Wednesday, December 4, 2013

The Money Changers Serenade: A New Plot Hatches

Former Treasury Secretary Timothy Geithner, a protege of Treasury Secretaries Rubin and Summers, has received his reward for continuing the Rubin-Summers-Paulson policy of supporting the “banks too big to fail” at the expense of the economy and American people. For his service to the handful of gigantic banks, whose existence attests to the fact that the Anti-Trust Act is a dead-letter law, Geithner has been appointed president and managing director of the private equity firm, Warburg Pincus and is on his way to his fortune.
A Warburg in-law financed Woodrow Wilson’s presidential campaign. Part of the reward was Wilson’s appointment of Paul Warburg to the first Federal Reserve Board. The symbiotic relationship between presidents and bankers has continued ever since. The same small clique continues to wield financial power.
Geithner’s career is illustrative. In the 1980s, Geithner worked for Kissinger Associates. In the mid to late 1990s, Geithner served as a deputy assistant Treasury secretary. Under Rubin and Summers he moved up to undersecretary of the Treasury.
From the Treasury he went to the Council on Foreign Relations and from there to the International Monetary Fund (IMF). From there he was appointed president of the Federal Reserve Bank of New York, where he worked to make banks more profitable by allowing higher ratios of debt to capital, thus contributing to the financial crisis.
Geithner arranged the sale of the failed Wall Street firm of Bear Stearns, helped with the taxpayer bailout of AIG, and rejected saving Lehman Brothers from bankruptcy in order to create the crisis atmosphere needed to more fully subordinate US economic policy to the needs of the few large banks.
Rubin, a 26-year veteran of Goldman Sachs, was rewarded by Citibank for his service to the banks while Treasury Secretary with a $50 million compensation package in 2008 and $126,000,000 between 1999 and 2009.
When a person becomes a Treasury official it is made clear that the choice is between serving the banks and becoming rich or trying to serve the public and becoming poor. Few make the latter choice.
As MIchael Hudson has informed us, the goal of the financial sector has always been to convert all income, from corporate profits to government tax revenues, to the service of debt. From the bankers standpoint, the more debt the richer the bankers. Rubin, Summers, Paulson, Geithner, and now banker Treasury Secretary Jack Lew faithfully serve this goal.
The Federal Reserve describes its policy of Quantitative Easing — the creation of new money with which the Fed purchases Treasury debt and mortgage backed securities — as a low interest rate policy in order to stimulate employment and economic growth. Economists and the financial media have parroted this cover story.
In contrast, I have exposed QE as a scheme for pumping profits into the banks and boosting their balance sheets. The real purpose of QE is to drive up the prices of the debt-related derivatives on the banks’ books, thus keeping the banks with solvent balance sheets.
Writing in the Wall Street Journal (“Confessions of a Quantitative Easer,” November 11, 2013), Andrew Huszar confirms my explanation to be the correct one. Huszar is the Federal Reserve official who implemented the policy of QE. He resigned when he realized that the real purposes of QE was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with “fat commissions from brokering most of the Fed’s QE transactions.” (See: )
This vast con game remains unrecognized by Congress and the public. At the IMF Research Conference on November 8, 2013, former Treasury Secretary Larry Summers presented a plan to expand the con game.
Summers says that it is not enough merely to give the banks interest free money. More should be done for the banks. Instead of being paid interest on their bank deposits, people should be penalized for keeping their money in banks instead of spending it.
To sell this new rip-off scheme, Summers has conjured up an explanation based on the crude and discredited Keynesianism of the 1940s that explained the Great Depression as a problem caused by too much savings. Instead of spending their money, people hoarded it, thus causing aggregate demand and employment to fall.
Summers says that today the problem of too much saving has reappeared. The centerpiece of his argument is “the natural interest rate,” defined as the interest rate at which full employment is established by the equality of saving with investment. If people save more than investors invest, the saved money will not find its way back into the economy, and output and employment will fall.
Summers notes that despite a zero real rate of interest, there is still substantial unemployment. In other words, not even a zero rate of interest can reduce saving to the level of investment, thus frustrating a full employment recovery. Summers concludes that the natural rate of interest has become negative and is stuck below zero.
How to fix this? The way to fix it, Summers says, is to charge people for saving money. To avoid the charges, people would spend the money, thus reducing savings to the level of investment and restoring full employment.
Summers acknowledges that the problem with his solution is that people would take their money out of banks and hoard it in cash holdings. In other words, the cash form of money provides consumers with a freedom to save that holds down consumption and prevents full employment.
Summers has a fix for this: eliminate the freedom by imposing a cashless society where the only money is electronic. As electronic money cannot be hoarded except in bank deposits, penalties can be imposed that force unproductive savings into consumption.
Summers’ scheme, of course, is a harebrained one. With governments running huge deficits, who would purchase bonds at negative interest rates? How would pension and retirement funds operate? Would they also be subject to an annual percentage confiscation?
We know that the response of consumers to the long term decline in real median family income, to the loss of jobs from labor arbitrage across national borders (jobs offshoring), to rising homelessness, to cuts in the social safety net, to the transformation of their full time jobs to part time jobs (employers’ response to Obamacare), has been to reduce their savings rate. Indeed, few have any savings at all. The US personal saving rate is currently 2 percentage points, about 30%, below the long term average. Retired people, unable to earn any interest on their savings from the Fed’s zero interest rate policy, are being forced to draw down their savings in order to pay their bills.
Moreover, it is unclear whether the savings rate is an accurate measure or merely a residual of other calculations. With so many people having to draw down their savings, I wouldn’t be surprised if an accurate measure showed the personal savings rate to be negative.
But for Summers the plight of the consumer is not the problem. The problem is the profits of the banks. Summers has the solution, and the establishment, including Paul Krugman, is applauding it. Once the economy officially turns down again, watch out.

