The Globe and Mail Publishes My First Book Excerpt

The Globe and Mail, Canada's national newspaper, has published an excerpt of my first book this week (click on the post title above to see the excerpt). This is a short book on personal finance, focused on the psychology of Saving Money. It has nothing to do with frugality, discipline or budgeting, but shows how to best use your natural desires as a tool to build financial strength.

US Employment Instead of Unemployment

Several readers have expressed doubt that the US unemployment rate has been held in check in the face of declining manufacturing share in GDP. That doubt is reasonable given the political usage of selective unemployment data, so let's take a quick look at employment data from the US Bureau of Labor Statistics.



The graph shows the annual number of jobs in all goods and services producing industries, as well as the aggregate since 1962. And the trend clearly confirms that total employment has consistently increased over the past few decades.

Manufacturing employment has held within a narrow range for decades but its slight decline since 2002 has not been recovered due to the 2008 financial crisis. Jobs continue shifting to the services sector where most of the recession losses in the number of employed have been recovered.

Another way to view total employment is by comparing its growth rate to population growth. The average annual growth rate of employment is nearly double the population growth rate. Since 1962, employment has grown at 1.77% per year while the population grew at 1.05%.

US Manufacturing Share Declines, But Unemployment Improves

On Feb 18 I discussed manufacturing and employment in the US. The large trade deficit with China showed no correlation with US unemployment, and in fact trended in the opposite direction.
To follow up, here is  graph that I compiled and that I doubt you will see anywhere else.
It shows that decades of normal decline in the manufacturing share of GDP has not resulted in more unemployment. Again, the opposite happened.
As manufacturing share declined, unemployment improved.


- to enlarge the graph, right click and choose 'view image'

The middle line on the graph captures the effect of the US trade deficit. China is most often singled out as the culprit for blame in the trade deficit, but China is in fact less than half of the deficit. So the graph shows the number of manufacturing jobs that would be needed in the US if the trade deficit were eliminated.
As the manufacturing share declines, that number of jobs grows. So you might expect total US unemployment to grow too, but instead, jobs tend to shift to other sectors and unemployment improves.

That is what I mean by the 'normal decline' in manufacturing share.

As an industrial society develops, its economy first transfers workers and output from agriculture to manufacturing. That is normal in the sense that technology develops, skills build up and firms specialize in narrower activities. So farmers that built plows would switch to focus on building plows..... and the share of agriculture in GDP declines while the share of manufacturing rises.
So it's also normal for manufacturing firms to spawn service firms. An employee who did accounting for a manufacturer would open an accounting firm..... and the share of manufacturing declines while the share of services rises.
That's an entirely normal process, so a falling share of manufacturing should not be alarming.

Again, the graph shows the trend (over decades) that a falling  share of manufacturing in US GDP was accompanied by rising employment in the overall economy.

This explanation is not meant to imply that the process is smooth or painless, as it is clearly not so. Factories do close and workers do lose jobs. But working life tends to improve as less manual labour is done on farms, and less menial labour is done in factories. The most tedious and hazardous jobs get automated, and workers tend to shift to easier conditions in other sectors.

So, if the trade deficit or manufacturing decline do not correlate with unemployment, what does? One key factor that does correlate with unemployment is the price of crude oil.

US Auto Market Bails Out Europe and Asia

I wrote this article in May2011.....   When domestic auto industry bailouts are discussed, the tone suggests that punishment is appropriate. The Detroit 3 are roundly criticized for bad management and told that they deserve whatever nasty fate the economy brings them. The most common accusation is of building vehicles that nobody wants. They are also seen as lacking appeal in foreign markets, being poor in quality, and lagging in fuel economy. The facts speak otherwise.

Within the US, the world’s freest market, the Detroit 3 hold a 48% market share. The other 52% is split by over a dozen other carmakers. So it can’t be true that Detroit builds cars that nobody wants. On the other hand Volkswagen, the European leader, has less than 2% of the US market and is truly the car that nobody wants. But are Detroit’s products similarly dismissed in Europe? No. 

Due to import restraints Ford and GM started manufacturing in Europe in 1911. Today the top three sellers there are VW with 11% of the market and Ford and GM, each with 8%. Toyota lags in 8th place with 5.1%. Ford and GM have outdone every brand except VW in hyper-nationalist and protectionist Europe.

The most popular vehicles in the US even after the financial meltdown were GM and Ford pickups, each selling about half a million per year. That’s about 50% more than the next two best sellers, Toyota Camry and Honda Accord. Before the meltdown the Detroit pickup numbers were nearly double, so it’s plainly wrong to claim that Detroit’s products are domestically unpopular. 

Conversely, Europeans control a mere 7% of the US market but even worse, there is no representation from UK, Italy and France. With forty years of open market opportunity, Europe consistently built cars that America doesn’t want and has largely failed.

The situation in Japan is more strongly skewed. The Japan Auto Digest reports that Japanese carmakers hold 97.25% of their domestic market, while Europeans hold a slim 2.5% and Detroit a meager 0.25% (Korea sells nothing in Japan compared to 5% in the US). If one was to believe in the fiction of an open Japanese market it would seem that the entire Western world builds cars that nobody wants. But, for popularity in existing major export markets, Detroit generally fares as well as any other regional car producing group.

