Worse yet, per capita income in the US is headed downward or will remain stagnant for a long time. Globalization means cheaper goods from international sources. Healthcare costs are headed up more everyday. That means extreme pressures on the wage earner to accept lower pay and fewer benefits to keep a job.
Bad enough for the US consumer, but the rest of the world will also be headed for trouble. It is vulnerable to the coming US downturn. Europe is already in a recession. Japan has been experiencing sustained deflation. India and China have been booming based on overstretched US demand soon to end. Africa is booming in small ways and maybe one of the few places left to invest in a bull market.
Stephen Roach has details on the expected impact on Asia, and their reluctance to accept the inevitable.
Job and income insecurity is still a big deal throughout Asia. That’s true in Japan, where the work force is still coping with a new social contract --- the demise of lifetime employment. It’s also the case in China, with ongoing headcount reductions in state-owned enterprises of some 8-10 million per year. In China, worker/consumer insecurities are exacerbated by the absence of a well-developed safety net, with little support from unemployment insurance, worker retraining programs, private pensions, and national social security. That pretty much says it all: Lacking in domestic consumption growth, Asia has had little choice but to go back to the well and do what it has long done best -- opt for another dose of externally led growth.
[...]
Most Asians react with sheer disbelief when I even dare to mention the possible demise of the American consumer. Never mind the juxtaposition between excess US consumption and subpar wage income generation: Consumer outlays have surged to a record 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period, while real private sector wage and salary disbursements are up only 5% in the first 39 months of this recovery versus a 15% average increase in the five previous cycles. Nor do Asians want to hear about the excesses of the household debt cycle -- in terms of the record stock of indebtedness as a share of GDP as well as debt service payments that are near historical highs in an historically low interest rate climate. Believe it or not, one client out here was so angry with me he actually tore my chart of the vanishing personal saving rate into tiny little pieces. Asians want to believe that the income-short, saving-short, overly indebted, asset-dependent American consumer will never stop spending.
Yet in the end, there can be no mistaking the central role played by excess consumption in defining America’s current account problem: With US imports fully 61% higher than exports (as of February 2005), the only conceivable way to correct the external deficit is by a reduction in consumption-driven imports. For Asia, that spells serious trouble: If you are a believer in the coming US current account adjustment, Asia’s most important growth prop is about to meet its demise. Lacking in domestic consumption, Asia’s only hope may be nothing more than wishful thinking.
US Wages in Trouble | Steve Roach On Asia
Falling Fortunes of the Wage Earner
By Steve Greenhouse
The New York times
Tuesday 12 April 2005
Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans. But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come.
Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade.
"Pay increases are not rebounding, even though the factors normally associated with higher pay have rebounded," said Peter LeBlanc of Sibson Consulting, a division of Segal, a human resources consulting firm.
The problem is not with the jobs themselves. Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off.
"We're in for a long period where inflation-adjusted wages will be under acute pressure," said Stephen S. Roach of Morgan Stanley. "That's a most unusual development in a period of high productivity growth. Normally, real wages track productivity."
But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market.
"What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase," said Allan H. Meltzer, an economist at Carnegie Mellon University. "I think the long-term trend will be that wages will right themselves and look like productivity growth on average."
The most commonly used yardstick of wages - the Bureau of Labor Statistics' measure of nonsupervisory private-sector workers, covering 80 percent of the labor force - fell 0.5 percent last year, after inflation. Real wages for these workers are now lower, on average, than two years ago. A broader measure, the employment cost index, which includes supervisors, managers and most government workers, dropped 0.9 percent.
At a Sprint call center in North Carolina, 180 customer service representatives are well aware of how such forces are squeezing them. Their jobs have not migrated overseas, but the employees just concluded their most bruising battle ever over wages.
(Graphic: The New York Times)
The Sprint workers in Fayetteville emerged from negotiations that lasted months with a contract that left them with a pay freeze for last year and no definite increase for 2005. While the best performers are promised 2 percent merit raises, even those are likely to lag inflation.