Federal Reserve and Wall Street Assassinate US Dollar

Since 2006, the US dollar has experienced a one-quarter to one-third drop in value to the Chinese yuan, depending on the choice of base.  
Now China is going to let the dollar decline further in value.  China also says it is considering undermining the petrodollar by pricing oil futures on the Shanghai Futures Exchange in yuan. This on top of the growing avoidance of the dollar to settle trade imbalances means that the dollar’s role as reserve currency is coming to an end, which means the termination of the US as financial bully and financial imperialist.  This blow to the dollar in addition to the blows delivered by jobs offshoring and the uncovered bets in the gambling casino created by financial deregulation means that the US economy as we knew it is coming to an end.
The US economy is already in shambles, with bond and stock markets propped up by massive and historically unprecedented Fed money printing pouring liquidity into financial asset prices.  This month at the IMF annual conference, former Treasury Secretary Larry Summers said that to achieve full employment in the US economy would require negative real interest rates.  Negative real interest rates could only be achieved by eliminating cash, moving to digital money that can only be kept in banks, and penalizing people for saving.
The future is developing precisely as I have been predicting.
As the dollar enters its death throes, the lawless Federal Reserve and the Wall Street criminals will increase their shorting of gold in the paper futures market, thereby driving the remnants of the West’s gold into Asian hands.
PBOC Says No Longer in China’s Interest to Increase Reserves
By Bloomberg News – Nov 20, 2013
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policymakers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting.

