We Are The New China

Well not exactly but it is looking more like this.  For many years China was the engine of the world. It was reassuring to see China growing 10% to 12% per year while we in the developed world were stumbling from one Bubble to another. 

Now the tables have turned a bit.  China is still growing but more like 7% to 8% and there are questions about Bubbles in their real estate market.  Europe has weakened and some feel it is on the edge of another recession, and emerging markets are mixed, some doing well while others struggle with political and economic problems.

The U.S. is the bright spot today. We are creating 200,000 net new jobs  per month, GDP is growing at a 3% annual real rate, our energy production continues to be the marvel of the world and we seem to be less fragile and more insulated from the global economic ups and downs.

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The chart above indicates that although exports are important to us they are not as important as for other countries. Weakness abroad does not get translated as quickly into weakness here. The new found energy in the U.S. has helped push our oil and natural gas prices down. Companies from all over are locating new energy intensive plants here.  The International New York Times recently reported that the Dutch multinational, Royal DSM a maker of nutritional supplements and high tech materials, used to go through a lengthy process of deciding where a new plant would be located. Now, “we won’t even do the study, it is clear the plant will be in the United States.” 

There are problems with this story however. The big one is wages.  The chart at the bottom shows that real wages in many industries have been flat since 2009.  This is not how it is supposed to go. Productivity has increased since 2009 but most workers have not benefited.  Many reasons have been put forth. There are the pressures from lower cost areas, and technology has replaced people with machines. Every company is doing more with less. But this can’t go on forever.

To make long term progress workers will have to make more money. Otherwise demand for housing, autos, etc. won’t grow. With the unemployment rate notching down to 5.8% today and the economy getting closer to full employment, many analysts predict that companies will start increasing wages to attract and keep quality workers. This would be helpful. We are in a healthy recovery now but to keep it so, we need to see across the board income growth for those below the top one percent.

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