"It's like their wages are in a severe coma," said Rocky Barnes, president of the union local. "Sprint said they had to restrain wages because the company's performance wasn't so good, but we think a lot of it has to do with offshoring."
Sandra J. Price, a Sprint vice president, took issue with union leaders. She said Sprint sought the freeze not because of low-wage competition overseas, but because benefit costs were soaring and the company felt the call center's compensation was generous for the area.
Whatever the explanation for Sprint's action, many economists, liberal and conservative, are perplexed by two unusual trends. Wage growth has trailed far behind productivity growth over the last four years, and the share of national income going to employee compensation is low by historic standards.
Mr. Roach of Morgan Stanley said wages were being held down by foreign competition; corporations that are moving jobs offshore; the uncertainty of businesses over demand; and management's ability to substitute computers and other devices to replace workers.
"These factors aren't going to go away," he said. "The competitive pressures for companies to hold the line on labor costs are intense, and the alternatives they have - technological substitution and offshoring labor - are growing."
The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more.
The upper-income group enjoyed strong pay increases largely because of bonuses, stock options and other inducements and because of robust demand in certain fields, like law and investment banking.
J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations.
"You'd think that with the unemployment rate near 5 percent and productivity growth so strong, employers would be anxious to raise payrolls and would have plenty of headroom to raise wages," he said. "But they're not."
Since 2001, when the recovery began, productivity growth has averaged 4.1 percent a year; overall compensation - wages and benefits - has risen about one-third as fast, by 1.5 percent a year on average. By contrast, over the previous seven business cycles, productivity rose by 2.5 percent a year on average while compensation rose roughly three-fourths as fast, by 1.8 percent a year.
"The question is not whether corporations are seeking higher profits; the question is how come they're getting them to such a degree at the expense of compensation," said Jared Bernstein, an economist with the Economic Policy Institute. "I'm struck at how successful they've been at restraining labor costs."
Labor unions' declining bargaining power has given corporations a stronger hand to hold down wages, he argued, but more recent trends, including the emergence of Wal-Mart Stores as a central force in the economy, now play crucial roles, too.
(Graphic: The New York Timrs)
Laurie Piazza, a Safeway cashier in Santa Clara, Calif., said she reluctantly voted to approve a pay freeze in the first two years of her union's three-year contract because Safeway insisted that it needed to hold down costs to compete with Wal-Mart. Her take-home pay will fall $20 a week because the contract reduces the premium for working on Sundays to 33 percent of regular pay, from 50 percent.
"We tried to get weekly pay increases, but the company wouldn't do it," said Ms. Piazza, who earns $19 an hour after 18 years on the job. "I think Wal-Mart has a lot to do with this. They're setting the model."
With Wal-Mart moving aggressively into California with supercenters, Safeway officials say they need to clamp down on what they consider high labor costs to meet the challenge.
Last year's double-digit rise in health costs helped squeeze wages as well; many companies also required employees to cover more of the premiums out of their own pay.
"Benefit costs are rising fairly substantially, and that may explain the tendency to hold down wages," said Sylvester J. Schieber of Watson Wyatt, a human resources consulting firm. "If you throw an extra 10 percent into your health plan, that can suck 1 percent out of your budget for compensation."
Many executives say they are offering raises that do not exceed inflation. Pitney Bowes, which provides mail and document-management systems, plans to offer merit raises averaging 3 percent this year, about equal to the expected inflation rate, compared with recent merit raises, also in line with inflation, averaging 2 percent to 2.5 percent.
"The past couple of years we've maintained a moderation of our wages," said Johnna G. Torsone, the company's chief human resources officer, who noted that the company has had to greatly increase spending on health and pensions.
While agreeing that these factors are important, Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages.
"Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected," he said.
