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Policy analysts and pundits alike seem to enjoy downplaying the U.S. economy’s recovery since the recession of 2008/9. It is time for them to wake up and smell the roses: The U.S. economy clearly is the dominant economy of the world. The European Union’s death rattle continues, while China is encountering a litany of unforeseen problems.
By contrast, the U.S. economy is holding up well. Industrial production is at its highest point since 2008. While our manufacturing firms aren’t producing 100 percent of what they’re capable of producing, many are at 60 to 80 percent of capacity, and moving in the right direction. Jobless claims are at their lowest since 2000; as a share of the U.S. labor force, unemployment claims are at their lowest point since record-keeping began in the 1970s. Manufacturing payrolls are increasing steadily and new job creation has been over 200,000 a month for some time. Declining gas prices should be a boon to consumers and retailers, though oil stocks will take a hit. The oil and gas industry can withstand lower prices for its products; according to the Energy Information Administration, due to advancing technology, the amount of oil and gas produced from every modern well has increased by 300 percent over the past four years. In the second quarter of 2014, gross domestic product (GDP) increased by more than 4 percent.
Discretionary spending by consumers appears to be on the rise. Large western ranches are being sold at record prices, and Harley Davidson reports big increases in the sale of its motorcycles, not generally purchased out of need but rather for fun. The company reports 71 percent of its sales are now in the U.S.
The 18 Euro area countries are showing no growth, with output in 2014 below that of 2011 as reported by the European Commission. They still blame it on the recession of 2008. In fact, with few exceptions, these countries are spending more as a share of GDP than before. Brian Wesbury reported in an October 15 article in The Wall Street Journal, “Euro area government spending was 49.8 % of GDP in 2013 versus 46.7 in 2006.” At a time when they should be on an austerity kick, they are on anything but.
In October of this year I had the opportunity to be in Austria, Belgium, France, Germany, Holland, and Luxembourg talking to folks about their economy. They appear to be oblivious to their long-term problems. Germany, once the economic guiding light of Europe, has seen its growth grind to a halt as renewable energy investment is making many manufacturers uncompetitive. We are likely to see many new European manufacturing plants built in the United States in the near future to take advantage of energy costs, often 70 percent lower here than in their native countries.
Italy, with the most convoluted labor laws, has seen efforts to reform met with huge protests in the streets. Older workers have unbeatable protections against being fired, laid off, or disciplined, regardless of poor performance. Firms in France cannot close a factory without finding new jobs for all its workers.
While a poor European economy does create a drag on the U.S. economy, that drag is small. Josh Zumbrun, writing in The Wall Street Journal on October 22, says, “Among major economies the U.S. is less reliant on export demand from overseas. Exports account for only about 14% of U.S. gross domestic product.” He goes on to compare this to 51 percent for Germany and 26 percent for China, according to the World Bank. Perhaps more important, trade with Europe represents only 15 percent of our foreign trade.
We have gotten used to hearing China may one day over take the U.S. economy, but this is not likely anytime soon. They are presently going in the wrong direction. Economic growth has slowed significantly and they can no longer rely on low labor costs, which are rising rapidly. China’s slowdown is due in some part to enforcement of environmental regulations that had been ignored in the past. They have run into banking problems, with an uptick in non-performing loans, while corporate and domestic debt has risen from 120 percent of GDP to 170 percent. The country’s domestic consumption is only 36 percent of GDP, while ours is 70 percent.
Due to a low birth rate, China’s labor force is expected to decline by 67 million people in the next 15 years, likely pushing manufacturing to other countries. While government officials there are beginning to loosen the one-child-per-family policy, the country’s actual birthrate is well below one child per family. Many families choose to have no children, so it will take at least two generations to create an adequate stream of workers.
Once the United States wakes up to the fact that it remains in the world’s driver’s seat, we will see more companies hire more people, with unemployment continuing to fall. If we have one economic problem it is that today’s jobs require more skills than are being taught in our public schools. Further growth is going to require an improvement in our K–12 education system. More and more companies are participating in local school training and creating apprentice programs, so this is a problem we can and will solve. We have a great economic future for years if not decades to come.