Economy On Road To Improvement

April 23, 2004
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GRAND RAPIDS — From an economic perspective, 2004 will likely prove a very strong year, with modest inflation, falling unemployment and stocks doing reasonably well.

The risk of the United States falling back into recession is declining, said Carl Tannenbaum, Standard Federal Bank’s chief economist.

The remainder of the year should see good economic performance — barring a national incident or another terrorist attack, he told a group of business people at a recent economic forecast reception at Cascade Hills Country Club.

Tannenbaum tried to set the record straight by correcting some of the false impressions about offshore finances.

He urged those present to keep in mind that international commerce brings a lot of benefits to both U.S. consumers and shareholders.

The scale of offshore business, he pointed out, is actually a small fraction of the labor market. People also need to keep in mind that foreign firms employ 6.4 million Americans.

“You’ve got to understand, if you want your sweat socks six for $5 at Wal-Mart, they’ve got to get sewn overseas. So with our zeal for low prices and high quality, ultimately we are motivating firms to look for the cheapest places to buy things and make things.

“We can take advantage of these things and we shouldn’t try to stop it. It’s like trying to put a genie back in the bottle.

“That’s why some people say, ‘We should do what we do best and outsource the rest.’”

Tannenbaum believes job growth is slower because companies are getting more efficient.

Some people say manufacturing has been hard hit by outsourcing activities, but the United States has been losing manufacturing jobs for 50 years — well before China became a semi-capitalist country and a major competitor.

“The reason that we’ve lost manufacturing jobs is that our factories have gotten more efficient, and I don’t think you want to turn back the clock on that either.”

The country is losing some of the lower level manufacturing technology jobs to Asia and wondering where those people are going to go and what they’re going to do. According to Tannenbaum, it’s always easy to put a finger on the number of U.S. jobs lost, but very hard to put a finger on where new jobs are going to come from.

“They’ve always come from somewhere. They come from entrepreneurs who come up with ideas that create demand and employment here.

“If government has a role in this, let’s by all means put the funds in retraining, so people can make those job transitions as easily and painlessly as possible.”

The news on the job situation has been getting better over the past couple of months. Significantly fewer people are filing for unemployment insurance, and that’s usually an early indicator that the job market is firming — even in manufacturing, he said.

Last month was the first time in nearly four years that the manufacturing sector did not lose jobs.

As Tannenbaum observed, the more small businesses a community has, the more vibrant the community is economically, and the less vulnerable it is to having one headquartered firm fail and throw most of the populace out of work.

“I sense there is more of an opportunity for small companies at times to really move ideas through and get them done. The bigger the company gets, it’s sometimes hard to really make a difference and germinate an idea.

“If I were Gov. Granholm I would not be thinking about ways of luring Fortune 500 companies to Michigan. I would be looking for ways to build a more vibrant small business community and making the state more attractive for business formation.”

The country’s budget deficit is a challenge that Tannenbaum believes needs to be addressed sooner rather than later. As the baby boom generation moves into retirement, demands for health care will rise, as will dependence on Social Security and Medicare.

“We have a tremendous long-term deficit problem and nobody seems to be coming up with solutions either to fixing Social Security or the health-care situation,” he said.

According to the Bureau of Labor Statistics, the cost of health-care benefits as a percentage of total hourly compensation was 5.8 percent in 1998 and is now about 7.2 percent.

The large national deficit has also caused interest rates to rise, and they’ll rise further if the deficit persists, Tannenbaum said. In the last three weeks, long-term interest rates have gone up by 75 basis points.

Higher mortgage rates would also dampen home sales and the ancillary purchases consumers make to outfit a new or existing home.

Tannenbaum believes Federal Reserve Chairman Alan Greenspan will start raising rates before the presidential election. He estimates the now 1 percent federal fund rate will increase to 1.5 percent by year’s end and will rise to 3 percent by year-end 2005.

The country’s very deep trade deficit doesn’t worry Tannenbaum, either. As far as he’s concerned, the major reason the United States has a poor trade balance is because the U.S. economy has done better than the rest. He said if Europe were performing better, the United States would sell a lot more over there.

“Their rate of economic growth is only about a quarter of what ours is. Japan has been struggling for almost a decade, and other markets just aren’t ready to absorb more American products.”

The U.S.’s ability to sell overseas is limited not by rules and regulations but by whether foreigners have the income and the appetite to buy U.S. goods, he emphasized.

He said there has been a lot of talk, particularly on presidential candidate John Kerry’s side, that the United States ought to get tougher with its trading partners and put up more trade barriers. Tannenbaum believes, however, that such protectionist measures only lead to retaliation.

“The minute we put up trade barriers, other countries are going to do the same thing to us. We’ll end up losing more jobs and more business than we’ll save.”           

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