OurFuture.org Blogs: Charles McMillion

Ten Things You Should Know About China

Charles McMillion — Mon, 11 Aug 2008 11:24:20 -0400

Whether or not China ultimately wins the most Olympic medals over the next two weeks, the unrivaled triumph of the events’ government-planned and executed opening ceremony has awakened interest in China and its stunningly rapid modernization.

Antigovernment U.S. “experts” have incessantly assured us of an imminent Chinese slowdown or collapse. But the pace of China’s development accelerated after it was admitted to the World Trade Organization in 2001. Since then, China’s economy has grown four times faster than the U.S. and twice as fast as the rest of the world.

China is now the world leader in producing computers, mobile phones and most other electronic equipment, as well as a widening array of more traditional manufactured goods. Next year it will likely surpass the U.S. and Japan to become the world leader in auto production. Despite constantly false “news” reports, virtually all autos sold in China are made in China, and although many are foreign brands (Volkswagen, Buick, Toyota), ALL are made in plants where China’s state-owned firms have controlling interest.

There are now over 600 million mobile phone accounts in China—all in government-owned firms—and they are increasing by as many as 9.5 million per month. Taking advantage of this immense, captive market, China just launched the use of a long-awaited, government-owned telecom standard, TD-SCDMA, to compete at home and abroad with the standards used in the U.S. and the rest of the world.

Already, more Chinese than Americans use the Internet, and the potential growth—and China’s influence—is enormous. China’s government has shifted its powerful strategic focus for future growth away from manufacturing to high-quality professional services.

Over the past decade, China transformed its state-controlled companies into some of the largest, most sophisticated companies in the world. Almost entirely state-controlled, China’s financial services sector was believed by deregulation extremists to be a basket-case in 2001. Today, the major concern of China’s highly profitable financial services firms is their relatively small holdings of U.S. subprime housing debt. The biggest global financial firms are now eagerly sending their best talent and their best product ideas, paying premium prices to acquire the legal limit of 20 percent minority “partnership” in China’s financial institutions—just as manufacturing firms have done for the past 20 years. The Industrial and Commercial Bank of China surpassed Citigroup last year to become the most highly capitalized in the world. China now has several financial firms in that league.

Economists normally expect countries growing faster than the world economy to import more and export less, thereby having current account trade deficits. Yet despite its soaring growth, China’s global current account surplus rocketed from $17 billion in 2001 to $372 billion in 2007. China imports so much oil and other non-manufactured raw materials that even its overall surplus in current accounts or goods trade obscures the even more remarkable surplus for manufactured goods, which reached $401 billion last year and will likely exceed $500 billion in 2008. China was the world’s largest manufacturing exporter last year and the largest exporter of goods to the U.S.. Because of rising prices for imported oil, iron ore and other commodities, China’s overall global trade surplus is down about 11 percent in 2008, but its manufacturing surplus is up over 30 percent!

China has accumulated global current account surpluses of $1.1 trillion since 2002. These current account surpluses, strong foreign investment in China and other factors, has built China’s war chest of foreign currency reserves from $212 billion at the start of 2002 to almost $2 trillion now. In April alone, China added $103 million each hour to its foreign reserves. Together with China’s newly restructured and healthy financial system, and their large firms’ new access to equity and bond markets, China is now uniquely capable of cherry-picking today’s worldwide “fire sale” opportunities for patents, talent, natural resources, brands, distribution channels and much more.

An important indicator of China’s modernization is the loss of the long-held U.S. surplus in advanced technology products. Globally, the traditional U.S. surplus in these products turned to a deficit for the first time in 2002. Since then, the U.S. has suffered advanced technology product deficits that are far larger than any past U.S. surplus. China accounts for more than the entire U.S. global deficit in these products—concentrated in advanced machinery and electronics. U.S. import payments for advanced technology products from China are almost four times as much as export earnings. The U.S. deficit in this area with China is more than eight times the U.S. deficit with Japan, 35 times the size of all U.S. intellectual property earnings in China, and 10 times the size of all reported U.S. corporate profits in China.

The weakness of the U.S. dollar affects trade and investment flows. From the time China was admitted to the World Trade Organization until now the Chinese yuan was allowed to strengthen somewhat against the dollar but most other currencies strengthened far more against the dollar. That is, since 2002, the yuan strengthened somewhat against the dollar but it weakened slightly against the Japanese yen and it has weakened sharply against the euro.

Whether in the Olympics or in the competition to create good jobs with a promising future, a winning plan and strategy is usually essential. China has such a plan; the U.S. does not.

Charles W. McMillion is president and chief economist of MBG Information Services in Washington, DC. He is a former associate director of the Johns Hopkins University policy institute and a former contributing editor of the Harvard Business Review. For more on China’s modernization read this document and refer to the work of the U.S.-China Economic and Security Review Commission.

