Trade Improves but . . . : U.S. Adjusts Painfully to Low Dollar
When Ohio sheep farmer Joe Hixenbaugh ordered some grazing fences and gates from Kenneth Townsend’s small livestock equipment-manufacturing company here a few months ago, he confidently expected that the goods would arrive within a few days.
No such luck. After weeks of waiting, Townsend officials finally confessed that it might be several months before the gates would be finished--because they couldn’t get the structural steel to make them.
“We’re running into serious supply shortages,” said Norris Nowlin, the portly, gray-haired office manager who serves as Townsend’s one-man sales force. “You almost can’t get any steel these days unless you order 90 to 120 days in advance.”
Rapidly Changing
Townsend’s difficulties signal potential trouble in America’s rapidly changing--and generally improving--trade situation.
To help correct the trade imbalance, the Reagan Administration has relied on lowering the value of the dollar, both to make imports more expensive here and to make American goods more attractive in worldwide competition.
The Administration’s strategy has worked--up to a point. Exports are booming, up 18% from their level of a year ago, reflecting the sharply increased competitiveness of U.S.-made products. And Americans are buying fewer imports, heightening demand for more domestic goods that they can substitute for them.
But economists believe that the United States is failing to make other necessary adjustments. As the trade deficit shrinks, they believe, the United States should do what Brazil and other debtor nations are doing--trim consumption at home and increase saving and investment so that it can shift more of its resources into building up its export industries.
Stepped Up Spending
Instead, although consumers seemed to retrench briefly after last October’s stock market crash, they recently have stepped up their spending again. And the economy still grew at a 4.8% annual rate in the final three months of last year--fine for ordinary times, but far too fast when the country is trying to reduce its trade deficit. The federal government likewise is still on a consumption binge. While the federal budget deficit is shrinking, the pace is too slow to free up much money for private investment.
To top it off, after years of squeezing profits and cutting costs, many American industries simply lack the capacity to produce enough both to meet the growing demand at home and to exploit new markets abroad.
Federal Reserve Board figures show that a spate of major manufacturing industries already are running flat-out to meet the increased demand, operating at more than 85% of their capacity--a rate that some economists believe is creating supply bottlenecks such as those plaguing Townsend.
Not only steel but other industries--from critical metals such as copper, nickel, brass and aluminum to paper, chemicals, plastics and even computer chips--are experiencing disruptive shortages that are forcing manufacturers to increase prices sharply and to delay delivery frequently. Some mills are openly rationing supplies among their customers. And they are still too wary of the market to expand their facilities substantially.
“We’re bumping up against the capacity ceiling,” said Jim Cochrane, chief economist for Texas Commerce Bank. “We’re not adjusting very rapidly to the trade situation.”
Some analysts fear that unless the economy winds down significantly in the next few months, the bottlenecks could become so widespread--and labor could be in such short supply--that inflation would accelerate sharply and finally bring on the long-predicted recession. Forecasters say that the economy looks as though it will be all right through the November election, but after that--in late 1988 or 1989--the problems could begin to show in spades.
If that happens, the United States may lose one of its best sources of funds to finance its trade deficit--foreign investors. Last year, the United States borrowed $160.7 billion from abroad to help pay for its spending, but glitches in the U.S. economy could make foreigners unwilling to continue investing their money here. The Fed then would have to raise interest rates sharply to attract more money from abroad and the economy then could be expected to slide into a serious slump.
Balked at Buying Securities
Washington got a taste of that last year when Japanese investors balked at buying U.S. Treasury securities. That forced the Bank of Japan to sop them up instead, lest the United States prove unable to finance its budget deficit--a predicament that would have sent the dollar plunging further, crimping Japanese exports still more.
The pressure is off for the moment but the United States remains vulnerable to such a shift in the wind. Japanese investors “still are wary” about the course of the U.S. economy, according to Tadashi Nakamae, a Tokyo-based financial analyst.
As a result, many analysts believe that Americans now are going to have to accept a relatively long period of decidedly lackluster economic growth--and a slowdown in the gain in living standards.
“The challenge we face is to keep the domestic economy growing slowly, at about a 1% to 2% pace, for the next three or four years,” said David Hale, economist for Kemper Financial Services in Chicago. Just like any debtor country, Hale asserts, “we’re going to have a sizable adjustment to make.”
Federal Reserve Board Chairman Alan Greenspan has said that the best solution is a reduced federal budget deficit--and eventually a surplus--to trim the government’s demands on the economy and to make more money available to finance private investment at home.
Consumption Tax Proposed
Greenspan’s predecessor, Paul A. Volcker, has suggested a new consumption tax--possibly a 10- or 15-cents-a-gallon increase in the federal gasoline tax--to help slow consumer spending. Some analysts have even called for changing the nation’s tax laws to force consumers to save--much as Japan does now by requiring citizens to contribute to postal savings accounts.
But none of these prospects seems very likely now. And there are serious questions whether the economy is adjusting fast enough on its own.
Edward Guay, economist for Cigna Corp., the Hartford-based insurance company, estimates that to bring the trade deficit to balance by 1991, the United States will need to increase its manufacturing capacity by 3.5% to 4% a year. Yet economists say that, while business investment is picking up, it still is not keeping pace with needs.
Commerce Department projections show manufacturing industries expected to increase their spending for new plant and equipment by a lackluster 1% during the first three months of this year and 0.9% during the second quarter. Many business executives say they are waiting until they see that the increased demand is here to stay.
