh the higher labour costs, particularly for high-tech manufacturing.
Like the billboard says, We Believe in Mich-Again!       

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