Ohio Job Losses Worst Since Great Depression

Charles McMillion — Thu, 21 Feb 2008 15:45:14 -0500

According to the U.S. Department of Labor, Ohio had 209,400 fewer nonfarm jobs in December 2007 than it had in December 2000. This loss of 3.7 percent of Ohio’s jobs is the worst seven-year loss in state records that begin in 1939 as the Great Depression was ending. (The details are in my special report.) The previous seven-year job loss record was the period ending in 2006 (3.6 percent of jobs lost) and before that the record was held for the period ending in 1962 when 3.4 percent of jobs were lost in the demobilization after the Korean War.

Nine of the state’s 13 metropolitan areas suffered recent job losses more severe even than Ohio’s statewide losses. Most devastated is the Springfield area, losing 10.0 percent of its jobs over the last seven years. The other areas with job losses worse than statewide include Canton (8.6 percent job loss), Dayton (7.6 percent), Mansfield (6.5 percent), Youngstown (6.3 percent), Lima (5.7 percent), Cleveland (5.5 percent), Toledo (5.0 percent) and Steubenville, Ohio–Weirton, W. Va. (3.8 percent).

Only three of Ohio’s metropolitan areas added jobs over the past three years and none of them even matched the 4.3 percent overall U.S. job growth, the weakest seven-year period since the mid-1940’s demobilization from World War II. The Akron area has the best recent record in Ohio, adding 4.1 percent to its job base since 2000. Jobs increased by 2.0 percent over the period in Cincinnati and by 1.7 percent in Columbus while declining by 2.7 percent in the Sandusky area.

The industrial composition of Ohio job losses and gains reflect recent record trade deficits and the explosion of household and federal debt stimulus. Over the past seven years Ohio lost 23.3 percent of its manufacturing jobs (236,000 jobs,) lost construction jobs, lost jobs in wholesale and retail, lost jobs in information services and even in financial activities. Recent job growth came in private health services bureaucracies (100,100 jobs), restaurants and bars (24,500 jobs), and in state and local governments (18,700 jobs), mostly for public education, health care and prisons. Since 2000, Ohio added just 2,500 jobs in firms providing professional, scientific and technical services.

That is, every industry that is capable of exporting and faces foreign imports or routine outsourcing lost jobs in Ohio over the past seven years. All new jobs are in domestic consumer services that rely on soaring levels of debt.

Ten of Ohio’s metropolitan areas suffered plunging jobs in manufacturing that are even more severe than for the state as a whole. Over the past seven years Springfield lost 46.9 percent of its manufacturing jobs, Sandusky lost 36.5 percent, SteubenvilleWeirton 31.4 percent, Dayton 31.2 percent, Lima 30.7 percent, Canton 30.6 percent, Youngstown 27.3 percent, Mansfield 25.7 percent, Cleveland 25.2 percent and Columbus lost 24.4 percent.

Even the three areas with less precipitous manufacturing job losses than the state as a whole suffered severe losses. Akron lost 17.5 percent of its manufacturing jobs over the past seven years, Cincinnati lost 18.4 percent and Ohio lost 22.6 percent.

The U.S. lost a record 19.8 percent of its manufacturing jobs over the past seven years. The previous record, before recent years, was the loss of 14.6 percent from the peak of the World War II buildup in 1942 to the depth of the demobilization in 1949.

Record-smashing U.S. manufacturing trade losses (production shortages) totaled over $3.0 trillion over the past seven years as the full current account trade losses reached $4.3 trillion.

Together with the unprecedented loss of total jobs — particularly highly productive/high wage manufacturing jobs — the industries that are creating jobs in Ohio are also of concern. These jobs are almost entirely in less productive, lower-paying industries — including the low end of the “professional and business services” category — that cannot create export earnings to offset the cost of imported oil, autos, computers, clothing, etc. But with rising health care costs a serious obstacle for U.S. businesses and households alike, it is troubling that the vast majority of new jobs in Ohio are in private and public health care bureaucracies.

The jobs data tell only one important part of Ohio’s past seven-year economic story. Yet these record job losses bare strong witness to the depressing effects of record trade deficits and the loss of U.S. production that they represent. Another key part of Ohio’s past seven-year economic history is the unprecedented levels of household and federal debt stimulus that — even in Ohio — played a vital role in moderating the effects of import competition, outsourcing and job loss. With the soaring engine of household debt now sputtering and debt service payments rising, strong industrial and trade policies seem urgently needed to halt Ohio’s further decline.

