In this week’s Economic Report, Dr. Rick Harper discusses the latest manufacturing numbers, the role economic incentives play in our area and why the trade deficit isn’t decreasing any time soon.
The U.S. Department of Commerce released its October report on U.S. factory orders, and the numbers were much better than expected.
“Orders are up 2.7 percent. This is the fourth month in a row that factory orders have been up,” Harper said. “We actually got an upwardly revised number for the prior month.”
But Harper said that while the orders may be up, where those orders were placed is important.
“Those orders may be placed with firms that are heavily automated and thus cost-competitive,” Harper said. “New machinery is a fixed cost for them, and that can lead to a situation where there is downward competition on prices. They may well be getting that order because they don’t employ that many expensive workers.”
While the numbers may be up in manufacturing, they may not translate to more employment.
“The dollar value of output produced by the manufacturing sector in the U.S. will be up, but that’s not necessarily an indicator that there will be many more manufacturing job,” Harper said.
But the report, taken with other measures like durable goods, points to a healthy U.S. economy.
“We’re producing more manufactured goods than we ever have before,” Harper said. “It’s just we’re doing it with fewer people. So you’ve got this kind of odd combination of the overall economy being fairly healthy, gross domestic product having recovered from the Great Recession and the labor market looks pretty good. But most of those new jobs are in the service sector.”
The service sector jobs are in fields such as health care and education as the labor force continues to move away from manufacturing.
“We’ve got the paradox of great discontent. We saw this in the election particularly in the Midwestern states – traditionally the home of manufacturing intensity in the U.S. where so many manufacturing jobs have been lost to technology and automation and those are unfortunately not coming back,” Harper said. “The cost advantage of well-implemented automation and technology is substantial enough so that manufacturing jobs even at $5 an hour wouldn’t make sense compared to the cost of equipment.”
Locally, several politicians have campaigned on bringing manufacturing jobs into the area. Harper said, though it’s rare, manufacturing jobs do occasionally return to some areas.
“There’s the big debate about incentive policy,” Harper said. “Every state has economic development policy in place, and it’s to stick it to the other states and steal their jobs. They want the pepperoni off of everybody else’s pizza.”
In Florida, Gov. Rick Scott has been very aggressive in seeking incentive money, while locally UWF has administrated the oil spill recovery funds that have led to businesses relocating and expanding in our area.
“Incentives are popular, and I don’t see them going away anytime soon,” Harper said. “But, it will be a happy day when Florida is indispensable to any major employer because they look at each other and say, ‘You know, we’ve got to have the high-skilled workforce even though they cost more in Florida. They’re worth it.’ That will be the day we’ve achieved good economic development.”
While manufacturing grew, the U.S. trade deficit widened to $42.6 billion in October.
“There hasn’t consistently been a trade surplus since the ’60s in the U.S. That’s because we have a lower saving rate than the rest of the world – we’re a nation that tends to spend our income when we get it,” Harper said. “Part of that income goes to purchase imported stuff, and as long as we have a saving rate that’s below the average of the rest of the world, we’re going to be a trade deficit nation.”
Harper said because of this, the trade deficit will continue to rise.
“That’s what happens when we buy goods from other nations and we pay for them with dollars. Those dollars get paid to the people who manufacture this stuff, and they turn it into their home currency,” Harper said. “But somebody’s got a lot of extra dollars – about a half trillion a year in the world economy – to pay for the excess goods and services that Americans consume.”
The expansionary policies of the incoming Trump administration, such as spending on infrastructure with the country at near full employment, will increase growth in the U.S and strengthen the dollar, which will lead to an increased trade deficit.
“When the dollar is strong, you can afford that German sports car you’ve been looking at, or you can afford that expensive imported wine from France,” he said. “I don’t see the trade deficit going down anytime soon, although if we could get a lot of manufacturing exports going from the U.S., that would help bring down the trade deficit.”
Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at firstname.lastname@example.org. CREO staff writer Mike Ensley contributed to this report. He can be reached at email@example.com.
This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.