Wednesday, March 11, 2009

When China and Brazil Become A Better Investment Than the U.S.

investment economy china
A vendor rests in front of a banner displaying mobile phone numbers at a shop in Shanghai

Now that most investors, both institutional and individual, have lost a large portion of their stock market holdings, all that most people want to know is how they can get their money back. The easy answer is that they probably won't get their money back, at least not over the next five or ten years. But, that kind of answer is never satisfactory.

One well-known market analyst suggests that putting money into the stock markets in China and Brazil will pay off better than keeping capital in U.S. equities. According to Reuters, Mohamed El-Erian, chief executive at Pimco, the world's biggest bond fund manager, said about China and Brazil, "The case for optimism comes from the fact that these countries entered today's global crisis with better initial conditions." (See pictures of the global financial crisis.)

In horse racing and boxing, experts will point out that a strong start does not mean a strong finish. China is a case in point. Its GDP has grown at a rate of about 10% a year for a decade. The government has done whatever it needed to do to keep the economy on track. It has underwritten the build-up of the manufacturing sector, the telecom and electric infrastructure, and a large and complex financial system. It has also sold parts of the nation's largest companies to the public to give the companies more access to capital. The communist central government says it will put about $585 billion into the domestic economy in order to stimulate consumption and business expansion.

It is hard to see how China could fail with its plans to keep its GDP growing rapidly with such an impressive arsenal. It looks almost as good as the one that the U.S. had in the 1920s and Japan did in the 1980s.

Of course, the Chinese economic leaders have read all of the analysis about what caused economic collapses in large nations during the past. China has certain advantages that have never been present in another rapidly growing country. The country has both an abundance of national resources and a large supply of workers who can be trained to work in factories. China has also grown and continues to grow with virtually no restrictions on how industry effects the environment. The World Bank estimated that 700,000 Chinese die prematurely due to poor air quality. Perhaps the best way to look at that number is that it is the price of progress.

China has obviously demonstrated that it has both the will and the capacity to exceed the growth of any other large nation in the world. But, what is rarely if ever mentioned by the government is that the nation's economic fate is not in its own hands.

Recently The Wall Street Journal reported that "Goldman Sachs estimates that China's economy grew 2.6% in the October-December period from the July-September quarter. The OECD puts the quarter-on-quarter growth for the same period at 0.3%." The numbers are telling in two ways. The first is that estimates of economic activity on the mainland are imprecise. The second is that China's growth rate may have already have slowed considerably.

None of the current explanations of China's GDP growth are able to explain the discrepancy between China's GDP growth and the sharp drop in imports among the developed nations. China does not have another set of nations that it can send its goods in order to replace the diminished demand from the U.S., Japan, and Europe. As unemployment in these regions continues to rise, and that looks like a certainty now, China's ability to send its manufactured goods overseas drops each month.

So far this year, the Shanghai Composite, the best measurement of stock values in China, is up over 20%. Those making the argument that the world's most populous nation will have a strong year can point to that number as an indication of optimism. The trouble with the theory is that when the Asian nation's economy was at its most robust, in 2007 and early 2008, the same index of China's stock fell from a level of 6,000 to 1,700 where it bottomed five months ago. This must be what the head of Pimco meant when he said that investing in Chinese stocks is the best game in town.

Douglas A. McIntyre

Original here

U.S. Downturn Dragging World Into Recession

Job candidates tussle for enrollment forms at a career fair in India, where more than half a million jobs vanished in the last three months of 2008, according to the World Bank.
Job candidates tussle for enrollment forms at a career fair in India, where more than half a million jobs vanished in the last three months of 2008, according to the World Bank. (By Mahesh Kumar -- Associated Press)

Washington Post Staff Writer

The world is falling into the first global recession since World War II as the crisis that started in the United States engulfs once-booming developing nations, confronting them with massive financial shortfalls that could turn back the clock on poverty reduction by years, the World Bank warned yesterday.

