U.S. Economy Leads While Rest of World Struggles

Published November 11, 2014

Policy analysts and pundits alike seem to enjoy downplaying the U.S. economy’s recovery since the recession of 2009, especially in light of the recent announcement that China has become the world’s biggest economy. It is time for them to wake up and smell the roses: the U.S. economy clearly is the dominant economy of the world, while the European Union’s death rattle continues, and China is encountering a litany of unforeseen problems.
The U.S. economy is holding up well. Industrial production is at its highest point since 2008. Although our manufacturing firms are not producing at full capacity, many are producing at 60 to 80 percent of capacity, and increasing.

Jobless claims are at their lowest since 2000; as a share of the U.S. labor force, unemployment claims are at their lowest point since record-keeping began in the 1970s. Manufacturing payrolls are increasing steadily, and more than 200,000 new jobs have been created every month.  Although too much of the unemployment decrease is attributable to people leaving the workforce at record rates, that is a result of national-level economic policy decisions that could be revoked with a change of presidential administrations.

Bright U.S. Outlook
Declining gas prices should be a boon to consumers and retailers, although oil stocks will take a hit. According to the Energy Information Administration, the amount of oil and gas produced from every modern well has increased by 300 percent over the past four years, thanks to advancing technology.
Discretionary spending by consumers also appears to be on the rise. People are buying large ranch houses, and the Harley-Davidson company reports large increases in the sale of its motorcycles. Additionally, the company reports 71 percent of its sales are now in the United States.
The 18 Eurozone countries, by contrast, are experiencing economic contraction, with output below that of 2011, as reported by the European Commission. They still blame it all on the recession of 2008.

In fact, with few exceptions, these countries are spending more on government as a share of GDP than before. Brian Wesbury reported in an October 15 article in The Wall Street Journal, “Euro area government spending was 49.8 % of GDP in 2013 versus 46.7 in 2006.” At a time when they should be on an austerity kick, they are on a spending binge.
In October 2014, I had the opportunity to visit Austria, Belgium, France, Germany, Holland, and Luxembourg, giving speeches about their local economy. They appear to be oblivious to their long-term problems.

European Woes
Germany, once the economic guiding light of Europe, has seen its growth grind to a halt as renewable energy investment is causing many manufacturers to become economically uncompetitive. We are likely to see many new European manufacturing plants built in the United States in the near future, to take advantage of energy costs—often 70 percent lower than in their native countries.
Italy’s efforts to reform its organized labor laws have been met with huge protests in the streets. Older workers receive protections against being fired, laid off, or disciplined, regardless of poor performance. In France, companies cannot close a factory without first finding new jobs for all its workers.
While a poor European economy does create a drag on the U.S. economy, that drag is small.

Josh Zumbrun, writing in The Wall Street Journal on October 21, noted, “Among major economies the U.S. is less reliant on export demand from overseas. Exports account for only about 14% of U.S. gross domestic product.”
Wrong Way in China
We have gotten used to hearing China would overtake the U.S. economy, and that has technically come to pass, but only because China’s population is three times as big as ours. On a per capita basis, which is what counts in regard to how people actually live, the U.S. economy is much larger by far.

Economic growth in China has slowed significantly, and labor costs there are rising rapidly. Chinese businesses have run into banking problems, with an uptick in nonperforming loans, and corporate and domestic debt has risen from 120 percent of GDP to 170 percent. China’s domestic economic consumption is only 36 percent of GDP, whereas ours is 70 percent.
Due to a low birth rate, China’s labor force is expected to decline by 67 million people in the next 15 years, likely pushing manufacturing to other countries as labor costs rise further due to simple supply and demand considerations.

Many Chinese families choose to have no children, so it may take at least two generations to create an adequate stream of workers.

U.S. in Driver’s Seat
Once the United States realizes it is in the “driver’s seat” of the world economy, companies will hire more people, and unemployment will continue to fall.

If we have one real economic problem, it is that today’s jobs require more skills than are being taught in our public schools. Further economic growth is going to require an improvement in our public education system.

In all, however, we in the United States have the potential for a great economic future for years, if not decades, to come.
Jay Lehr, Ph.D. ([email protected]) is science director at The Heartland Institute.