So why is Detroit’s domestic market share declining? Detroit has certainly had its share of blunders in labour relations, product focus and trust, but these are not at the root of its decline. The answer stems from the post war situation. After World War 2 every major car producing nation was near ruin except the US. Detroit’s domestic share peaked at about 95%, and import rules were liberalized to help rebuild bombed-out industries in Europe and Japan. There was literally nowhere for Detroit’s market share to go but down. 

Of all the attempts to penetrate the open American market, the British, French and Italians utterly failed. Germany’s modest success lay in the luxury segment, Japan took the top prize and Korea now threatens to follow. A declining market share was Detroit’s involuntary contribution to rebuilding the industrial base of America’s future allies. 

 One quality ranking method used by JD Power is the number of their awards earned by vehicle models. Of the 18 awards for 2008, Asian carmakers received 9 while Detroit received 7. Hardly a landslide that could justify dismissing Detroit as unworthy of a buyer’s consideration. 

The fuel economy situation is similar. The broadest measure of fuel consumption is Corporate Average Fuel Economy (CAFE). According to US EPA data, domestic car fuel economy has been within 5% of imports since 1992 and is now virtually equal (for 2008 it was 31 mpg vs 31.7 mpg). There are two key reasons for the convergence. First, Detroit reduced car sizes and improved fuel economy by 76% since 1977. Second, importers increased car sizes so their fuel consumption only improved 12% since 1977. Detroit’s innovations have resulted in CAFE that exceeded the imports in 5 of the past 9 model years.

Like firms in any other industry, autos are always consolidating. One of the Detroit 3 should be acquired in order to reduce excess capacity. The only point through the next year or so is whether to let the industry collapse or evolve more gradually. If the decision is based on ill will toward Detroit instead of on the facts then many viable jobs and valuable technologies will be unnecessarily lost in the ensuing chaos.

What Caused the US Trade Deficit ?

In an earlier post, I tried to raise some doubt about the assumption that US manufacturing was in decline. The crux of the issue was that the total real volume of US manufacturing had been steadily increasing since at least 1970, and so it would be unjustifiable to hold a negative view.

Meanwhile the unemployment trend was rising from 1950 to 1980 and then started falling at the same time as a major trade deficit with China had opened. Let's repeat that: US trade with China increased and unemployment decreased. This is the opposite of what most people assume.

So now we should ask, if the total amount of US manufacturing is not falling, then what is causing the trade deficit?

The US Congressional Budget Office studied this issue and reported on it in March 2000.
Here is a quote:

"In the early 1980s, the percentage of GDP accounted for by gross saving fell rapidly and was reflected in a widening gap between the supply of saving and the
demand for domestic investment.2 The declining share of saving had broad
consequences: the economy accumulated less capital and therefore grew more slowly
and paid workers lower average wages than it would have if the share had remained
higher. Inflows of capital from abroad partially filled the gap and permitted domestic
investment to exceed saving. Those inflows also created a trade deficit.

In effect, the Budget Office concludes that a severe decline in saving is the root cause of the trade deficit.

Get the original CBO report here http://www.cbo.gov/publication/12139

Worried About How the World Will Feed Itself?

The world's population is projected to grow to 9 billion by 2050, but what about food production? Can the world feed itself or are we already destined to suffer shortages? 

Food production presents a complex mix of issues such as climate change, water supply, technology transfer, transportation and human rights, so I won't give a complete analysis here. Instead, I will provide some data to help build the context for assessing any reports you may read elsewhere (and there is quite a lot).

This data on agricultural output was sourced from the UN statistical database and is freely available on the web. It shows how much the entire world's nations produced every year since 1970, and it may be a bit surprising.

Let's start with a graph that plots 2 key parameters. First is total output, which gives you an idea of the condition of the agricultural sector by showing how much it has grown. This is encouraging, as the total annual production has increased significantly.

However, the population has also increased over the period so total output alone cannot indicate whether there was enough growth. So the second parameter is agricultural output per capita.

 

-click the graph to enlarge it-

The blue line shows that total output has more than doubled over the period, an average growth rate of 2.34% per year.

The red line shows that output per person has grown at a lower rate, 0.72% per year.

So regardless of the fact that the world's population has increased, agricultural production has grown more quickly than the population. 

A quick look at the graph also clearly indicates the effect of the Soviet collapse in 1990. World output per capita was set back about 20 years in the early 90s, recovered by 2002 and has continued growing faster than the population.

Of course recent history does not guarantee that the trend will continue, but it does prove that agriculture can increase productivity and output levels. It also shows that population pressure is not a new issue, or one that should necessarily be daunting.

I should note that in the UN classification system, agriculture includes forestry and fishing. This might cause doubt that the world's food production is rising. A second data source can be used to confirm or refute the above result. 

The UN FAO Summary of Food and Agricultural Statistics[1] reports sectoral growth rates over three decades: the 1970s, 1980s, and 1990s. World average growth in agricultural production held steady over the three decades at 2.4%, 2.4%, and 2.3% respectively. The corresponding population growth remained lower at 1.7% in the 1980s and 1.4% in the 1990s (no population data was reported for the 1970s). 

The same pattern held true for Africa and Asia, albeit by a smaller margin. By this measure, world agricultural output grew between 40% and 60% faster than population and is reconfirmed by reported growth in food availability for every region worldwide. 

Is this also confirmed by most food commodities? Food availability per capita has grown in every continent over the past four decades except for a 2.3% decline in Oceania (UNFAO report page 69). This is accompanied by a reduction in the percentage of undernourished within each continental population

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[1] Summary of Food and Agricultural Statistics 2003, Food and Agricultural Organization of the United Nations, Rome 2003