Facing intense foreign competition, Delphi, the auto parts manufacturer, has decided against any merit raises this year for its salaried workers. And at its air bag and door panel factory in Vandalia, Ohio, it persuaded unionized workers to accept a three-year pay freeze, warning that the plant would be closed otherwise.
"The majority of workers felt they had to agree to this," said Earl Shepard of the United Steelworkers local in Vandalia. "People here say the big problem is competition from Asia."
Lindsey C. Williams, a Delphi spokesman, said the company was seeking to keep the Vandalia factory "viable" and was working with the union.
Many economists say the nation may be returning to a period like 1973 to 1996, when inflation-adjusted wages stagnated or rose glacially. That era was a reversal from the golden years of 1947 to 1973, when wages marched steadily upward.
From 1996 to 2001, wages grew strongly again because of an unusually low jobless rate, caused in part by the high-technology boom. In the late 1990's, the tight labor market pressured companies to give sizable raises to attract and retain workers even as a surge in productivity helped business afford them without substantially cutting into profits.
Thomas A. Kochan, an economist at the Massachusetts Institute of Technology, said wages could once again rise, but only if there was especially robust economic growth.
"To produce real wage gains now, it takes sustaining a very tight labor market," he said. "Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages."
Global: Asia's Only Hope
Stephen Roach (from Seoul)
Here in Asia (again), they have only one question for me: How’s the American consumer? For a region lacking in self-sustaining internal demand, this concern is understandable. More than ever, externally led Asian economies remain a levered play on US consumption. Therein lies Asia’s biggest pitfall: If the American consumer ever fades, Asia could be headed for serious trouble. The coming US current account adjustment offers good reason to worry about just such a possibility.
The good news is that Asia has learned many of the painful lessons of the wrenching 1997-98 financial crisis. In general, the region has done a very good job of repairing its balance sheets and reorienting some of its most misguided policies. Specifically, that means current account deficits have given way to surpluses. Foreign exchange reserves have been rebuilt in an especially dramatic fashion. Currency pegs -- with a few obvious exceptions -- have been replaced by more flexible foreign exchange mechanisms. Moreover, reliance on the most fragile form of external funding -- the “hit money†of short-term capital inflows -- has been sharply reduced. And for some countries, there has been meaningful progress on the corporate restructuring and labor market reform fronts. All of these developments are unequivocally good news for what I believe is still the most dynamic region of the global economy.
The bad news is that the next crisis is never like the last one. As a result, it follows that backward-looking fixes are no guarantee that new and different problems will be avoided in the future. For Asia, that remains the biggest challenge of all. Particularly worrisome in that regard is the region’s unbalanced growth model -- an externally led macro dynamic that is still lacking in meaningful support from internal private consumption. What that means, of course, is that the region is highly vulnerable to a growth shortfall in foreign economies. In a US-centric global economy, that spells one thing -- over-reliance on the over-extended American consumer. Should the US consumer cave -- a distinct possibility in the event of a long overdue current account adjustment -- Asia would be toast.
A decomposition of the sources of Asian growth leaves little doubt as to the region’s lack of autonomous support from internal demand. In Japan, real domestic demand growth has averaged a mere 0.9% over the past five years, with gains in private consumption averaging 0.8% over the same period. By contrast, growth in Japanese exports averaged 7.4% over the 2000-04 period. Our Japan forecast for 2004 sees this pattern worsening -- only a 0.4% increase in private consumption versus 0.7% growth expected for overall Japanese GDP. For non-Japan Asia, there can be no mistaking the region’s reliance on exports as the main driver of growth: Over the past five years, our calculations show, annual export growth in the region averaged 15.3%, more than triple the 4.9% pace of private consumption. Our forecasts over the 2005-06 period call for more of the same -- 10.5% average export growth in non-Japan Asia versus 4.1% consumption growth. Nor is China any different from the rest of the pack, with private household consumption falling to a record low of 42% of GDP in 2004. Compare that with America’s 71% record at the other end of the spectrum. China remains very much an export-driven growth machine, with the export share of GDP having soared from 20% in 1999 to 35% in 2004. Moreover, China’s investment bubble -- with fixed investment likely to exceed 50% of GDP this year -- is also an outgrowth of outward-oriented industrialization and infrastructure.
