Weekly Standard Online
May 26, 2012
by Irwin Stelzer
America is the best house in a run-down neighborhood: The famous BRICs are crumbling.
Start with B: Brazil's manufacturing sector is contracting. The nation's finance minister, Guido Montega, blames this and the country's other ills on the crisis in Europe. Not to worry: President Dilma Rousseff assures us that Brazil "is 100 percent, 200 percent, 300 percent" prepared to prevent the global economic downturn from spreading to Brazil. In response to the slower growth, Montega is flirting with protectionism to reduce the massive trade deficit, and Rousseff has announced $1 billion in temporary tax reductions that favor the auto industry, in return for an industry pledge to lower prices and maintain employment. Inflation is running at a rate in excess of 5 percent, but the central bank is lowering interest rates, hardly likely to drive inflation down. More important, no significant effort is being made to introduce supply-side reforms to bring down the "Brazil Cost," described by Emerging Money (a website) as "a combination of bureaucracy, taxes, and infrastructure," added to a "level of intervention and politicking … a little too reminiscent of other leftish leaders within the region." The Wall Street Journal calls Brazil "one of the world's most expensive places to do business."
R: Russia, once again in Vladimir Putin's safe pair of hands, is an oil-based economy and not much else. Putin is desperate to increase Russia's oil output, especially now that crude prices are falling, but has appointed Igor Sechin, a long-time co-worker in the KGB, as head of Rosneft and de facto energy czar. Presumably Sechin will attract foreign capital and know-how from companies that have not heard of Yukos and are unaware of the hostility reflected in Putin's warning that the government will prohibit "private companies holding licenses for offshore projects [in the Arctic] to resell them to ExxonMobil, Chevron or other foreign players."
I: India's finance minister Pranab Mukherjee reminded many here in America of Herbert Hoover's 1932 reassurance that "prosperity is just around the corner" when he reassured investors, "I have full faith in the resilience of the Indian economy…"—which he is confident will overcome double-digit consumer inflation, a falling rupee, a rising trade deficit, a growth-stifling bureaucracy, and a host of other ills.
C: China's growth is slowing. Activity in its manufacturing sector has declined for seven consecutive months; its banks are loaded down with dicey paper from state-owned enterprises (SOEs) while they cannot find healthy companies interested in borrowing (new bank loans fell 8 percent in April); the wealthy are setting up bolt-holes in the U.S.; bank deposits are being transferred to safer places; and political instability has the regime close to paralyzed in this year of transition to a new set of rulers.
Li Keqiang, due to take control of the country next year, says that "man-made" GDP figures that show growth of around 8 percent, are unreliable and that what counts are data on electricity output, rail cargo volumes, and bank loans—data this writer used over 50 years ago during his short-lived career as a forecaster of the U.S. economy in the days before econometric models provided the accurate forecasts to which we have become accustomed—all of which are dropping like stones. In an unmistakable reference to the political paralysis gripping the regime, Premier Wen Jiabao called for "timely" action "to prevent the economy from slowing down too rapidly." That could mean another stimulus package, although the limited success of the last one might cause a re-think.
Which brings us to Europe. Its ills need little retelling. A majority of countries want to send more of Germany's hard-earned wealth to periphery countries, and now, right away. Not surprisingly, Germans are less enthusiastic about that idea, as Chancellor Angela Merkel told François Hollande, France's new socialist president, when they gathered last week for still another meet-greet-eat and disagree session. The eurozone economy is contracting at a rapid rate, unemployment is in double digits, German business confidence is at its lowest ebb in six months, and the Grexit fans are at loggerheads with the "more Europe" crowd that fears contagion and would have Germany pay any price necessary to keep Greece in the eurozone, including issuing eurobonds that transfer Germany's fine credit rating to less worthy countries.
Meanwhile, in America consumer sentiment is at its highest level in more than four years. The recovery plods on, probably at something like a historically low 2.2 percent growth rate, which many economists are guessing will step up to close to 3 percent by year-end. Oil prices are coming down. Manufacturing output is rising, and the growth is "relatively broad-based, with healthy gains in both consumer goods and business equipment," according to Goldman Sachs' economists. In part this reflects an emerging trend for production and jobs to return to the U.S. due to a combination of leaner and meaner, lower-cost manufacturing operations here, and rising labor costs in China and India. A survey by Accenture consultants found that 40 percent of companies moving manufacturing operations in the past two years had moved them to the U.S., compared with 28 percent who had moved facilities to China which, however, still tops America as the preferred location for new factories.
The housing sector seems finally to be in remission. Sales of both new and existing homes rose last month by 3.3 percent and 3.4 percent, respectively, month-over-month. The supply of homes on the market is relatively low, and new home prices are up close to 5 percent compared with last year. This might be due to unaccounted for seasonal factors, but at worst it seems that new home prices have stabilized. Prices of existing homes also rose, but more modestly.
Housing starts are up, and the National Association of Home Builders reports that builders are cheerier than they have been since the housing recovery started. Beazer Homes USA, one of the largest home builders in America, reported a 50 percent jump in closings and a 29 percent rise in new orders in its recent quarter. And Toll Brothers, builders of luxury homes, moved from a loss of $20.8 million in the first quarter of last year to a profit of $16.9 million in its just-ended fiscal quarter. And so far in May its reservation deposits, which are non-binding, are up 39 percent compared with last year.
But two cheers only. Home builder sentiment remains well below pre-recession levels, there is a long road up from what seems to be the new floor, and foreclosures (repossessions) will continue to haunt the sector. Worse still, early reports for this month suggest some slowing in both the manufacturing and service sectors, and there are few signs that the jobs market is improving: The unemployment rate is down primarily because so many workers have dropped out of the work force.
On the other hand, contagion from Europe still seems unlikely to derail the recovery, barring a panic in equity markets. Exports to the eurozone account for only 1.2 percent of U.S. GDP; money funds have reduced their exposure to the eurozone and claim to have collateralized much of the remaining risk with U.S. treasuries; the gap left as European banks pull money home to shore up balance sheets is being filled by domestic lenders; and our banks are far stronger than those in Greece, Spain, Italy, and even France and Germany.
Still, Europe has something to teach us. Political stalemate and failure to devise a blend of austerity and growth-inducing tax and structural reform is costly. Borrow-and-tax-and-spend Democrats, and Tea Party Republicans are as far apart as Frau Merkel and Monsieur Hollande. And we can see from Europe's experience where continuation of just such a rift might lead America.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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