A Paradoxical Framework To Restoring The American Labor Force: Much More QE?

Tyler Durden's picture

Back in May, Zero Hedge penned "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?" in which we predicted that rising labor costs courtesy of the Fed's ongoing exporting of inflation could easily backfire, and force large, profitable multinationals, for whom dollar weakness goes straight to the bottom line, to reorganize and pull offshore workers back to the US. It appears the theory is slowly shifting to practice. As Reuters reports, Conglomerates ranging from Emerson Electric to Honeywell International feel pressure on margins from double-digit wage increases in China. So have toymaker Mattel, fast-food chain Yum! Brands and computer maker Dell, analysts and investors say..."Input cost increases have been a steady headwind to margins for some time now," Fairchild Semiconductor International Chief Financial Officer Mark Frey said last month. "I do believe that labor inflation will continue high for quite a while," Yum CFO Rick Carucci said on the company's earnings conference call. He called commodity prices another "wild card" for the company." Curiously, China is proving far more adept at pushing labor price increases than America's sad, and largely ineffectively unionized labor force: ""A lot of the wage increase is to keep civil unrest at a minimum," said William Blair analyst Nick Heymann, who said suicides at an Apple supplier and the "Arab Spring" protests have alarmed Beijing. "These guys have watched North Africa and the Middle East with a lot of trepidation."" And as we speculated, the perverse outcome of Bernanke's policy to reward only companies at the expense of US Laborers (i.e., middle class) will soon backfire, as more and more companies end seeing their margins cut, in the process being forced to hire ever more people. "Wages are getting large enough that you start to feel the difference," said Hal Sirkin, a BCG senior partner, who said U.S. companies are looking at alternative manufacturing sites. "One of the answers is to start moving back to the U.S." And when they do, they may, just may, start hiring Americans once again.

More from Reuters:

China this year adopted a five-year plan that calls for 7 percent growth in per-capita income, ahead of earlier targets, and fresh investment in research and development, to boost domestic consumption and modernize its economy.

Manufacturing wages are a fraction of those in the United States but are narrowing the gap, both fueling and responding to China's inflation, now at three-year highs. Between 1978 and 2009, wages jumped almost 13 percent a year, six times the pace of U.S. wage rises, according to BernsteinResearch.

By 2015, wages around Shanghai, adjusted for productivity, will be 61 percent of those in low-cost U.S. states like Alabama, according to the Boston Consulting Group (BCG). Transport and other considerations further shrink that gap.

The next few years will bring a wave of reinvestment by U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make China a less attractive production center, BCG predicts. Its July BCG paper names 14 companies rethinking where they produce goods, including NCR (NCR.N), Ford (F.N), Flextronics (FLEX.O), Ashland (ASH.N), and Jarden's (JAH.N) Coleman unit.

Where China once had ample labor, and supply was well balanced with demand, that equilibrium has broken down, BCG argues. The change does not mean shutting Chinese factories and firing workers; it means selectively scaling back future expansion or investment. China's size will ensure it remains a major global player.

Another key component to the future success of American labor? The emergence of China's middle class:

Ultimately, the success of that drive to shore up China's consumer base may determine how U.S. companies perceive the risks and rewards of operating in China.

 

"The customer base in China is just so immense," said Tim Hanley, Deloitte LLP U.S. Process & Industrial Products Leader. "Companies that were in China as a low-cost exporting base recognize they need to be there. That's where demand is."

The paradox in all of this is that while the short-term pain may be acute, the one thing that may eventually restore America's labor force is not just one more QE but many more inflation exporting episodes down the line, until the point where corporations are ambivalent about where to base factories, and as a result start hiring US workers yet again. The other thing that likely be necessary is for China to finally depeg and float its currency, which means that America has to telegraph that the US consumer is finally giving up the ghost making the opportunity cost of continuing China's export-oriented mercantilist model less attractive. Of course, for that to happen, we would need to get our mortgage house in order, whereby Americans once again start paying their mortgages, a process which would massively cut into discretionary purchases of made in China trinkets and electronic gizmos.

Alas, this pathway to actual success for both US and China middle classes is based on the fundamental confidence in respective administrations that there is a future that is feasible for everyone, and not one purely based on rolling off the last days of the global ponzi, which alas is the existing economic model. Until that changes, which is a sufficient and necessary condition, all speculation about how the world may eventually be fixed is moot.