More Stress for Households Deep in Debt

Charles McMillion — Wed, 20 Feb 2008 15:39:47 -0500

The Bureau of Labor Statistics reported today that average seasonally adjusted weekly wages fell another -0.5 percent behind consumer price increases in January, with wages now able to buy -1.4 percent less than they did one year ago. This chart illustrates the impact.

Weekly wages fell in four of the past five months since last August. Average real weekly wages are now again lower than they were in January 2002…and in January 1981, when the irresponsible debt and deregulation ideology took power.

Oh, and the Commerce Department report last week that nominal consumer spending rose 0.3 percent in January that the debt industry spun to suggest economic growth: Today the BLS reports that consumer prices rose 0.4 percent in January. After adjusting for inflation, consumer spending fellby about -0.1 percent in January but their real wages fell even further.

Today’s reports are more evidence that the economy is very likely already in recession and consumer finances are certainly worsening rapidly.

The Economic State of the Union -- 2008

Charles McMillion — Tue, 12 Feb 2008 09:13:28 -0500

Originally Appeared in "Manufacturing and Technology News" January 24, 2008

In just the past seven years, US household debt almost doubled and federal debt soared by near two-thirds, rocketing by a combined $10.5 Trillion. The total combined debt of households ($14.4 Trillion) and the federal government ($9.2 Trillion) is now 168% of GDP, far higher even than in the brief spike during World War II. All other levels and ratios of debt also have soared far beyond any past precedent.

Yet, this record-shattering explosion of debt stimulus created the weakest seven year job growth (4.4%) and one of the weakest periods of real GDP growth (18.1%) since the Depression: less than 6 million new jobs ($1.8 million of debt per job) and a mere $4 Trillion increase in GDP.

This period began with the collapse of Wall Street's stock market bubble from the late 1990s and ends now with the collapse of Wall Street's housing and other debt bubbles. That such massive mortgage and consumer borrowing, tax cuts and war spending produced such remarkably weak real economic results suggests the months and years ahead could be quite difficult.

Yet, along with Fed rate cuts for cheaper debt, the only policies seriously considered by this year's crop of Wall Street-funded political candidates is more short-term household and federal debt "stimulus." Locked into a failed, 30-year-old ideology of deregulation and debt, there is no option to compete with the remarkably effective industrial and trade policies pursued by China and others.

2008 will be the ninth consecutive year the US economy grows slower than the world's growth while China grows more than three times faster. In the past seven years of sluggish growth, the US accumulated Manufacturing trade deficits (production shortfalls) of over -$3 Trillion with full Current Account trade losses of -$4.3 Trillion; more than the entire nominal growth of GDP.

At the same time, now in the third year of their remarkable 11th 5-Year Development Plan, China's accumulated Current Account surplus soared by nearly $1 Trillion since 2001, near 13% of GDP in 2007. These surpluses are funding China's now $1.5 Trillion war chest of foreign currency reserves.

Record US trade losses have accelerated the hollowing-out of the once dynamic US economy. For the first time on record, in 2002 the US lost its historic global trade surplus in Advanced Technology Products. Worsening sharply, since 2004 the ATP deficit became larger than the US trade surplus for Intellectual Property services, royalties and fees. That is, for the past four years the US has a worsening combined deficit in technology goods and services. Technology no longer pays any part of the US import bills for oil, cars, electronics and clothing, etc. China now accounts for half the US Manufacturing trade deficit and more than the entire deficit in technology.

Reflecting the production shortfall from the trade deficits, BLS data show output growth since 2001 is among the weakest since the Depression and the gain in total hours worked (just 0.5%) is, by far, the weakest. This is why productivity growth has appeared misleadingly healthy; productivity is a measure of output per hour of labor.

Another powerful measure of the hollowing out in the economy is the radical shift in the job market. Of the 5.92 million total new jobs in last seven years, only 4.32 million were in the private sector while 1.66 million were in state/local governments, mostly for public education, health and prisons. The federal government cut jobs in the Postal Service.

More than all of the new jobs added by the private sector since 2001 are in private education and health care bureaucracies (3.34 million new jobs) and in bars and restaurants (1.53 million new jobs.) Uniquely, all net new jobs added fall in the non-supervisory/production category -- half a million supervisory jobs were lost. Manufacturing lost -3.28 million jobs (-19.1%) and now provides fewer jobs than in July 1942 -- seven months after the attack on Pearl Harbor.

Despite concerns about illegal immigration, since 2001 the labor force has grown more slowly (7.4%) than during any seven-year period since 1955 and participation rate of those in the labor force, those working or looking for work, also fell sharply -- from 67% to 66%. This is the reason that the un-employment rate, now 5.0%, is not much higher.

