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Article
What is 2017 Likely to Look Like?: Jobs, The Economy and Politics

Reflections on recent dramatic economic and political changes, and how they will impact our supply chains in the coming year--how and where we manufacture, how we trade goods, and the impact on jobs at home and abroad.


Full Article Below -
Untitled Document

Introduction

The close of one year and beginning of another always calls for a time of reflection and forecasts. This year also ushers in dramatic economic and political changes on the world stage. The impact will surely be felt on the supply chain—how and where we manufacture, how we trade goods and, of course, on the jobs front. There are also underlying, profound changes in our world that will continue untouched by the outward rhetoric of politicians, talking heads, and economists. These too will continue to affect our lifestyles—where we live, our homes, travel, how we shop and work, and how the supply chain supports all of that.

First, Some Numbers

In spite of rhetoric that things are worse than ever, the US has had steady growth during the last few years, though not the numbers of the post WWII baby boom. Preliminary numbers on 2016 look like the year ended with lower unemployment (which continues to shrink), and GDP slowly rising.

In an interesting report, Dr. Andrew Chamberlain, Chief Economist, of the Glassdoor, stated, "This year, America’s job market made remarkable gains. After years of lackluster pay growth and an anemic economic recovery, the job market turned a corner in 2016. The economy added 1.98 million new jobs in the first 11 months of this year. For context, that’s 660,000 more jobs than were added during the entire eight years of the George W. Bush administration. That’s an average pace of 180,000 new jobs per month, well above the ‘break even’ pace of job growth of 50,000 to 110,000 economists estimate the economy needs to keep Americans fully employed. This year, the economy set new records for the longest streak of consecutive months of job gains: 74 months, or more than six years. That’s the longest streak on record since the 1930s when the federal government started collecting jobs surveys.”1

However, for many other workers there have been few real gains in their personal finances for many years.2 Many of them were badly bruised in 2007/8, losing prime income years that they will never recover. It is as if we have two economies—one of growth, the other of stagnation.

There is, however, some optimism that a 2017 spending stimulus and tax cuts will provide a boost. In spite of promises, though, our readers all know that no matter which party is in office, government, though it has a role to play, is not the key player in growth.
 
For all our challenges, the US has been and will still be the major source of game-changing innovation for the world in the foreseeable future. The EU faces huge generational and political challenges ahead with looming Brexit-type threats from other nations beside the Brits. The Indian currency crisis continues to play havoc, certainly in the short term, for growth in the world’s most populous nation. And China may face some serious challenges as the Trump administration assumes the mantle.

On the brighter side, consumer confidence indices have been on the rise. According the University of Michigan, consumer spending may surge due to expectations of an improved economic outlook (see Figure 1).

Final Results for December 2016


Figure 1: Consumer Confidence

Says Chief Economist Richard Curtin, of the Survey of Consumers, “Consumers anticipated that a stronger economy would create more jobs, although expected wage gains were quite meager.”3 That, of course, sounds a bit like emotions over facts. We are not sure exactly what policies and agreements the new Trump administration will get from the incoming 115th Congress, and what impact any changes to trade deals would have on supply chain/cost of goods/price of imports (i.e., most of what we use).

Is It All About Jobs?

Manufacturing

Figure 2: Manufacturing Jobs vs. Output

In terms of new initiatives, the US manufacturing sector has continued to grow during the last few years, but that growth has not been reflected in jobs or salaries. And it is questionable what any politician can do about it (short of implementing some kind of super shock policy).

“Technology and automation have given manufacturing companies the means to function, and even thrive, with fewer employees than ever before,” say Andrew Tangel and Patrick McGroarty of the Wall Street Journal (see Figure 2).

Manufacturing output is nearing prerecession levels, but about 1.5 million factory jobs—approximately 20% of positions lost during the downturn—haven’t returned. Manufacturers employed 12.3 million people in November, down from 13.7 million in December 2007, when the recession officially began.”

Continue Tangel and McGroarty, “Overall the number of positions on U.S. payrolls grew 11% between June 2009, when the recession officially ended, and November [2016], when the Labor Department counted about 145 million jobs on nonfarm payrolls. Manufacturing payrolls grew only 5% during that span.”

We loved the days of the mythology of steady employment, affordable housing, and manageable college tuition. We just are no longer there and it is hard to envision those types of manufacturing jobs returning, for now. The forces that have changed the world for more than two decades (the leveling of compensation), with China, India and even part of Africa having captured much of the labor-based manufacturing, will continue.
 
The leveling of worldwide pay—seeking the best mix of cheap labor and favorable markets for sales—means that US and EU workers compete on a world scale for jobs. Consider this example: when a German auto manufacturer looked for a place to build cars, they could—and did—choose non-union US locations where workers get paid between $12 to $20 an hour vs. Germany’s $40 to $60. And so with Japan as well. Not only did they get very professional, high quality workers, lower wages, and lower supply chain costs, the US is a market in which they can sell their products. With that kind of model, it is hard to envision how new high-paying jobs can be created.

