Euler Hermes


Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United States


◾◾◾ Which favorable market conditions support a full-fledged U.S. recovery?


>The favorable economic environment in the short- run for private sector development is a product of dis- tinctly unfavorable conditions which actually started well before the Great Recession. Accommodating monetary policy, credit availability, lower cost of capital and the (timid) rebound in the housing market are some of the major positive contributors to this. In the late ‘90s and early 2000s, the Federal Reserve kept monetary policy too loose for too long. When the hou- sing bubble burst in 2006, it destroyed billions of dol- lars of wealth and wreaked havoc on the economy. As a result, the subprime mortgage crisis developed in 2007, impairing the financial markets. In 2008 oil prices rose to a record high creating yet another huge drag on the economy. And as the financial crisis reached its height in the Fall of 2008, credit markets came to a vir- tual standstill, paralyzing the economy. To counteract the chaos, the Federal Reserve drove short-term interest rates virtually down to 0%, and then injected $1.4 trillion of liquidity into the financial sys- tem, more than doubling its balance sheet in just a few weeks. Congress and the President passed the $700 bil- lion Troubled Asset Relief Program (TARP) to keep im- paired banks functioning, and in early 2009, an $800 billion stimulus package was passed in an attempt to jump-start the economy. By this time the economy was losing over 700,000 jobs per month, the fastest rate in over 60 years (Figure 1). Although the recession technically ended in June of 2009, only about half of the total jobs lost have been recovered, and GDP has ave- raged a mere 2.2% annualized growth rate since then, well below the long-term average of 3.3%..


>Yet this chaotic backdrop helped set the stage for an economic recovery, which although tepid, was ideal for a manufacturing rebound. The deep recession had cau- sed manufacturers to cut employment to the bone, so


1. Jobs Created and the Unemployment Rate 600 400 200 8 0 10% -200 -400 -600 5 -800 -1000 2002


Source: BLS 8


2003 2004 2005 2006 2007 2008 2009 2010 2011 4 2012 Source: Federal Reserve -30% -20%


One reason this recovery has taken so long compared to other


Unemployment rate (right scale)


7 0% 6 -10%


Non farm payroll jobs created (000’s) (left scale)


9 20% 10


after the recovery began they were able to operate with minimal labor costs using highly productive, motiva- ted workers. Unit labor costs plunged in the manu- facturing industry, particularly in some southern states. At the same time that labor costs were falling, so were the costs of capital. The Fed had driven short-term rates virtually to zero, which was an open invitation for in- vestment. Starting in the fourth quarter of 2009, the in- vestment component of GDP set a blistering pace over four quarters, growing at annualized rates of 41%, 20%, 15% and 16% respectively - while the economy as a whole grew less than 3%. Credit conditions eased substantially and commercial and industrial loans have grown more than 10% annually since the Fall of 2010 versus a long-term average of 6% (Figure 2).


>In addition, high credit quality manufacturers are also able to tap the corporate bond market at historically low rates. The Fed’s QE programs further lowered the cost of capital by boosting stock prices. Energy costs for manufacturers have also fallen, due in part to the emer- gence of very cheap shale gas. The housing market is now firming (Figure3), setting the stage for a rebound in manufacturers of home building materials and ap- pliances.


>Approximately three quarters of U.S. manufacturing is sold domestically, where conditions are very good, yet the export markets are also in surprisingly good condition. Canada is the largest market for U.S. exports, consuming approximately 19% of all U.S. exports. While Canadian GDP has experienced slow growth re- cently and is expected to grow only about 2% in 2013, the Canadian economy is in much better fiscal and mo- netary condition than most industrialized nations, and therefore offers some stability to U.S. exports. Mexico is the next largest importer of U.S. goods, consu-


2. Commercial and Industrial Loans quaterly annualized % change


40%


Lending resumed


30%


3. US Housing Market Fundamental Measures, Seasonally Adjusted Annualized Rates


450 500 550 600 650 700 750 800 850 900


2008 2009


Permits (left scale) Starts(left scale)


2010 2011


Existing 1-Family Home sales ( right scale)


Source: National Association of Realtors, Census 2012


3000 3200 3400 3600 3800 4000 4200 4400 4600 4800 5000


1974


2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976


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