Drop in holiday sales reflects US social crisis

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US retail sales over the Thanksgiving weekend dropped for the first time in seven years, reflecting the impact of falling wages and mass unemployment on American households.
Sales fell 2.7 percent from a year ago, to $57.4 billion, according to preliminary figures from the National Association of Retailers. The drop in sales came even as a record number of people went shopping over the holiday weekend and stores opened earlier than ever on Thanksgiving Day.
The decline in sales came despite a single-minded focus by the media on the official launch of the holiday shopping season. On Thanksgiving eve, all three US broadcast networks led their evening news programs with enthusiastic reports of major retailers opening earlier in the day and consumers preparing to spend record amounts. The relentless media coverage was a transparent attempt to encourage people to flood the malls and increase spending.
The sales figures give the lie to the claim of the Obama administration and the media that the US is in the midst of a genuine economic recovery. They are an expression of the reality, covered up by the media, that the conditions of life for broad sections of the population have declined drastically and are continuing to deteriorate.
The unexpectedly poor sales figures sent tremors through US stock market on Monday, with the Dow Jones Industrial Average falling 77.64 points, the Standard &Poor’s 500 index declining nearly 5 points, and the NASDAQ dropping 14 points. Retailers were hit particularly hard by the sell-off, with JC Penney, Macy’s and Target each falling by 2 percent.
The sell-off points to the unsustainability of the stock market bubble that has been inflated by the Obama administration and the Federal Reserve through their easy money policies. Behind the orgy of profit-making on Wall Street there are fears that another financial collapse could be imminent. The reality is that the financial bubble rests on a real economy that continues to be mired in slump, both in the US and internationally.
“Consumers are stressed,” GameStop CEO Paul Raines told the Wall Street Journal. “They’re still under a lot of pressure from things like high unemployment. We see that in our business.”
The lagging sales figures came despite the fact that retailers such as Walmart, Macy’s and Target opened earlier than ever Thursday, forcing tens of thousands of retail employees to work during the Thanksgiving holiday.
Walmart and Target, which cater to lower-income shoppers, had reduced their earnings estimates earlier this year, citing falling wages, continued unemployment and declining consumer confidence.
Some 45 million people went shopping on Thursday, up 27 percent from last year, and foot traffic on Friday increased by 3.5 percent, to 92 million, according to figures from the National Retail Federation.
The holiday shopping season generally accounts for two fifths of retailers’ annual sales, with the Thanksgiving weekend representing between 10 and 15 percent of total holiday sales.
“This holiday season is not going to be a gangbuster,” Lindsey Piegza, chief economist of Sterne Agee, told the Los Angeles Times. “Retailers are bracing for declining activity from now to the beginning of the year.”
According to a separate survey, using a different methodology, conducted by Market researcher ShopperTrak, foot traffic at stores on Black Friday fell by 11 percent and sales were down by 13 percent, even though this was offset by increased sales on Thursday.
The disastrous sales figures underscore the widening chasm between the broad mass of the American people and the financial elite. They come the same month that the Dow closed above 16,000 for the first time and the S&P 500 breached 1,800.
Between 2007 and 2012, median household income in the United States plummeted by 8.3 percent. The percentage of the US working-age population that has a job has fallen by 4.6 percent since 2008, while manufacturing wages have fallen 3 percent since May 2009.
The number of people receiving food stamps in the US grew from 28.2 million in 2008 to 47.7 million this year, an increase of 70 percent. This number continues to swell, with over 1 million new food stamp recipients added between 2012 and 2013.
The growth in stock values, on the other hand, has led to a corresponding growth in the wealth of the super-rich. The world’s billionaires have seen their combined net worth double in the past four years. Since 2009, the richest 1 percent in the US have captured 95 percent of all income gains, while the bottom 95 percent have seen their incomes stagnate.
So far this year, luxury retailers have largely been spared a drop in sales. Tiffany & Co., the high-end jewelry retailer, announced last week that its third-quarter sales had increased by 50 percent over the previous year. The company took in $94.6 million in the three months that ended in October, compared to $63.2 million a year ago. As a result, the company increased its sales estimates for the rest of the year.