William Strauss, an economist at the Federal Reserve Bank of Chicago, expects the share of U.S. workers in manufacturing to keep falling from its current 8.5% level as productivity and efficiency obviate the need for big workforces. “We’ve seen these trends going on for decades, and it’s unlikely to see a reason why those would change,” Mr. Strauss said.

Conversely, demand for healthcare4 and technology workers continues to rise. These tend to be good paying jobs. One does wonder what tinkering with the Affordable Care Act will do to the healthcare sector. The nominee for the labor secretary is Andrew F. Puzder, a champion of automation, a king of fast food and slow wages, and the CKE Chairman, who is anti-minimum wage and Affordable Care.

As well, one wonders what influence Carl Icahn (the corporate raider as the regulation czar), who has not been a friend of the middle class or jobs, will have on the Trump administration policy.

Of course, direct intervention can have an impact, as we saw Governor Pence and President- Elect Trump directly ‘encourage’ Carrier and Boeing to think twice about foreign deals and jobs. This is the kind of intervention that the President-Elects’s supporters are looking for. Any company doing direct business with the US government may expect this kind of pointed action. One would expect that corporations, in general, may face higher taxes if they move operations overseas. However, regulation will also be needed since the President cannot intercede in every deal. This is a punitive regulation that would have a positive impact on the trend of re-incorporating overseas to avoid paying US taxes. On the carrot side, the promise of lower corporate taxes could be very attractive to entice some corporations to stay in the U.S. or come back.5

Retail Jobs and Growth

What about that import tariff? The idea of a 5% tariff (numbers from 5% to 45% have been floated)6 would increase retail prices, thereby reducing consumer spending and would have a profound effect on the retail sector by reducing sales and jobs. Retailers, in general have slow growth.7 Worker compensation, in general, is low, with minimal benefits.

“Everyone will lose if there is a global trade war,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

This could get a lot worse. After all, consumers do about two thirds of America’s spending. Dampening that can have huge consequences for retail and overall economic growth. Wisely, public spokespersons for the industry have been careful in their remarks, but have also been quick to create detailed analyses about the costs and unintended consequences of restricting trade.

Trade War?

In addition, a tariff would obviously hurt export countries, especially China, whose biggest customer is the US. Of course, one assumes China’s rulers would not tolerate a slowdown of the Chinese economy. They could retaliate by launching a trade war, undercutting American manufactured goods; as well as restrict the sale of US goods in China.

There are some very powerful players in manufacturing who source most of the things we use today from Asia.8 Even if they wanted to (which they don’t), transitioning work back to the US could not happen in a day…or two years, but retaliation by China could happen overnight.

There are also the issues of corporate taxes, value-added taxes (VATs), and so on that have been discussed for several years. That is a very complex topic (as if this whole discussion is not complex and laced with a lot of maybes and ifs). Part of the challenge will be the packaging of various incentives, penalties, interventions, changes in trade deals and so on, and the ultimate impact—and balance—they will have on jobs, GDP, and tax revenue. Any student of US history and the ups and downs of tariffs will know that one industry’s protection is frequently at the cost of dampening trade in the others.

There are a lot of maybes in all this. We know what the Republican majority is advocating, but that doesn’t include all Republicans, so bipartisanship will still be necessary. And the President-Elect’s appointees are not totally in sync with the party’s thinking, either. In this climate, and in the end, we, the business community, need to turn to ourselves for solutions for innovation and growth. Yes, one policy may be more favorable than others, but even the best policy cannot sell a mediocre idea or product. There is just more at play here than the government.

The BIG Shift

There are bigger forces at work—maybe bigger than policies and regulations—that are the real crux of why we are where we are today, as well as a path to a better tomorrow (as far as the economy is concerned, that is.) As we mentioned earlier, American and EU workers are now competing on a global stage. This has been true since the famous visit from Deng Xiaoping9 to America and his pronouncement, “It is glorious to be rich," which shepherded in the capitalist system he helped to create in China: socialism with Chinese characteristics. (Read that capitalism with Chinese characteristics!).  

Wisely, as well, the Indian government’s dedication to education has created the largest English speaking professional workforce in the world, ushering in not only job competition but a huge market for US companies.  

New Generation

The world is also going through profound changes with a new generation assuming not only the consumer role, but bit-by-bit, leadership in business, innovation and ultimately, politics.
Let’s look at a few numbers.

  1. Today about half of the world’s population is under 30.
  2. In 2020, there will be ~7.6 billion people. 4.2bn will live in cities.
  3. The world’s middle class population grew in the last decade and a half by more than 1bn people and will increase by another 1bn in the next 8 years, with almost half the world’s population younger than 30.

Much of that population is international, educated, and very competitive.10 We know that some of today’s largest and most powerful companies were started by iconoclasts, rebels and very young people. The future is theirs—nay, the present is also theirs—since they are now the majority. Think of this: we know that so much of the negativity we are experiencing today (such as terrorism and a resurgence of racial tension) is the result of youth dislocation. Hence, we must find a way to include them.

So How Can We Prepare for 2017 and Beyond?

