Just because I took some criticism earlier this year for predicting there would be no recession in the U.S. economy, I want to point out that the latest economic data proves I’m still correct, and everyone panicking about a recession is still wrong.
Of course, I could one day be wrong. That proviso applies to everyone, especially in the field of economic reporting. The standard rule of “two consecutive quarters of negative economic growth” is a pretty high hurdle, particularly for an economy (i.e., our economy) with so many people pushing so hard to improve themselves and their economic interests. This is the world of microeconomics: every data point means something, but getting them to add up to something consequential is pretty hard.
Financial reporters and analysts live by microeconomics, because it makes them experts on a specific subject — and it makes them “right” every once in a while. It’s much more difficult to navigate the world of macroeconomics, but if panicking is your game then macroeconomics is the place for you.
Macroeconomics is the study of large-scale trends that shape financial conditions across industries, regions, or the whole world. For example, explaining all the causes of rice shortages in parts of the world requires macroeconomic insights. The problems generally ascribed to domestic manufacturing are macroeconomic, which means they won’t be solved by trade barriers or the usual prescriptives.
Take a new look at the strike by the United Autoworkers at American Axle & Manufacturing. It has entered its third month, has idled or slowed 31 General Motors plants, and contributed $800 million to GM’s $3.3-billion Q1 ’08 loss. The effects on other GM suppliers are harder to determine, but they're surely significant.
Where is it heading? There may be a resolution soon, but microeconomics won’t solve the problems at American Axle because this is much more than an stand-off between a union and a company who cannot agree on a number: for two months they haven’t agreed on a common problem. And, this strike reveals a manufacturing sector that is incapable of planning its way out of a macroeconomic impasse.
The impasse is that labor costs for plants like AAM’s in Michigan and New York are increasing. UAW members at AAM have been accepting buyouts for close to two years, and still the operations are uncompetitive with the company’s domestic rivals, which have received past concessions from the UAW.
American Axle’s position is simply that it wants the labor costs lower — as low as the UAW agreed to with Chrysler, Dana, FormTech Industries. Reportedly, it is equally willing to invest in plant upgrades as it is to move all its manufacturing out of the country. But, up to now, these are all points the union cannot or will not address.
The problem isn’t isolated either: Chrysler is offering to sell its Detroit Axle subsidiary for $400 million, before it completes a new $700-million plant. The Wall Street Journal reported that Chrysler wants to “reduce the capital it traditionally has invested in major components.” It even offered to sell the plant to — you guessed it! — American Axle. That seems pretty close to panicking, and if Chrysler can reach that point others can, too. And will.
To recap, in the world of microeconomics we’re in relatively good shape — no recession — even though lots of people are panicked about the indicators. In the world of macroeconomics, we’re lost and wandering, and panicking might be a reasonable reaction.