Dollar Survival Behind US-China Tensions

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The escalation of military tensions between Washington and Beijing in the East China Sea is superficially over China’s unilateral declaration of an air defense zone. But the real reason for Washington’s ire is the recent Chinese announcement that it is planning to reduce its holdings of the US dollar.
That move to offload some of its 3.5 trillion in US dollar reserves combined with China’s increasing global trade in oil based on national currencies presents a mortal threat to the American petrodollar and the entire American economy. 

This threat to US viability - already teetering on bankruptcy, record debt and social meltdown - would explain why Washington has responded with such belligerence to China setting up an Air Defense Identification Zone (ADIZ) last week extending some 400 miles from its coast into the East China Sea. 

Beijing said the zone was aimed at halting intrusive military maneuvers by US spy planes over its territory. The US has been conducting military flights over Chinese territory for decades without giving Beijing the slightest notification. 

Back in April 2001, a Chinese fighter pilot was killed when his aircraft collided with a US spy plane. The American crew survived, but the incident sparked a diplomatic furor, with Beijing saying that it illustrated Washington’s unlawful and systematic violation of Chinese sovereignty. 

Within days of China’s announcement of its new ADIZ last week, the US sent two B52 bombers into the air space without giving the notification of flight paths required by Beijing. 

American allies Japan and South Korea also sent military aircraft in defiance of China. Washington dismissed the Chinese declared zone and asserted that the area was international air space. 

A second intrusion of China’s claimed air territory involved US surveillance planes and up to 10 Japanese American-made F-15 fighter jets. On that occasion, Beijing has responded more forcefully by scrambling SU-30 and J-10 warplanes, which tailed the offending foreign aircraft. 

Many analysts see the latest tensions as part of the ongoing dispute between China and Japan over the islands known, respectively, as the Diaoyu and Senkaku, located in the East China Sea. Both countries claim ownership. The islands are uninhabited but the surrounding sea is a rich fishing ground and the seabed is believed to contain huge reserves of oil and gas. 

By claiming the skies over the islands, China appears to be adding to its territorial rights to the contested islands. 

In a provocative warning to Beijing, American defense secretary Chuck Hagel this week reiterated that the decades-old US-Japan military pact covers any infringement by China of Japan’s claim on the Diaoyu/Senkaku Islands. 

It is hard to justify Washington and Tokyo’s stance on the issue. The islands are much nearer to China’s mainland (250 miles) compared with Japan’s (600 miles). China claims that the islands were part of its territory for centuries until Japan annexed them in 1895 during its imperialist expansion, which eventually led to an all-out invasion and war of aggression on China. 
Also, as Beijing points out, the US and its postwar Japanese ally both have declared their own air defense zones. It is indeed inconceivable that Chinese spy planes and bombers could encroach unannounced on the US West Coast without the Pentagon ordering fierce retaliation.
Furthermore, maps show that the American-backed air defense zone extending from Japan’s southern territory is way beyond any reasonable halfway limit between China and Japan. This American-backed arbitrary imposition on Chinese territorial sovereignty is thus seen as an arrogant convention, set up and maintained by Washington for decades. 

The US and its controlled news media are absurdly presenting Beijing’s newly declared air defense zone as China “flexing its muscles and stoking tensions.” And Washington is claiming that it is nobly defending its Japanese and South Korea allies from Chinese expansionism. 

However, it is the background move by China to ditch the US dollar that is most likely the real cause for Washington’s militarism towards Beijing. The apparent row over the air and sea territory, which China has sound rights to, is but the pretext for the US to mobilize its military and in effect threaten China with aggression. 

In recent years, China has been incrementally moving away from US financial hegemony. This hegemony is predicated on the US dollar being the world reserve currency and, by convention, the standard means of payment for international trade and in particular trade in oil. That arrangement is obsolete given the bankrupt state of the US economy. But it allows the US to continue bingeing on credit. 

China - the second biggest economy in the world and a top importer of oil - has or is seeking oil trading arrangements with its major suppliers, including Russia, Saudi Arabia, Iran and Venezuela, which will involve the exchange of national currencies. That development presents a grave threat to the petrodollar and its global reserve status. 