The World Bank also cautioned that the cost of helping poorer nations in crisis would exceed the current financial resources of multilateral lenders. Such aid could prove critical to political stability as concerns mount over unrest in poorer nations, particularly in Eastern Europe, generated by their sharp reversal of fortunes as private investment evaporates and global trade collapses.

In its report, released ahead of a major summit of finance ministers in London this week, the World Bank called on developed nations struggling with their own economic routs to dedicate 0.7 percent of the money they spend on stimulus programs toward a new Vulnerability Fund to help developing countries.

The report predicted that the global economy will shrink this year for the first time since the 1940s, reducing earlier estimates that emerging markets would propel the world to positive growth even as the United States, Europe and Japan tanked. The dire prediction underscored what many are calling a mounting crisis within a crisis, as the downturn that started in the wealthy nations of the West washes over developing countries through a pullback in investment, trade and credit. Despite the United States' position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.

"We need to react in real time to a growing crisis that is hurting people in developing countries," World Bank President Robert B. Zoellick said in a statement. Action is needed by governments and multilateral lenders "to avoid social and political unrest," he said.

The report said that 94 out of 116 developing countries have been hit by economic slowdowns. The World Bank projected that the economic crisis will push around 46 million people into poverty in 2009 through job and wage cuts, as well as declining flows of remittances, the money that foreign workers send to their families. Net private capital flows to emerging markets are plunging, set to fall to $165 billion this year -- or 17 percent of their 2007 levels. Falling demand in the West is sparking the sharpest drop in world trade in 80 years, sending sales of the products and commodities of poorer nations spiraling down, the report said.

That decline is touching off a wave of job losses. Cambodia has lost 30,000 jobs in the garment industry. In India, more than half a million jobs vanished in the last three months of 2008, including cuts in the gem, jewelry, auto and textile industries, according to the World Bank.

As a result, the report estimates that at least 98 countries may have problems financing at least $268 billion in public and private debt this year. It noted a worsening in market conditions could raise that figure as high as $700 billion. Additionally, only one quarter of vulnerable developing countries, the World Bank said, have the ability to launch their own stimulus programs or to independently finance measures such as job-creation or safety-net programs.

To help them, multilateral lenders will need to dig deep. The World Bank remains well financed and is positioned to almost triple spending to $35 billion this year. But it warned the scope of the need in the developing world will exceed the combined ability of major multilateral lenders, and it called on governments in major nations and the private sector to pitch in more.

For instance, its sister organization, the International Monetary Fund, recently received $100 billion more from Japan but is still asking more affluent nations to come up with an additional $150 billion to replenish its rapidly diminishing funds. While the World Bank aims to reduce global poverty largely through long-term projects in the developing world, the IMF is charged with offering bigger, more immediate bailouts to countries on the verge of economic collapse. The list of countries fitting that description has soared in recent months.

In November alone, the IMF parceled out $50 billion to nations in crisis -- the most the institution has ever spent in a single month. With more nations, particularly in Eastern Europe and Central Asia, facing serious trouble, the IMF is preparing to hand out tens of billions more. It is hoping to raise more funds from Western nations and other cash-rich countries such as China and those in the Middle East.

The concern now, however, is that the scope of the crisis may be so vast that even an extra $150 billion may not enough. Some fear that nations in Western Europe such as Austria, Ireland and Spain -- believed to have graduated from IMF lifelines decades ago -- may soon require bailouts, taking funds that would have been spent on poorer nations. It could also prove difficult to raise more money from hard-hit countries including the United States and Britain, where politicians and citizens may decide that charity begins at home.

"I'm worried about what happens when you see that a Greece or an Ireland that might need bailouts," said Simon Johnson, an MIT economics professor and former IMF chief economist. "Where is the money going to come from?"

Original here

Lean Factories Find It Hard to Cut Jobs Even in a Slump

SPARTANBURG, S.C. -- At a factory here that churns out plastic parts for everything from spray cans to blasting caps, laying off just one worker can be more trouble than it's worth.

The plant, owned by Cleveland-based Parker Hannifin Corp., has become so lean over the past decade that many assembly lines run with only a handful of highly trained workers.

