James Srodes America rising

JAMESSRODES | Veteran commentator on Washington & Wall Street

America rising

Is US prosperity just around the corner?

Riddle: Why is Federal Reserve Chairman Ben Bernanke like a Venezuelan oil well? Both have to pump harder tomorrow just to have the same impact they had today. Both also are racing the clock.

The Venezuelan oil well is faced with dropping petroleum prices and the impending mortality of dictator Hugo Chavez.

But even in the worst case scenario, the well itself and indeed Venezuela will both survive. Chairman Bernanke, however, has more pressing problems. He must keep at least the spark of hope of an economic recovery alive through 6 November if President Barack Obama is to be re-elected.

Failure would bring Mitt Romney into the White House and a reversal of the expansionist economic policy that the ObamaBernanke team is convinced is the only key to an American economic recovery.

To understand the mood at the White House and Federal Reserve these days it is worth noting a recent Obama comment that earned him an instant rebuke from the news commentators.

The President opined that “the private sector is doing fine.” The Romney campaign immediately charged it was further evidence of how out of touch the President was when unemployment still affects millions.

While the statement was treated as an inadvertent gaffe, it deserves closer examination. For the President and his central bank chief do believe the American economy ‘is doing fine’; it just is not doing fine fast enough, soon enough.

When compared with economic conditions elsewhere among other global rivals – say Europe, China or India – the United States is in much better shape. After all, two percentage points of annual gross domestic product growth is better than recession and 300,000 net new jobs per month are better than none.

There is a sense of frustration among White House spokesmen who brief the press because of their conviction that the United States is poised for a genuine economic break-through.

New growth drivers

Ask where the roots of such a boom time may lie and most Obama aides offer two words – ‘fracking’ and ‘reshoring.’ The most immediate impact, they say, is already being felt by the hydrocarbon boom driven by the new technologies that enable the ‘fracturing’ of the massive deposits of shale that produce both petroleum and natural gas in abundance in such formerly depressed areas of the country as Pennsylvania or the far western states.

According to a recent study the flood of oil and gas coming from shale means America is likely to become the world’s top producer of hydrocarbon energy by 2020, exceeding the output of such energy superpowers as Saudi Arabia and Russia.

This energy boom has had an immediate impact on US economic prospects and, more important to the White House, to the President’s election prospects. The recent plunge in world oil prices from above $100 a barrel to around $80 has translated into sharp price cuts and that most visible annoyance: the rising price of motor car petrol which had been above four dollars a gallon but now has dropped by nearly a dollar just in time for the summer driving season.

Longer term, ‘fracking’ means that US imports of oil and gas are forecast to fall from 52 per cent of total demand in 2010 to 22 per cent by 2020. That points to a fundamental reordering of the world energy market that makes America far less vulnerable to international tensions than it is currently.

The positive reversal of America’s energy fortunes will, the White House and Fed are convinced, hasten that other force that will revive the broader economy. ‘Reshoring,’ as it is called, is a trend where US firms bring back manufacturing capacity previously based abroad, most notably in China and elsewhere in the low-wage countries of Asia.

Rising wages in Asia generally, plus a flat wage picture at home, plus the uncertainties of transportation and political stability in other countries all combine to make manufacturing back in the United States increasingly attractive to American multinationals, this analysis argues.

Over the next five years, the analysis concludes, the costrisk balance between making goods in, say, China and in the US will reach a tipping point in seven key industries which had shipped plants and jobs offshore over the past 20 years. Those industry groups are identified as computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metals, plastics and rubber and transportation goods.

Together those industries amounted to a nearly two trillion dollar market in the United States during 2010 with China producing about $200 billion of that total. ‘Reshoring’, the White House forecasts, could add $80 billion to $120 billion in annual output and two to three million new jobs in direct manufacturing and spin-off employments over the next five years.

Further on, both low domestic energy costs and a return of high productivity manufacturing output could add as much as $65 billion a year in new US export sales abroad.

Just how realistic these predictions are remains to be seen. The important point is that they are an article of faith shared by the President and his central bank chief.

But the Fed and the White House need time to make the case that the US economy is in better shape than most people believe. And time is running out between now and 6 November. n