The average weekly wage for non-supervisory jobs buys 2.0% more now than seven years ago and the average real salary and benefits for all workers is up by 9.0%. These real increases are down from the bubble period of the late 1990s but they are far better than the declines of the previous 20 years. Unfortunately, these recent increases in "average" wages appear to be a product of the latest financial bubbles, the widening use of stock options and very large bonuses in compensation, particularly on Wall Street.

Median real wages have continued to decline, including by -1.4% over the past year. Median household real incomes fell -2.0% from 2000 to 2006 (latest data available) and even the average income fell -0.5% with inequality now the worst on records back to the 1960s. The total current savings of ALL households over the past three years is virtually nothing; by far the worst since the 1933.

The foolishness of powerful, self-interested claims of a "new paradigm" is again exposed. The fantasy is that soaring debt and the loss of production through trade deficits are good things and the lack of current savings irrelevant. As a long forgotten advertisement once proclaimed: "If you don't have yourself an oil well, get one!" We can all live well from royalties and asset appreciation.

Soaring debt and debt schemes did drive up many asset prices, creating a borrowed illusion of general prosperity along with enormous actual wealth and power for a few. But now, unprecedented debt and soaring inventories of unsold homes are driving down the inflated prices for homes and other assets. For at least the next several years, most households will now be forced to cut spending and earn, not borrow, their living standard.

Another short-term debt stimulus may take the edge off the difficult economic conditions of the next few months. But trading away our once unique economic strengths while borrowing against the future has failed. Making even minimum interest payments on these massive, soaring debts will be increasingly difficult as the success of thoughtful industrial and trade policies in China and elsewhere continues.

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Charles W. McMillion is president and chief economist of MBG Information Services in Washington, DC and a past contributing editor of the Harvard Business Review.

How Big Media Hides the Real Economic News

Charles McMillion — Thu, 07 Feb 2008 14:29:21 -0500

Read this AP story on productivity growth and labor costs, then read the note below (written Wednesday) about the same Bureau of Labor Statistics report on employment, wages, output and productivity. This is a very clear example of how the media spin the news every day to hide economic troubles and mislead those who believe they are following economic conditions. All the major media spun this story in almost exactly in the same way as the AP.

After years of denial and spin about the financial condition of U.S. households and consumers, you might think the newswires and salesmen on cable would be buzzing with the key findings in Wednesday’s Bureau of Labor Statistics report on U.S. hours worked, real compensation, output and productivity. You would be wrong; the debt industry’s misleading confidence game prevails with the key findings either not mentioned at all or they are relegated to an afterthought as space permits.

The key finding in that report is that the total number of hours worked (and paid) in non-farm businesses during the fourth quarter of 2007 fell at an annual rate of 1.5 percent. Indeed, the total number of hours worked in the fourth quarter was less than in the fourth quarter of 2006. The report shows total non-farm jobs also falling at a 0.5 percent annualized rate in Q4 and rising by only 0.4 percent year over year.

Furthermore, after adjusting for the increased costs of gasoline, health care, etc., real average (not median) salary and benefit compensation for all U.S. workers fell at an annualized rate of 0.3 percent in the fourth quarter and by 0.3 percent year over year. Since total hours worked fell even with meager year over year job growth, this means that average real weekly and monthly hours paid per job were reduced along with the decline in real compensation per hour. With lavish soak-the-customers-and-shareholders bonuses on Wall Street lifting average compensation, the median decline in compensation was surely far worse.

Non-farm business output grew at only an annualized rate of less than 0.4 percent in the fourth quarter. But since total hours worked declined 1.5 percent, output per hour of work – productivity – grew at a rate of 1.8 percent. The vital distinction between virtually stagnant production growth and 1.8 percent productivity growth is lost in the confidence spin and fairy-tale assumptions.

An even better example is manufacturing. The report shows productivity in manufacturing rising at a seemingly reasonable rate of 2.9 percent in the fourth quarter. Appearances can be deceptive; manufacturing production fell 1.9 percent and the number of hours worked in manufacturing plunged 4.3 percent in the fourth quarter. That is, since employment plunged even faster than output, manufacturing output per hour worked – productivity – appears healthy.

With total hours worked over the past year falling slightly for all nonfarm business and by 0.8 percent in manufacturing, weak output growth of just 2.6 percent for all nonfarm business and just 1.8 percent in manufacturing translates into the same, misleadingly reassuring 2.6 percent productivity growth.

(See pages one and two of my attached graphics for the elements of productivity growth in the fourth quarter of 2007 and over the past year.)

Indeed, this record weak output growth and virtually stagnant gain in hours worked has been the unique characteristic of the past six years of cyclical economic recovery from the recession that ended in November 2001. (See page three of my attached graphics.)

Today’s report and the general ignorance of its key findings are again helping Wall Street attract new money after Tuesday’s steep sell-off. As with the debt fraud and recession, the time for “everyone” to be surprised will come later.