Economic Jolts

“In January, the Commerce Dept. reported the nation’s 2006 personal savings rate was a negative 1%, the worst showing in 73 years.”

The Associated Press, on February 27, reported on Alan Greenspan’s satellite-linked speech to a Hong Kong business conference, where the past Federal Reserve chairman said, although the U.S. economy has been expanding since 2001, certain signs indicate the current economic cycle may be ending. Greenspan said corporate margins are beginning to stabilize, and this, he claimed, indicates businesses are in the later stage of a predictable swing that could cause the U.S. economy to enter a recession phase by year’s end.

The National Bureau of Economic Research (Cambridge, MA) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months; it’s normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”

Essentially, a recession is a decline in consumer spending caused by business cycles, economic jolts or both. The decline moderates factory production, and this causes management to implement layoffs that, expectedly, prolong the recession cycle by reducing personal income.

National economic levels are affected by various factors, consumer spending being the most highlighted because it affects the businesses — manufacturers, producers and suppliers — that affect our daily lives.

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If Greenspan’s prophecy comes true, it will affect business spending worldwide, including yours and your customers’: less cash flow, less sign orders.

China’s stock plunge

CNNMoney.com writer Paul La Monica tied Greenspan’s remarks to a same-day report that the Shanghai Composite Index fell 8.8%, which was caused, business writers said, by Beijing’s government offices’ planned crackdowns on record-high market speculation. The combined news – China/Greenspan – triggered a consequential Wall Street selloff, a jolt that, by day’s end, caused the Dow to fall more than 400 points. Although not devastating, the jolt sacked this year’s gains for the Dow, Nasdaq and Standard & Poors.

The China stock fall was its worst in 10 years. Reuters’ Shanghai office said it effectively wiped out $140 billion of value. Analysts fear the incident points to an abnormality that may spread to Asian, then international, markets.

The next day’s Wall Street Journal (WSJ) headline, “Markets’ Slide Spotlights Risks,” should light a fire under all of us, because it emphasizes the U.S. market’s volatility, especially when appraising emerging markets. The WSJ said the fall “signals that investors may finally be re-evaluating their passion for risky investments.”

Risky investments, here, describe monies sent to support emerging markets, principally those in Asia and South America, although Africa and Eastern Europe can fit into the mix. Emerging markets’ sometimes robust gains can easily reverse, especially over time.

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Remember the 1998 East Asian recession and currency devaluations? At that time, Indonesia’s, South Korea’s and Thailand’s currencies nearly collapsed, which caused comparative losses in Hong Kong, Malaysia, Laos and the Philippines. Still, the situation caused investors to lose confidence in emerging markets, and that action created a global economic crisis.

Investor risks

The February 28 USA Today’s editorial and opinion blog described the February 27 jolt more strongly. Its story, headlined “Wall Street’s unnerving drop raises global ques¬tions,” said, although the previous day’s falloff was fairly small, it did raise questions, mainly, if investors (50% are American households) truly understand global financial-market risks. It also asked if the jolt was a brief correction or the beginning of something else. A leak in the dam, if you will.

Other stock indices also fell, although not as significantly, including Canada, the United Kingdom, France, India, Brazil and Mexico.

Disappointingly, the WSJ didn’t highlight or clarify the China action ripple effect.

China has 1.3-billion potential customers, worth, analysts say, $246 billion a year (retail). It also finances our national debt, owning, at last count, $349.6 billion in U.S. Treasury securities, which is why its part in the recent jolt is important.

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As of February 25, the United States’ national debt was $8.7 tril¬lion. Your share is $28,679.70. Last year, the U.S. government paid $406 billion in interest payments on the national debt. Your annual interest share, paid via your income taxes, exceeded $600 — if everyone paid.

