China slowdown threatens US factory revival
Carlos Barria / ReutersA laborer works at a shipyard in Yueqing City, Zhejiang province in this March 27, 2012 file photo.
An emerging renaissance in American manufacturing is staring at the oncoming threat of a global economic slowdown.
After investing hundreds of thousands of dollars in high tech equipment last year, Drew Greenblatt’s manufacturing business is beginning to see a return on that investment. Business was up 20 percent in 2011 at Marlin Steel, which makes wire baskets for industrial customers.
Exports are helping a lot. Greenblatt’s company just shipped to China a $20,000 order made at his Baltimore, Md., factory with steel supplied by a mill in Illinois.
Low wages and low-cost manufacturing used to make Chinese markets tough for U.S. manufacturers to break into. Today, rising wages in China are giving American companies second thoughts about moving their manufacturing jobs to China, Greenblatt said.
“All of a sudden, if your math says, ‘I’ve got to pay the guy $7.50 an hour in Shanghai or I can hire a guy for $12 a hour in Canton, Ohio,’ why would I do it in Shanghai?” said Greenblatt. “I’ve got intellectual property issues over there, there’s no rule of law, there’s a lot of corruption. Plus if I make it here, I get the stuff six weeks faster: there’s no freight. So a lot of the reasons to push jobs overseas are starting to fall apart.”
Other companies are doing the same math. A report in March by the Boston Consulting Group found seven industry groups, selling about $200 billion in Chinese-made imports, that will likely shift production back to the U.S. to duck rising costs in China. That could add between $20 billion to $55 billion to U.S. gross domestic product before the end of the decade, the authors estimated.
U.S. export gains in Chinese and other global markets will create between two million and three million American jobs, lower the U.S. unemployment rate by between 1.5 to 2.0 percentage points and cut the U.S. merchandise trade deficit by 25 to 35 percent, according to the study.
Demand for Chinese exports, meanwhile, is being hurt by the ongoing recession in Europe, China’s largest trading partner. The hit to China’s exports so far has been relatively mild compared to the sharp downturn that followed the financial panic of 2008, according to Carl Weinberg, chief economist at High Frequency Economics. Lost exports amount to about $300 billion - about half the losses from the 2008 downturn – and the Chinese economy is better able to weather the loss because its large and its currency is stronger than in 2008, he said. But he figures the drop in exports hasn’t run its course and could get a lot worse.
The slowdown in China is also starting to take a bite out of the economies of smaller, emerging economies and trading partners that supply the raw materials needed to feed China’s export machine.
“Asia should be very worried if the European situation continues to unravel," said Rob Subbaraman, chief Asia economist, at Nomura Group. “It can handle moderate growth in Europe or the U.S. But if we start to move toward a deep recession there’s a tipping point where Asia gets hit very hard again.”123
To be sure, China’s economy is still growing at a pace that would feel like wild prosperity in larger developed economies like the U.S. or Europe. But as the last major engine of growth, some forecasters are cautioning that the loss of Chinese demand threatens to spark a wider global slowdown that will crimp demand for U.S.-made products.
U.S. manufacturers are “about to face a negative shock from the hit to exports from the deepening European downturn and the spreading impact on demand in other key trading partners in Asia,” said David Rosenberg, chief economist at Gluskin Sheff.
One big unknown is whether Chinese consumers will pick up the slack from the lost growth in exports. China continues to pursue an ambitious, 30-year plan to transform itself from a rural agrarian society to an urbanized manufacturing and consumer-driven economy. The ongoing flood of workers from farms to factories -- the largest peace-time migration in human history -- will continue to drive demand for new housing, cars and other consumer products.
But in the short-run, consumer spending isn’t kicking in fast enough. Retail sales, adjusted for inflation, are slowing. As the government continues to invest heavily in public products and state-owned businesses, consumer spending makes up a smaller portion of the economy than it did five years ago. More than 50 percent of the Chinese economy still relies on some form of government spending: consumers account for roughly a third of GDP – about half the level in the U.S.
To revive growth, China’s leaders are expected to continue heavy government investment. After years of trade surpluses with the rest of the world, the government has plenty of cash to invest. But the risk now is that the government is creating a massive infrastructure and real estate bubble.
“They have been overbuilding everything to create jobs for these rural migrants,” said Harry Dent, an author and economic forecaster. “They have 20 to 30 percent more capacity built in their main industries –- cement, aluminum, steel, on and on. They just build stuff to create jobs and to keep people happy. And they’ve been doing this for over a decade.”
123China’s central bankers also face a difficult choice in trying to stimulate growth. The usual path of lowering interest rates could add heat to a real estate market that has already reached bubble levels in many urban areas. China’s bankers are also coping with a pile of bad loans to failing state-owned companies after an earlier round of easy credit aimed at heading off the 2008 recession.
That means easier credit may not produce the economic stimulus China’s leaders are hoping for.
“The positive, long-run outlook doesn’t give firms an incentive to invest today if China largely has all the apartments and car production lines it needs for the next couple of years,” said Mark Williams, chief Asia economist at Capital Economics.
It remains to be seen how badly U.S. manufacturers would be hurt by a wider, deeper coordinated global slowdown. Once recessions spread around the world, they become more difficult to reverse.
Greenblatt is upbeat. He sees an opportunity in export markets as competitors pull back. He also thinks the U.S. is somewhat insulated from a trade shock. Only about 10 percent of U.S. GDP comes from exports compared to the economies of China or Germany, where nearly a third of total output relies on exports.
“Most American factories don’t even consider exporting -- it doesn’t even cross their mind,” he said. “Because it’s easier sell to Denver and Duluth than it is to Denmark.”Discussing whether China's economy could be on the brink of collapse, with Gordon Chang, Forbes columnist, and Peter Navarro, UC-Irvine business professor.
But Dent argues that the wider cause of the global economic slowdown -- a historic shift in demographics -- will continue to weigh on global growth for another decade or so no matter how hard governments try to spur more growth.
Most developed countries are seeing their Baby Boom population peak, which slows consumer spending and adds to the cost of government-funded social programs. That means global growth won’t revive to historic levels for another decade, until the next generation of Millennials reaches its own peak spending years, said Dent.
“Were all slowing down,” he said. “And China does not have good demographics going forward. They only have this export machine and urbanization and they’ve overdone both.”
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