The latest move by Beijing on November 20 giving notice that it intends to shift its risky foreign exchange holdings of US Treasury notes for a mixture of other currencies is a harbinger that the 
American economy’s days are numbered, as Paul Craig Roberts noted last week. 

This is of course China’s lawful right to do so, as are its territorial claims. But, in the imperialist, megalomaniac mindset of Washington, the “threat” to the US economy and indebted way of life is perceived as a tacit act of war. That is why Washington is reacting so furiously and desperately to China’s newly declared air corridor. It is a pretext for the US to clench an iron fist.

New Wave of US Mortgage Trouble Threatens Banks

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U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks.
The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.

More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.

The number of borrowers missing payments around the 10-year point can double in their eleventh year, data from consumer credit agency Equifax shows. When the loans go bad, banks can lose an eye-popping 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

There are scenarios where everything works out fine. For example, if economic growth picks up, and home prices rise, borrowers may be able to refinance their main mortgage and their home equity lines of credit into a single new fixed-rate loan. Some borrowers would also be able to repay their loans by selling their homes into a strengthening market.


But some regulators, rating agencies, and analysts are alarmed. The U.S. Office of the Comptroller of the Currency, a regulator overseeing national banks, has been warning banks about the risk of home equity lines since the spring of 2012. It is pressing banks to quantify their risks and minimize them where possible.

At a conference last month in Washington, DC, Amy Crews Cutts, the chief economist at consumer credit agency Equifax, told mortgage bankers that an increase in tens of thousands of homeowners' monthly payments on these home equity lines is a pending "wave of disaster."

Banks marketed home equity lines of credit aggressively before the housing bubble burst, and consumers were all too happy to use these loans like a cheaper version of credit card debt, paying for vacations and cars.

The big banks, including Bank of America Corp., Wells Fargo & Co., Citigroup Inc., and JPMorgan Chase & Co. have more than $10 billion of these home equity lines of credit on their books each, and in some cases much more than that.

How bad home equity lines of credit end up being for banks will hinge on the percentage of loans that default. Analysts struggle to forecast that number.

In the best case scenario, losses will edge higher from current levels, and will be entirely manageable. But the worst case scenario for some banks could be bad, eating deeply into their earnings and potentially cutting into their equity levels at a time when banks are under pressure to boost capital levels.

"We just don't know how close people are until they ultimately do hit delinquencies," said Darrin Benhart, the deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. Banks can get some idea from updated credit scores, but "it's difficult to ferret that risk out," he said.

What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks, even seven years after it burst. By many measures the mortgage market has yet to recover: The federal government still backs nine out of every ten home loans, 4.6 million foreclosures have been completed, and borrowers with excellent credit scores are still being denied loans.


Banks have some options for reducing their losses. They can encourage borrowers to sign up for a workout program if they will not be able to make their payments. In some cases, they can change the terms of the lines of credit to allow borrowers to pay only interest on their loans for a longer period, or to take longer to repay principal.

A Bank of America spokesman said in a statement that the bank is reaching out to customers more than a year before they have to start repaying principal on their loans, to explain options for refinancing or modifying their loans.

But these measures will only help so much, said Crews Cutts.

"There's no easy out on this," she said.

Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising.

"These are very profitable at the beginning. People will take out these lines and make the early payments that are due," said Anthony Sanders, a professor of real estate finance at George Mason University who used to be a mortgage bond analyst at Deutsche Bank.

But after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping to $293.16 from $81.25, analysts from Fitch Ratings calculate.

That's why the loans are starting to look problematic: For home equity lines of credit made in 2003, missed payments have already started jumping.

Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That's a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.

This scenario will be increasingly common in the coming years: in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.

