A circular problem – capital spending decision-making and unemployment

Snippet #1: There is no good solution to this manufacturing job loss issue that I can think of in the current economic environment, where ‘a job in the hand may be worth as much as five jobs in the bush’. Essentially, while such behavior on the part of plant personnel is understandable – who wants to go ‘out on a limb’ to have it break off and ‘fall’ – it is counterproductive to, and inconsistent with, economic stability and perhaps recovery.

Snippet #2: China continues to be dependent on its export markets (read the Eurozone and the United States), and is some distance from being a self-sustaining economy. The old saying ‘when America sneezes the rest of the world catches a cold’ can be easily adapted to say ‘when the Eurozone and the United States catch a cold, China could catch pneumonia’. Snippet #3: Greece officials have now blinked by approving Greece’s required 11.5 billion euro austerity program. That is hardly likely to be a big deal, but rather just a minor postponement before the Greek austerity ‘rubber hits the road’.

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Today’s Detailed Commentaries World >> Employment: A circular problem – capital spending decision-making and unemployment Why read: Because this problem is real, and is ‘real important’. Commentary: A friend of mine has a business that manufactures and supplies specialized industrial equipment where:

• his customer base is largely comprised of American and Canadian Fortune 500 multi-plant companies controlled by head offices that operate in the chemicals, food, mining, and plastics sectors;
• the price of each of the principal units he sells averages about Cdn$75,000;
• there is both a large amount of knowhow and a proprietary component to the equipment sold;
• individual orders (comprising multiple units and related ‘systems’) can range up to Cdn$500,000 and higher;
• when in place and operating, the units and accompanying software typically have a payback of less than 18 months and usually a much shorter payback time than that; and,
• a portion of that payback relates to labour savings, as installation typically results in the purchaser plant requiring at least one less worker per unit installed.

My friend recently told me that he is increasingly running into the following problem:

• his typical project is analyzed for return on investment at the plant level, but must then be approved at head office;
• he is finding that even where production efficiencies and plant saving are obvious, he is having difficulty – particularly with persons employed in plants in the United States – getting them to forward their ‘approved analysis’ to their head offices for final approval; and,
• he has been told in some instances ‘in so many words’ by plant personnel that they are ‘concerned for their jobs’ in the current economic environment.

To the extent this is a fair summary of what I was told, clearly there is ‘negative economic circularity’ at work (no pun intended) here. There is no good solution to this that I can think of in the current economic environment, where ‘a job in the hand may be worth as much as five jobs in the bush’. Essentially, while such behavior on the part of plant personnel is understandable – who wants to go ‘out on a limb’ to have it break off and ‘fall’ – it is counterproductive to, and inconsistent with, economic stability and perhaps recovery. Brief Commentaries prompted by world headlines Asia >> China: Is China catching pneumonia? The official Chinese Purchasing Managers’ Index is reported as having fallen very slightly in July to 50.1, staying just above 50, the number said to separate growth from contraction. A second index that measures overall Chinese manufacturing activity rose in July from 48.2 to 49.3. Concurrently, manufacturing contraction is said to be increasing elsewhere in Asia. While I am not sure, given they register only one-month changes, these numbers mean very much in and of themselves. Moreover, who really knows how valid they are, other than to say they are ‘what is available’. That said, China continues to be dependant on its export markets (read the Eurozone and the United States), and is some distance from being a self-sustaining economy. The old saying ‘when America sneezes the rest of the world catches a cold’ can be easily adapted to say ‘when the Eurozone and the United States catch a cold, China could catch pneumonia’. Monitor this closely. Topical Reference: China manufacturing slows in July, from The Telegraph, August 1, 2012 – reading time 4 minutes. Eurozone >> Greece: Postponing the inevitable Last Friday I said that I expected Greece to find the incremental 1.5 billion euros of the necessary 11.5 billion euros in austerity that they had to that point failed to agree upon – but needed to satisfy their prior Eurozone funding agreement. Yesterday they did that, although Greek officials still think they will have an opportunity to negotiate a time extension to the realization of the austerity measures imposed on them. So Greece officials have now blinked. That is hardly likely to be a big deal, but rather just a minor postponement before the Greek austerity ‘rubber hits the road’. Topical Reference: Greek leaders reach austerity deal, from The Financial Post, from Reuters, August 1, 2012 – reading time 1 minute. North America >> United States: Early unofficial July jobs report In a ‘jobs report’ that precedes the more comprehensive U.S. Government’s jobs report, an ADP National Employment Report yesterday said U.S. private employers had created 163,000 net new jobs in July. The ADP report has averaged a difference of 50,000 jobs per month from the official U.S. Government combined private and public sector ‘non-farm payrolls’ report. That report is expected tomorrow, and is expected to report net July jobs gains of 100,000, and no change to the U.S. 8.2% ‘official’ unemployment rate. Watch for tomorrow’s ‘official’ U.S. jobs report, given its broad importance, and likely importance in the ongoing U.S. Presidential election ‘back and forths’ between the Obama and Romney political camps. The ADP (Automatic Data Processing, a provider of business outsourcing) report is a measure of non-farm private sector employment obtained by utilizing an anonymous subset of roughly 500,000 U.S. business clients of ADP (Wikipedia). Topical Reference: Companies add 163,000 jobs, but manufacturing falters, from Reuters, Leah Schnurr, August 1, 2012 – reading time 2 minutes. North America >> United States: More Iranian Sanctions The U.S. – Iran verbal confrontation is far from over. Earlier this week the U.S. House and Senate were reported to have agreed on new sanctions and punitive measures related to Iran’s suspected nuclear weapons strategy. You might consider reading the referenced article. While Iran technically is part of Asia, it and the Middle East countries are geographies of particular concern in the overall scheme of things – or at least so I think. Topical Reference: Congress Agrees On A New Round Of Sanctions Targeting Iran, from Business Insider, from AP, July 30, 2012 – reading time 4 minutes.