Text 2. Not making it

Date: 2015-10-07; view: 315.

Whether the entire American economy is now in recession is still debatable, but nobody doubts that manufacturing is in the grip of a severe downturn. Will the rest of the economy go down with it?

Every day brings reports of more well-known firms cutting jobs. Manufacturing production fell at an annualized rate of 2.1% in the fourth quarter of 2000 compared with the third quarter—the biggest decline since the recession a decade ago. Two leading indicators of manufacturing activity have both plunged in recent months. The National Association of Purchasing Managers' index has fallen to a level that, in the past, occurred only when the economy as a whole went into recession.

There are several sources of manufacturing's troubles. Despite its recent slide against the euro, the dollar remains strong relative to the currencies of its trading partners as a group. This has raised the price of American exports. Slower export growth has hit profits, as have rising labor costs, in turn causing firms to cut back on growth plans. This hurts suppliers and capital-goods producers.

Many companies became over-optimistic as, a year ago, the boom went roaring on, and increased production at precisely the wrong time, building up large inventories which they are now desperate to trim. Moreover, many manufacturing firms have never fully recovered from the Asian economic crisis of a few years ago. The result has been a dramatic fall in confidence in the manufacturing sector, starting last autumn, with reports of mass abandonment of plans to increase investment this year.

A recession in manufacturing does not always coincide with recession in the broader economy. Manufacturing's share of gdp is a mere 16%, its share of employment 15%. It is dwarfed by consumer spending — though, because of its unprecedented scale, corporate investment has been a vital contributor to total economic growth in the past few years. Manufacturing firms also create demand elsewhere in the economy, directly through their own purchase of services and indirectly through the private spending of their employees.

A downturn in manufacturing also affects the American psyche. People in other sectors may start to feel insecure about their own jobs and rein in their spending, just in case. Yet manufacturing's problems may also be reflecting developments in the broader economy, as much as leading them. For instance, the industry that has been hardest hit is car production, in which output in the fourth quarter of 2000 was 12.1% lower than a year earlier. A sharp fall in car buying may suggest that consumers are cutting down their spending across the board.

One mystery is why, despite the recession in manufacturing and the slowdown in the rest of the economy, unemployment has stayed so low. Consumer spending is unlikely to plunge to recessionary levels while there is, in effect, full employment.

(from “The Economist”)

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