The Federal Reserve could start raising rates as soon as July 2015, interest-rate futures markets show, which would also lift borrowers' monthly payments. The rising payments that consumers face "is the single largest risk that impacts the home equity book in Citi Holdings," Citigroup finance chief John Gerspach said on an Oct. 16 conference call with analysts.

A high percentage of home equity lines of credit went to people with bad credit to begin with - over 16 percent of the home equity loans made in 2006, for example, went to people with credit scores below 659, seen by many banks as the dividing line between prime and subprime. In 2001, about 12 percent of home equity borrowers were subprime.

Banks are still getting hit by other mortgage problems too, most notably on the legal front. JPMorgan Chase & Co. last week agreed to a $13 billion settlement with the U.S. government over charges it overstated the quality of home loans it sold to investors.


Banks have differing exposure, and disclose varying levels of information, making it difficult to figure which is most exposed. The majority of home equity lines of credit are held by the biggest banks, said the OCC's Benhart.

At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an Oct. regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years.

At Wells Fargo, $4.5 billion of home equity balances will reset in 2014 and another $25.9 billion will reset between 2015 and 2017. At Citigroup, $1.3 billion in home equity lines of credit will reset in 2014 and another $14.8 billion will reset between 2015 and 2017.

Bank of America said that 9 percent of its outstanding home equity lines of credit that have reset were not performing. That kind of a figure would likely be manageable for big banks. But if home equity delinquencies rise to subprime-mortgage-like levels, it could spell trouble.

In terms of loan losses, "What we've seen so far is the tip of the iceberg. It's relatively low in relation to what's coming," Equifax's Crews Cuts said.

Wages Stagnate as U.S. Manufacturers Reap Record Profits

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Machinist Michael Pargeter reached for a reference to a TV cartoon set in the Stone Age to explain why union members were spurning a contract offer from Boeing Co. (BA)
Wages would be set “back to the Flintstones era” with a plan to slow future raises for new employees, Pargeter, 62, said outside a Seattle union hall last week while ballots were being counted, referring to an animated television show about prehistoric family life.
Boeing’s quest for concessions and employees’ opposition exposed a fault line in U.S. industry’s post-recession comeback: Even with hiringand output robust enough to be dubbed a manufacturing renaissance by President Barack Obama, workers are falling behind. Factory pay hasn’t kept pace with inflation and has fallen 3 percent on that basis since May 2009, while average pay for all wage earners slid only about 1 percent.
“We need to focus on how many jobs there are that give an adult a chance to earn a decent living,” said Gordon Lafer, an associate professor at the University of Oregon’s Labor Education and Research Center in Eugene. “Too much of the discussion has been about the number of jobs, and that’s obviously important, but there’s also a crisis in the quality of jobs.”
Boeing said it needed labor givebacks to keep the Seattle area as the home of the 777X jet, a new model with more than $95 billion in orders since September. Union workers said Boeing needed to share more of the wealth they help create.

U.S. Symbol

“This is really a symbol of what’s going on in this whole country,” said Machinist Thomas Campbell, 40. “We’re losing middle-class jobs.”
Where unions and their allies see reason for alarm, employers see a way to retain jobs against the lure of lower wages overseas. There were about 12 million U.S. factory jobs in October, buoyed by recent gains while still down 39 percent from 1979’s peak.
“We certainly have seen manufacturers become much more competitive,” said Chad Moutray, chief economist at the Washington-basedNational Association of Manufacturers. Falling labor costs have helped “keep U.S. manufacturers much more competitive and you’re seeing more investment in the U.S. as a result.”
Related News:
The number of U.S. factory jobs is headed for its fourth annual gain. That’s the longest since a five-year streak ended in 1997 and ushered in a dozen years of declines.
Nonfarm productivity last quarter was the highest since 2008’s second quarter, and September industrial output was the highest since February 2008.

Profits, Shares

Manufacturers’ after-tax profits rose to a record $289.1 billion last year, more than three times 2009’s tally, the Commerce Department reported. The Standard & Poor’s 500 Industrials Index has more than tripled since its 2009 low, and topped the broader index by 59 percentage points over that span.
The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.
Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jerseylost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics.