Fewer Workers on Factory Floors

Andy McMillan for The Wall Street Journal

In Parker Hannifin's Spartanburg, S.C., factory, workers are safer than in many other industries because cutting a full-time employee has become quite costly.

So while mass layoffs have driven the U.S. unemployment rate to its highest in 26 years, Parker and other companies like it are responding to the slump in more surgical ways, mainly by cutting hours and shedding temporary workers.

"Because of productivity gains, every one of my people carries more dollars in sales today," says Donald Washkewicz, Parker's chief executive. In 2000, the average Parker worker represented about $125,000 a year in sales. Today, that figure tops $200,000. "If I need to cut back, I have to cut back fewer people to achieve the same goal."

Similar trims are taking place at each of Parker's nearly 300 factories. And to varying degrees, this is happening at thousands of other large and small factories across the U.S.

The selective cuts help explain a curiosity of this recession. The manufacturing sector is suffering a sharp contraction and has had to slash many jobs -- some 1.3 million, according to a Labor Department jobs report released Friday. But fewer positions have been eliminated than would be expected given the depth of the slump.

As of February, 14 months into this recession, manufacturers have cut payrolls about 9.4%. That's slightly less than the 9.5% cut 14 months after the start of the 2000 recession, when the economy was already recovering. The drop in production and orders, however, has so far been much worse this time around, indicating that companies have sought ways to cut back other than simply shedding workers. As of January, the latest figures available, U.S. manufacturers cut production 12.8% since the start of this recession, compared with just 2.6% at the same point after the last recession began.

[Lean Factories Find It Hard to Cut Jobs Even in a Slump]

The sheer speed of this downturn, and the fact that it hit many manufacturers after the economy as a whole was officially in recession, may have muted layoffs. A good chunk of the factory sector was still humming along until late last year, aided in part by strong exports. Manufacturers may also be trying to hold on to workers as long as possible, in the hope that business revives.

But deeper changes in manufacturing are also playing a role. A decade ago, most factories tended to do "batch" work, with large groups of employees churning out endless runs of the same pieces. Since many workers did identical tasks, it was easier for companies to cut people during downturns.

That kind of work, which employs more people and includes a larger share of less-skilled positions, has been steadily migrating to lower-cost locales overseas. In the U.S., companies now have new equipment and streamlined operations that require fewer, more highly trained people to make more goods. The sector lost 3.5 million workers -- one in five jobs -- between January 2000 and the start of this recession. Even as employment contracted, production in that same time period rose 10%.

"When you get down to where we are now, where manufacturing is less than 10% of the employed population, there just isn't that much more you can cut," says Kurt Karl, chief U.S. economist at Swiss Re. Mr. Karl says manufacturers are especially eager to hold on to workers who are trained to operate their increasingly sophisticated equipment.

At Parker's Spartanburg plant, five workers make the tiny plastic rings that become seals on aerosol cans. Each member of the group runs a different set of high-speed machines doing a distinct step, such as extruding long noodles of plastic, grinding them or cutting them into final product.

The group can curb production several ways short of layoffs. Two workers can complete the first two steps in one day, then the other three workers can finish those products the next day, essentially cutting everyone's hours by half. Or, all five can take whole days off together. But permanently pulling one or two of them out of the mix is far more difficult to accomplish, and could make it impossible for the line to operate efficiently.

Andy McMillan for The Wall Street Journal

Wanda Hughes, at Parker Hannifin's slimmed-down Spartanburg plant.

Mr. Washkewicz, the Parker CEO, says the last thing he wants to do is lay off a worker he's spent money training: "You want to sustain those skills."

But cutting hours might not be a long-term solution. Mr. Washkewicz says during the recession that hit the U.S. in the early 1980s, he headed one of Parker's operations that cut back to four-day weeks in order to save jobs. It worked for a while. But after about three months, many people were struggling to pay bills on salaries that had been reduced by 20%. The company ultimately changed its approach, laying off workers and restoring those who remained to a fuller schedule.