These findings are consistent with a recent study put out by the Asia Development Bank that uses a “growth accounting†framework to isolate the sources of growth in five Asian economies -- China, India, Korea, the Philippines, and Thailand (see Chapter 5 in the Asian Development Outlook 2005, “Export or domestic demand-led growth in developing Asia?â€). The ADB finds no compelling evidence of a post-crisis Asia that has shifted its growth dynamic from external to internal sources. In the parlance of the ADB, the long-awaited hopes of such “growth switching†remain more hype than reality.
I spent a fair amount of time discussing this problem with some of the wise men of Seoul. They, too, have been puzzled by the case of the missing Asian consumer. In the aftermath of what Korea still calls the IMF crisis, Korean macro policy did its best to support private consumption. Unfortunately, the stimulus backfired -- leading to credit and property bubbles that are now taking a serious toll on the nation’s consumer. Our Asian team is looking for a mere 1.9% average growth in real consumption in Korea over the 2005-06 period -- literally half the average gains of 3.8% during the five-year 2000-04 interval. In addition to post-bubble aftershocks, Korea’s experts pointed to several other key factors at work in constraining private consumption: a stagnant labor market with the unemployment rate holding around 3.5% since mid-2003 -- high by Korean standards; a growing profusion of temporary workers, which now make up about half of those on total business payrolls; and offshore job and income leakages that have arisen from Korea’s heavy foreign direct investment in China.
Nor is Korea an isolated example. Job and income insecurity is still a big deal throughout Asia. That’s true in Japan, where the work force is still coping with a new social contract --- the demise of lifetime employment. It’s also the case in China, with ongoing headcount reductions in state-owned enterprises of some 8-10 million per year. In China, worker/consumer insecurities are exacerbated by the absence of a well-developed safety net, with little support from unemployment insurance, worker retraining programs, private pensions, and national social security. That pretty much says it all: Lacking in domestic consumption growth, Asia has had little choice but to go back to the well and do what it has long done best -- opt for another dose of externally led growth.
Little wonder Asians now have a new edge in their voices when they ask me about the fate of the American consumer. Largely by default, it’s the region’s most important source of growth. That’s especially the case in China, where fully one-third of the country’s exports now go to the US. And it’s also the case elsewhere in Asia, which has become an important cog in the supply chain for China’s US-centric export dynamic. That’s particularly true in Taiwan, Japan, and Korea, where the growth of exports to China has been most impressive over the past couple of years.
Needles to say, my message has not been received with open arms as I travel through this region. Most Asians react with sheer disbelief when I even dare to mention the possible demise of the American consumer. Never mind the juxtaposition between excess US consumption and subpar wage income generation: Consumer outlays have surged to a record 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period, while real private sector wage and salary disbursements are up only 5% in the first 39 months of this recovery versus a 15% average increase in the five previous cycles. Nor do Asians want to hear about the excesses of the household debt cycle -- in terms of the record stock of indebtedness as a share of GDP as well as debt service payments that are near historical highs in an historically low interest rate climate. Believe it or not, one client out here was so angry with me he actually tore my chart of the vanishing personal saving rate into tiny little pieces. Asians want to believe that the income-short, saving-short, overly indebted, asset-dependent American consumer will never stop spending.
Yet in the end, there can be no mistaking the central role played by excess consumption in defining America’s current account problem: With US imports fully 61% higher than exports (as of February 2005), the only conceivable way to correct the external deficit is by a reduction in consumption-driven imports. For Asia, that spells serious trouble: If you are a believer in the coming US current account adjustment, Asia’s most important growth prop is about to meet its demise. Lacking in domestic consumption, Asia’s only hope may be nothing more than wishful thinking.
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