Indeed, the supply shortages seem to be increasing more rapidly than statistics show. In Peoria, Ill., the newly revived Caterpillar Inc. has so many buyers that it has had to allocate supplies of about half its construction equipment and to double the lead-time on most deliveries--mainly because of the steel shortages. “We’ve had to scramble to make the production schedule,” said Don Paris, Caterpillar’s chief economist.
Enjoying a Revival
The capacity problem is especially visible in Ohio, a “rust belt” state once plagued by imports that is now enjoying a revival in the face of the new export boom.
Thomas Tyrrell, president of American Steel & Wire Co., a Cleveland-based manufacturer of steel rods, says the shortage problem has grown so severe that last year his firm had to refuse some 60,000 tons’ worth of business that could have added 18% to his total sales.
“We’re now having to turn down a lot more lucrative business from people who used to buy foreign steel,” Tyrrell said.
Price increases for shortage-plagued materials have been staggering. Paul Schloemer, president of Parker-Hannifin, a Cleveland components builder, says that his firm now has to pay $8 a pound for nickel cadmium that cost $1 a pound a year ago--with suppliers adding on surcharges whenever the market will bear them. “In our case,” Schloemer said, “it’s a matter of paying the premium.”
Gary P. Davis, president of Aetna Plastics, a Northern Ohio pipes and fittings maker, said his company has encountered “tremendous price increases”--25% to 50% in the past year alone--for polyvinylchloride, the main feed stock for plastic products.
Lot of Shortages Seen
“A lot of that stuff is going overseas,” he says. “If this continues, we’re going to see an awful lot of shortages later in the year when the heavy production season comes.”
And Steve Bell, an executive of Great Lakes Textiles, said that American textile mills “are so swamped” by the export boom that “they can’t get out the supplies” needed to meet demand at home. Bell said that he is about to begin buying bed sheets, mattresses and other goods at retail to avoid losing more orders himself. In canvas goods, particularly tarpaulins used on construction jobs, the seconds that Bell usually buys are no longer available. “You have to buy first-quality material at a 30% premium--when you can find it,” he said.
Aggravating the supply bottlenecks in steel, computer chips and textiles are the import restrictions that the Reagan Administration imposed during the high-dollar days when these industries were clamoring for protection.
Along with several other manufacturers, Tyrrell of American Steel & Wire petitioned for--and received--permission to breach existing import quotas by buying an extra 23,430 tons of foreign-made slab. But analysts say that getting relief this way is slow and the total too small to ease the shortage problem much. And there is little indication that the new President to be elected in November will be willing to lift the steel restrictions entirely.
What’s more, many capacity-short businesses either cannot--or are not ready to--increase their production capability. Most of the nation’s major steel firms, already decades late in restructuring their outmoded facilities, have just closed down their most inefficient plants and cannot afford the $14-billion cost of building new full-service mills.
And many business executives remain wary that the government may reverse course and push the dollar up again, as it did in the early 1980s, undoing any advantage that American industry may have now. Dennis Casey, vice president for marketing of the Minster Machine Co., concedes that demand for his firm’s products is up sharply and that the company has had to increase its work force. But, he said, “before we’d expand our plant, we’d subcontract things out. This surge of activity could be a temporary thing.”
Confidence on Rise
Nor is relief very likely to come from sagging demand in the United States. The latest surveys by the Conference Board show consumer confidence on the rise again. And consumers went into debt another $5.42 billion in January, indicating that demand may be more robust than previously thought.
“The consumer is coming back,” said Lynn Reaser, vice president and senior economist at First Interstate Bank in Los Angeles.
Linn and Melody Obery of Cleveland Heights, Ohio, may be typical. Melody Obery said that the couple were anxious about the stock market crash just after it occurred but that those worries “quickly faded away. None of our friends has even talked about it since then.”
The Oberys say that neither the crash nor the series of recent forecasts predicting a recession has changed their buying plans. “I view the economy as being very strong,” Linn Obery insisted. “I don’t see that we’re pulling back at all.”
Vacation Spending Unaffected
Harvey O. Mierke, a Cleveland travel agent, said that spending on vacations and overseas trips--often a good indicator of when consumers are cutting back--is “about the same as last year” despite higher costs of some trips as a result of the less-valuable dollar. Despite everything, Mierke said, a tour sponsored by the Cleveland Zoo for a photo-safari in Africa sold out promptly.
To be sure, consumer spending may yet slow substantially in coming months, or business investment may pick up sharply--or both. Cigna Corp.’s Guay believes that Congress’ 1986 overhaul of the tax code is already beginning to prod businesses into shifting investment dollars away from more superficial business purchases such as fleet cars and into more productive ventures such as plant expansion.
Guay expects a capital spending boom in the next year or two. The capacity problem “is a short-term phenomenon,” he insisted.
But many analysts remain worried. “Many of our industries can’t increase their exports unless they reduce their domestic business,” says Walter Joelson, General Electric’s chief economist. If that continues for long, the trade adjustment could be painful.
And here in Trafalgar, livestock equipment manufacturer Kenneth Townsend still cannot find the steel he needs to build fences.
Jane Conover, the matronly production manager at Townsend’s back yard corrugated-metal fabricating plant a few miles east of here in Lewis Creek, points to near-empty racks that until recently were chock full of steel rods and square tubing. “We’ve got plenty of orders now,” she said, “but without steel we can’t make anything. We’re starting to get customers calling back and canceling.”
