An American recovery? Don't believe the hype
Both parties want the White House so they can bask in the expected glow of an economic recovery over the next four years. Yet it is hard to get excited about a revival based on so many ifs and buts.
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 November 6, 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 two million and five million new manufacturing jobs between now and 2020. That would make up for between one-third and three-quarters 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.
Copyright The Financial Times Limited 2012.