26 Sep 2003 Flexibility is Key
All of this week’s economic data has been released in the last two days. That conveniently coincided with my return yesterday after spending a few days on my annual trip to the impoverished and twice recently flooded coalfields of West Virginia. In light of our recent discussions ofAmerica’s waning manufacturing presence, I was struck by the awesome cost of inflexibility in a rapidly changing world.
The economic influence of coal has declined for years, yet many in the coal-rich Elkhorn Valley area continue to cling to it for their livelihood because it has been that way for generations. The government has tried for years to introduce other industries into the area, but their attempts have been unsuccessful. The military has been the most successful employer in the past as most of the area’s youth have seen it as their ticket to a better life. Typically they do not return.
Our early work in the area could be characterized as that of a ‘band-aid’ approach; where we repaired leaky roofs, rotten floors, pipes, even added bathrooms where there had been none. We interacted with individual families and showed them that people from the ‘outside’ cared. But it never really seemed to be enough.
In the past few years the Episcopal Church of West Virginia has worked more closely with the Governor’s office as well as the state’s two U.S. Senators to bring about more fundamental and enduring changes. The two devastating floods endured by the area in the past four years have been a catalyst for change, both from without and within. People have been forced by the floods to move from their ancestral homes into government-provided housing. Formerly isolated and scattered throughout the numerous hollers and valleys, many are experiencing community for the first time in their lives.
It is in this setting that the church and the government want to sew seeds of change. Community centers have been built to house meeting places for social, educational, and governance functions. Computers and books will soon be available for education and job training. It is hoped that not only the children, but the adults will take advantage of the new resources to improve themselves and to break the formidable ties to the dying coal industry.
Looking beyond West Virginia, the message to us is the same. America’s economy is rapidly changing. Our manufacturing base is going overseas, most recently toChina. China’s continued tying of their currency to our dollar has had significant short term impact on the speed of manufacturing movement, but cheaper and more abundant labor in virtually every corner of the less-developed world will continue to draw manufacturing away from this country.
However, the American labor force is more productive and better trained than any in the world. Many manufacturers who effectively adapt new productivity-enhancing technologies as well as employ the best-trained workers can continue to manufacture right here in the good ol’ US of A. The winners in this new world economy will be those who produce the new productivity-enhancing technologies and those who effectively employ them. Educators focused on improving worker adaptability will also thrive. Flexibility, adaptability, and creativity have long been part of the American experience and these traits remain our strengths.
Turning back to our present economy and market, we learn today that it continues to lumber towards recovery. Gross Domestic Product expanded at a 3.3% rate from April through June. The rise was greater than the 3.1% rise the government had projected last month and considerably better than the 1.4% rise in period from January through March. The results, taken over a longer period of time, show the recovery may be less fragile than some expected.
Durable Goods orders were released yesterday and surprised economists on the downside. They unexpectedly dropped in August by .9% and by .3% when things like cars and airplanes are excluded. But, as Steven Wietling, an economist at Citigroup Global Markets said, “these numbers are frequently saw-toothed,” rising one month and falling the next. “I don’t think this changes the picture that there is a manufacturing recovery,” he said. The simple fact that inventories have been falling relative to sales tells us that replenishment will have to begin soon if sales continue. And that bodes well for the recovery.
Similarly, the Help Wanted Index, a key barometer of the job market, dipped one point in August to 37. However, in the latest three months help-wanted advertising rose in seven of the nineU.S.regions, according to Bloomberg. While uneven in the monthly data, the longer quarterly trends remain positive.
But the spoiler just released, is consumer confidence. TheUniversityofMichiganreleased its survey this morning that shows a dip to 87.7 from last month’s 88.2 level. Jobs are increasingly on the minds of consumers. The drone of layoffs and plant closings is clearly taking a toll on consumers as they consider their own futures. But the Fed has pointed out that confidence indicators don’t always predict changes in spending patterns. The consumer has made major purchases of houses and cars in the past several quarters while indicating a relatively pessimistic outlook to pollsters.
The stock market continues to be the best indicator of the economy’s strength. As we said a couple of months ago, it should bide its time until the next round of corporate earnings in October. The index is roughly unchanged since early August when the latest earnings cycle concluded. During the period though, it has risen as much as 4% as investors reacted to short-term indicators.
We will continue to watch and study the indicators, short and long, for signs of recovery or recession. We remain flexible in our investment thesis and fully aware that we could be wrong about the recovery. But so far the weight of evidence suggests that better times are ahead for this economy. Caution remains in vogue among business leaders as they have been burned by several false starts over the past three years. Investors remain out of the markets as indicated by a record $3.1 trillion in savings accounts.
We remain in a ‘catch 22.’ As investors wait for improving jobs news, real job creation doesn’t occur until investors invest money again. But that’s at the macro level. Change occurs at the micro level, and some businesses are indeed hiring. Eventually their hiring should outweigh the declining numbers of layoffs and the snowball of recovery will begin to grow and gain momentum. We will stay tuned to the news and we will remain flexible and adaptive.