Profitability Recovery

“What’s being referred to as a recovery in manufacturing is to a large extent a recovery in profitability,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington-based group funded by unions and private foundations. “That’s good for the companies and good for the shareholders but it’s not necessarily good for the workers.”
Factory jobs loom large for U.S. policymakers, spurring efforts to nurture employment that aren’t lavished on industries such as retailing.
Obama announced a National Export Initiative in 2010 with goals including creation of 2 million jobs through programs such as financing for small- and medium-sized businesses to boost sales overseas. A four-point plan to revitalize manufacturing, unveiled in February in hisState of the Union address, is stalled amid congressional gridlock over changes in tax policy.
Boston Consulting Group found reason for optimism in an August study that concluded the U.S. may add as many as 1.2 million factory jobs through 2020, which would restore industrial employment to levels last seen in September 2008.

Energy Costs

The resurgence is partly a response to falling energy costs as new drilling techniques boost oil and gas production, and partly to the closing of a wage gap between the U.S. and China as workers there demand higher pay, the study found.
Boeing, the largest U.S. exporter and this year’s top performer in the Dow Jones Industrial Average (INDU), offered raises in the contract offer to Machinists. In return, the Chicago-based planemaker wanted to end the current pension and impose a wage scale that would mean a 16-year wait for newly hired employees to reach the top pay tier, instead of six now.
“When times are good, it’s easy to forget that continued success is not guaranteed,” Boeing Commercial Airplanes President Ray Conner said in a Nov. 8 letter to employees. He said that Boeing would weigh “all options” for a site to build the 777X after the union’s 2-1 rejection of the contract.
The geography of the industrial rebound helps explain why wages have stagnated.

Least Unionized

Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolinaworkers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.
Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman.
Higher wages also no longer go hand-in-hand with union jobs, as they once did.
In Houston, Neutex Advanced Energy Group Inc. won an agreement with the International Brotherhood of Electrical Workers this year for pay of about $14 an hour to help the closely held company shift production from China. Neutex plans to create about 200 jobs over the next year making light-emitting diode fixtures.

Auto Workers

In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paid as little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased.
The gains in Michigan show employers that union contracts aren’t an obstacle to job creation, said Scott Paul, president of the Washington-based Alliance for American Manufacturing.
“I don’t think they view that as any sort of an impediment, but rather than an asset in many cases, because they’re able to attract and retain skilled workers,” Paul said by telephone.

Wage Scales

While Boeing fell short in getting the new wage scale, other manufacturers are winning approval from their unions to follow the automakers’ lead.
General Electric Co. (GE) says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.
The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees.
GE announced today the plant will close as soon as September 2014 after it rejected a proposal by the union to avert a shutdown.

Boost Productivity

The shift has nothing to do with worker pay, according to Sebastien Duchamp, a GE spokesman, who said the company doesn’t comment on its wages. Closing the Fort Edward plant, which the company says has been unprofitable for years, and moving work to an existing facility run by its energy management business in Clearwater will help GE stay competitive by boosting productivity, Duchamp said.
“GE’s business units continuously review their operations and sometimes have to make tough decisions to keep up with market trends, address customer demands or reduce cost,” Duchamp said in an e-mail. “The intention of the proposed move is to address the increasing cost pressures and leverage the resources” available at the Florida site.
Bruce Ostrander, 64, who’s spent 21 years with GE, said he has little hope of finding a position matching his current pay at the Fort Edward plant. He lives in the Glens Falls part of New York state, which lost more more than 10 percent of its manufacturing jobs over the past 10 years. Factory jobs account for about 10 percent of the area’s employment, or about half of the early 1990s level.
“I’m forced into retirement,” Ostrander said in a telephone interview. “I’m not a doddering old man. I want to work.”