Millennial complexity is not just about the infinite connections between suppliers and customers.11 Many things about our life styles and work have changed and will continue to change. Estimates are that 20% to 30% of today’s jobs will be fully automated in the next 15 years. More than one third of the jobs that we’ll see 15 years from now don’t exist today. So, winning in manufacturing, teaching, and other essential professions, where it is hard to attract the Millennials to work, will require a new generation of entrepreneurial innovation. This really calls for inventiveness—not just in creating things, but in finding ways to catalyze innovation, our management culture, our ability to build human bridges and global relationships that are win/win.

New Employee Model a Must

The key to innovation is engaging energy and passion as well new technology. Recruit your current or future customers with their fresh perspective on the world, on products, their jobs, and their outlook on how things can be done differently or better. Millennials are action oriented, mobile, social, and analytical.
 
How can manufacturing recruit and provide a thriving environment for the new generation with the job descriptions and tasks designed in 1860s during the industrial revolution? Motivating the millennials to enter careers in manufacturing will take giving them space to create and innovate—not simply through creative outlets, but by providing challenges that also use their technology skills.

In truth, technology is driving changes in the way we work, how we manufacture and shop, where we live, and even our romances. In the last few years, we have gone through major changes. We live in a world of increasing connectivity and complexity. Billions of products and customers are connecting, and will drive trillions of transactions, redefining the supply chain.

Ecommerce will no longer exist as we traditionally think about it—goods shipped to the home by major parcel carriers—but as goods delivered to any point on the planet by an uberesk, driverless, or drone vehicle. Additionally, all the moves—on foot or in conveyances—will be recorded for a variety of big data analyses: everything from managing traffic, selling, and services, to tracking terrorists. The internet of things, tracking people by devices, video, and so on, with the analytics that drive movement and decision-making are rapidly evolving.

We Can Lead Innovation and Growth 

It is the development of automation—hardware and software—the robots, equipment, vehicles and conveyances, devices; and the software that manages these and the myriad of daily tasks and decisions that can lead. This is our forte.
It is the research and discovery of new healthcare solutions—biotechnology, new drugs and protocols, and new types of information services—that will lead to treatment for diseases that have plagued the world. This is our calling.

Conclusions

Many of the views expressed by many of the candidates, both national and local, represent ideas that may be waning in some ways. It is not to say these ideas and views are not important, but the real divide in the country, it turns out, is not between right or left,12 immigrant or U.S. born, but generational—globalized world citizen vs. a more parochial one. If you look at much of the data and talk to younger folks who are already working, inventing, paying taxes and so on, they are not too happy with the way we are leaving things for them.

Unlike my parents, and probably your parents (the middle class), who got us through college, paid off a mortgage and were able to buy their retirement home as well as a few other niceties along the way, the Millennials are saddled with a different type of economy. They are unable to afford a new home, and carry huge debt from school (which causes lack of capital for that first starter home). Yet they also have an optimism about the world and the way it works and what the future could be.

We have an opportunity to embrace globalization, new technology, new modes of work, lifestyle, shopping and job descriptions. This new era opens a world of possibility, of rethinking our challenges, and creating new opportunities.

January is the month when companies go into their annual think-tank sessions, brainstorm, and plan their future. So now is the time open our minds, listen, discover and embrace our potential.

____________________________________

References:

The State of American Jobs: Shifting Economic Landscape -- Oct. 6, 2016

Politics: Trump administration - Latest List -- Jan 3, 2017

U.S. Factories Are Working Again; Factory Workers Not So Much -- Dec. 18, 2016

Aging Population, Stagnant Productivity Challenge Trump's Growth Plan -- Dec. 4, 2016

_______________________________________________________________________________________

1 For more on this report go here. -- Return to article text above

2 Final reading on US Q3 gross domestic product was up 3.5% vs 3.2% prior estimate
and U.S. Economy Approaches Year’s End on Lackluster Note. -- Return to article text above

3 Italics added by author. -- Return to article text above

4 These are biotech, pharma, medical devices and professional healthcare providers
(therapists, nurses, and doctors). -- Return to article text above

5 This kind of action—reducing presence in another country—may limit sales in those countries, so it is a balancing act that a company may weigh. However, most of the stories about overseas ‘mergers’ or re-incorporation (tax inversion) have been about lowering corporate tax. -- Return to article text above 

6 Excellent analyses from CNCB here, and from Washington Post Commentary. -- Return to article text above

7 Most retailers experience 2% to 3% growth, in step with GDP growth and consumer spending. -- Return to article text above

8 Interestingly, Trump products are sourced from China today. (We’ll see if Ivanka Trump moves her manufacturing to another country while US/China relations are in flux.) In fact, a developing nation would be very smart to jump in and offer a ready workforce for US manufacturers since one can assume that outsourcing will continue, but possibly with a rebalancing of locations. -- Return to article text above

9 Deng Xiaoping. -- Return to article text above

10 An interesting research by the Pew Research Center. -- Return to article text above

11 IoT, networks, devices and so on. -- Return to article text above

12 US elections have been generally almost too close to count over the last many elections with very narrow wins or a balance of Electoral College with the popular vote extremely close on a national level. -- Return to article text above


To view other articles from this issue of the brief, click here.




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