Many of the current Parker workers whose hours have been cut say that they prefer it to losing their jobs entirely, but that they don't feel out of the woods yet. "I try not to worry about the economy," says Miriam Porter, one of the workers now taking two unpaid days off each month. However, she adds, "it is looking kind of bad."

The Spartanburg plant, which employs about 133 workers, is part of Parker's hydraulic-filter division, which has plants in several U.S. locations as well as overseas. In the 2000 recession, the division's sales fell about 7%, prompting layoffs of 22% of its work force. This time, sales are down substantially more -- the company declines to provide a specific percentage -- but only 5% of workers have lost jobs.

Last week, Parker announced a one-year salary freeze for its workers world-wide. When it comes to scaling back production, each part of the company is given broad leeway in how and whether to cut workers or their hours. As part of its announcement last week, Parker trimmed the hours and salaries of everyone at its Cleveland headquarters by 10% through the end of June. The pay cut for top executives, including Mr. Washkewicz, was even bigger, because it included reductions in incentive bonuses.

Parker isn't alone. The Labor Department reports that in February, manufacturing production workers spent an average of 39.6 hours a week on the job, down from 41.2 hours a week a year earlier. In a survey of chief financial officers conducted by Duke University and CFO Magazine last month, 55% of manufacturing firms said that they had reduced employee hours over the past month, compared with 30% for other firms. Over the next year, 58% of manufacturing firms said they planned to cut hours, compared with 32% for other firms.

Streamlined production and technological improvements also mean fewer jobs need to be cut in a downturn. In another section of Parker's Spartanburg plant, two long rows of machines churn out plastic tubes for blasting caps. The small explosive devices are used by construction and mining companies to clear debris. With demand down for blasting caps, Parker recently went from making them on two shifts to just one.

That move cost the jobs of two workers who ran those machines on a second shift. A decade ago, those same two blasting-cap lines required up to eight people to operate. Eliminating production on that second shift would have meant shedding four times as many workers. The labor-saving improvements included replacing nearly 400 mechanical rollers that required workers to painstakingly apply lubricant throughout the workday. Now the line has mechanisms that don't need oiling.

Another factor saving jobs thus far is smaller inventories. A decade ago, Parker, like many other companies, structured its factories so that workers were building large batches of goods at each stage of production. That often led to huge stockpiles and made it harder to adjust when a downturn hit. There might have been six months or more of goods on Parker's shelves before the signal finally came to reduce production.

Parker's plants today have been largely restructured to create smaller production clusters. Seals for aerosol cans, for example, are only made in numbers that match the flow of orders. Mr. Washkewicz says those big stockpiles of yesteryear used to mean he had to cut more people, much faster. "In the past, we were trying to adjust to past sins, as well as the current drop," he says.

Some companies say tighter inventories helped them notice a dropoff in orders more quickly than they might have in years past. "We saw the economy changing early last year and started cutting back," says Rick Olson, who oversees four of Toro Co.'s plants in the northern U.S.

Toro, based in Bloomington, Minn., makes lawn mowers and other equipment that traditionally sees lots of seasonal flux in sales. Rather than laying off workers in droves, the company curbed seasonal hiring and overtime and didn't replace workers who had left.

Some smaller companies have found ways to shrink head count since the last downturn. Germantown, Wis.-based Mahuta Tool Corp., which makes items such as 600-pound screws used in cranes, went from 23 to 12 workers in the last bruising manufacturing recession. This time, the company has only had to cut two workers, reducing its payroll to 17, in part because each worker now represents far more production than before.

"The highly skilled person, you're not going to lay them off," says CEO Lynn Mahuta. "You will find other work for them to do."

For workers who haven't been spared the ax, the future is an open question. Spurgeon Jackson, a 34-year-old machine operator who has spent 15 years at Parker's Spartanburg plant, was one of the two people laid off from the second shift making parts for blasting caps. He was recently called back to cover for a worker on medical leave, but he doesn't know how long it will last.

"The 2000 recession was bad," he says, stopping next to the clattering row of machines, "but not nearly as bad as things are right now."

Original here