The $600 is remunerated, as interest, to those financing the national debt, mostly U.S. Treasury notes, bonds or security holders. Many are household investors, but, the U.S. Treasury Dept.’s tables say the top five foreign, treasury-securi¬ties holders, as of December 2006, are (in billions): Japan ($644.3), Mainland China ($349.6), United Kingdom ($239.1), oil exporters ($100.9) and South Korea ($70.0).

Foreign investment

In view of the immensity of Japan’s, China’s and Korea’s holdings, it’s easy to see that an Asian economic crisis – and subsequent T-note to cash demands – could create worldwide havoc. Still, two views concern foreign investors who hold shares.

The first, a supportive one, says we’d have a less robust economy without strong foreign ownership of the U.S. debt. These advocates say U.S. savings accounts can’t begin to finance the country’s investments. Without foreign investment, employ¬ment rates and private investment dollars would shrink, while interest rates and inflation would be higher.

The more hawkish groups also support foreign investments, but with proposed business caveats that would force a more balanced exchange of money and goods. China, for example, in 2006, sold the United States $287,772.2 billion in goods; it purchased $55,224.2 billion. The imbalance (deficit) was $232,548.6 billion.

The critics say having foreign-debt holders is good for business, but want more equality in the joint-trade policies. Some are sponsoring tariffs if the deficit balance is widely off scale.

Truth is, most people enjoy buying things cheaply, and discount stores like Wal-Mart (it imported more than $18 billion in goods from China last year) are excellent sources. Over time, however, such buying practices can reason: American retailers, demanding high-impact discount pricing so they can sell cheaply, often require their providers to export jobs, which, in turn, creates American job losses, which causes even more shopping at discount stores.

It’s a clever marketing gambit, but I don’t remember seeing it in my college textbooks.

For example, Levi Strauss, once an American icon, no longer makes its jeans in the United States. Instead, it contracts with approximately 500 apparelmakers in 50 countries. Now, you can buy Levis at a discount store, Wal-Mart, say, more cheaply than you could three years ago; but, Levi’s price-reducing, outsourcing policies closed 58 American (and Canadian) manufacturing plants, and this cost more than 6,000 jobs.

Jobs lost or never created

A United States-China Economic and Security Review Commission (USCC) report states, between 1989 and 2003, “the ever-increasing U.S. trade deficit with China has led to about 1.5 million jobs that either moved overseas — or never were created in this country — as production work shifted to China.” The loss quotient has increased since China joined the World Trade Organization.

Critics say Wal-Mart is driving the U.S. deficit with China. Proponents say the retail giant’s low prices curtail inflation.

Wal-Mart is China’s fourth-largest trading partner. It imports 15.4% of all consumer goods from China. Wal-Mart’s global procurement center in China’s Shenzhen province conducts more trade with China than Australia. Australia ranks 17th in gross domestic product (GDP) per capita, world¬wide. The United States ranks seventh. China – a country whose military recently fired a missile that successfully destroyed a refrigerator-sized satellite that was soaring 600 miles high – ranks 109th.

Several months back, I wrote about China’s housing deal with oil-rich Venezuela. The two coun¬tries have signed a $1.2 billion deal in which China will help finance 20,000 Venezuelan homes. Iran is also financing Venezuelan housing.

China’s state-owned oil company, Sinopec, has a $70 billion oil deal with Iran, to develop its Yadavaran oil field, which is expected to produce 300,000 barrels a day. Further, China, the world’s fifth-largest arms supplier, is developing oil fields in Angola, Nigeria and Sudan; China’s National Petroleum Corp. owns 40% of Sudan’s 50,000-sq.-mile Sino-Sudanese oil field.

Remember, world events affect national and local economies. Realize, too, that China’s energetic, oil-contract programs will cause shortages that will drive up your supplies and transportation costs.

One of 2,257 Wal-Mart supercenters in the United States, this Florence, KY store’s facade was designed to appear as separate, neighborhood-type shops, but the structure actually houses more than 185,000 sq. ft. of wide-open, retail space – enough to park four Boeing 747s.