Much of the news chatter over the last month has been about the pressure being put on China to revalue the renminbi. While it can easily be argued that China is manipulating its currency, there will be losers if the yuan begins to rise.
One major loser will be companies selling consumer hard goods in the U.S. (we don’t buy much food from China). If the renminbi rises it will cost more U.S. dollars to produce goods in China. That could mean higher prices for American consumers at a period in time when they can ill afford it. Another scenario could see Wal-Mart and its retail brethren holding their price points firm thereby squeezing the margins for U.S. consumer hard goods makers. U.S. companies will then try to beat the difference out of Chinese factories that are already operating on razor thin margins. Arguably, this was a major contributing cause for the product quality problems of 2007.
While American politicians are naturally jabbering about jobs during the current period of high unemployment; the reality is that a rise in the yuan won’t help U.S. job growth as much as advertised. China is the final assembly point for the global economy. If the yuan rises that will increase its purchasing power making it that much “cheaper” to buy natural resources and components from Korea, Malaysia, Australia etc. That will make manufacturing in China even more attractive. On the other hand, thousands of U.S. consumer goods companies may have their margins squeezed making it that much more difficult for them to hire additional employees.
The Obama administration has said that it wants to double U.S. exports over the next five years with a particular emphasis on large developing countries especially China. Since China doesn’t currently have a very large consumer economy that means we’re talking about great big stuff – infrastructure projects that benefit the likes of General Electric, Caterpillar and Bechtel. Certainly global behemoths like these are capable of making larger political donations than ABC Toy Company. Coincidentally(?), they also tend to have large unionized workforces. It’s above my pay grade to say whether we should pressure China to stop manipulating its currency or trade sales and marketing jobs for union jobs. I’m just saying that there will be winners and losers. That’s the way the world rolls.
Meanwhile, back on the unemployment front; the job market is showing signs of life. Employers added 162,000 jobs in March, but almost one third of the growth came from the government hiring temporary workers for the census (in order to pave the way for the next round of gerrymandering?). While the headline unemployment rate (U3) has remained flat at 9.7% for the last three months; U6 (which includes the underemployed and discouraged workers) has started to creep upward from 16.5% to 16.8% and finally 16.9%. This is mainly a result of people who previously weren’t even bothering to look for work who are now beginning to restart their job searches as they begin to feel that the climate is getting a little bit better.
Indeed, there’s a good chance that we’re at the inflection point for unemployment. Increased demand on top of steep cost cutting (people) during the recession has meant a swift rebound in corporate profits. The level of profits economy-wide remains below the 2006 peak but accelerated sharply late last year. In the third quarter after-tax profits jumped 12.7% from the prior period. It is widely thought that when we get the government data, there will be similar strength in the fourth quarter of 2009 and in the just ended first quarter of 2010.
A recent surge in the hiring of temporary workers, often a precursor to full-time positions, also bodes well. Employment of temps has jumped by 248,000 since October; a 15% gain that is one of the strongest rebounds ever.
UPS, Federal Express and many trucking and rail companies have seen business activity picking up sharply. UPS reported last week that during the first quarter not only had their international business grown rapidly but that US domestic volumes grew for the first time in two years. Transportation activity has started to turn but remains well below previous levels meaning there is significant room for expansion. That seems to indicate that manufacturers and retailers (!) are still far from completing inventory restocking.
In March, the consumer seems to have rejoined the party. Consumers have shed an increasing amount of debt through defaults and government incentives for banks to forgive mortgage principal. Economists now expect consumer spending to grow at an annualized rate of 3% in the first quarter. In March there was a 1.6% surge in retail sales as shoppers turned up in surprising numbers at stores, auto dealers and restaurants.
Anecdotally, just as spring weather suddenly hit us in the second week of March, too the job market seemed to blossom as our phones started ringing off the hooks with companies inquiring about new search starts. All this is very hopeful but we can’t eat hope. Most of the toy company executives I speak with are feeling pretty good about 2010 but they remain cautious. They “think” that they’re going to have a pretty good year but they won’t “know” it until August/September. That is traditionally a time when hiring jumps in the toy industry and I expect a big pickup in activity then. In the meantime, while the climate is certainly not good; things are getting better faster. KGOY? TGBF!
Still cautiously muddling thru but breathing a little easier,