Maybe, just maybe, we ought to reconsider our definition of what a recession truly is. Or for that matter, a recovery.
I say this not as economist or a learned professor of a vaunted university business school, but rather as someone who gets around, asks a lot of questions and reads.
For while the Great Recession, which will go down in history as just that, technically ended in 2009, we’re still at least five years away from regaining everything lost during the 2007-2009 downturn.
That is the startling conclusion from forecasting firm IHS Global Insight, which predicts that real median household income won’t reach the prior peak from 2007 until, get this, 2019.
Adjusted for inflation, it means the typical family will wait 12 years until their purchasing power is as strong as it was before the recession. I have heard this and seen this in many communities across this great country. Even Texas.
A Lost Decade
The Census Bureau reported last week that the median income of families in the United States edged up slightly to $51,939 last year from $51,759 in 2012, showing no significant growth for the second year in a row.
The increase leaves incomes around 8 percent below their level of 2007, when the recession officially started, which should give us all great pause.
Justin Wolfers, economics professor at the University of Michigan, calls it a “lost decade” for the middle class.
“What recovery? Real median household income is up a mere $180 on last year and is still $5,000 below the 1999 level,” when middle-class incomes reached an all-time high in the U.S., Wolfers told The Washington Times.
With no growth in incomes, consumers are hard-pressed to splurge on much on of anything. Only the top 10 percent of households have seen a major increase in income.
Not a Winning Hand
As I noted in last week’s blog, The Canary in Our Mine, a recent survey of Harvard Business School alumni revealed that more than 40 percent of the respondents foresee lower pay and benefits for workers. Roughly half favor outsourcing work over hiring staffers.
A growing share prefer part-time employees, and nearly half would rather invest in new technology than hire or retain workers.
Lower incomes means less consumer spending, which means slower economic growth. Leave it to say, that is not exactly a winning hand for U.S. manufacturing. Talk of a “manufacturing renaissance” remains, in this writer’s opinion, a pipe dream.
“People are starting to realize that something serious has happened,” IHS economist Chris Christopher told Yahoo Finance. “What the younger generation, people under 35, is experiencing is something very different than their parents or grandparents experienced.”
IHS regards 2014 as a turning point in which real incomes ought to turn upward and continue to rise until they finally reach pre-recession levels in 2019. But it will be slow going.
“We are using a coffee cup to dig ourselves out of a big hole,” Lawrence Mishel, president of the Economic Policy Institute told Reuters.
I Know Now
Last month, I sat on a panel discussion of site selection consultants before a roomful of economic developers in Minnesota. All the consultants had toured various regions of the state (I had Duluth and Northeast Minnesota), and we had convened to report our impressions and answer questions.
One of the questions threw us for a loop. If I remember correctly, an economic developer asked what effect Alibaba would have on U.S. manufacturers and our jobs as consultants. As none of my colleagues were offering an answer, I leaned forward into the microphone and said, “I don’t know.”
My answer seemed to delight the audience as they probably don’t hear that very often, especially from a consultant. Since then, I have learned more about Alibaba, the Chinese e-commerce giant that raised $21.8 billion last week in the largest initial public offering in U.S. history.
Trust Means Volume
Although it is not well known among U.S. consumers, Alibaba is the largest e-commerce company in the world, bigger than Amazon and eBay combined. Its founder Jack Ma, a former English teacher and now the richest man in China, was at the New York Stock exchange where some of his customers rang the opening bell.
“What we got today was not just money, but trust,” Ma told CNBC.
Apparently, Alibaba has been winning a lot of trust of late. In the 12 months ending on June 30, the company, which quietly launched a U.S. e-commerce site of boutique specialty stores called 11Main, posted total gross merchandise volume of $296 billion across 14.5 billion orders from 279 million active buyers.
A Tech Giant Emerges
So what have we or could we learn from the emergence of Alibaba on the American consciousness? One is that China is not just a sweatshop for manufacturing, but is emerging as a real tech giant.
Literally, right across the street from where I live in Plano, Texas, is the North American headquarters for Huawei Technologies Co., which is fast becoming a threat to Samsung Electronics Co., as the world’s biggest smartphone maker.
The world is an ever changing place. As noted here, U.S. consumption has been constrained by a hammered middle class characterized by stagnant wages and weaker job prospects.
The New Engine
But that is far from the case in China, India and many developing nations, where consumers there are fast becoming the new engine of global economic growth. Therefore, it is vital, indeed absolutely necessary, for U.S. manufacturers, if they are to have much of a future, to compete in the marketplace for those consumers in the developing world.
It’s business Darwinism, adapt or die. U.S. manufacturers will have to come to realize that just as the U.S. consumer dominated the 20th century, consumers in the developing world willhold such a role in the future.
Jack Ma has said that he plans to expand Alibaba’s presence in the U.S., which continues a trend of foreign direct investment from companies from developing markets. Again, I only have to look across the street to know this is true.
According to the American Enterprise Institute, Chinese companies have invested more than $500 billion around the world since 2005 — with the U.S. the top destination. Chinese investment into the U.S. has increased from about $58 million in 2000 to $14 billion in 2013. Since 2000, it totals nearly $40 billion, according to the Rhodium Group.
Back from the Brink
The instinct in the United States against secession is now thankfully strong. This matter was settled with a bloody Civil War that took 750,000 lives.
Still, there are the wingnuts, the neo-confederates. I met a vendor at a flea market in Arlington, Texas, a few years back spouting off nonsense of Texas secession. I promptedly put down the item that I was about to purchase and walked away.
Sam Houston, elected twice as president of the Republic of Texas, was the only southern governor evicted from office on the eve of the Civil War because of his steadfast opposition to secession. He will always be a hero of mine.
So with that backdrop, you might know that I was relieved that a majority of voters chose to step back from the brink and continue Scotland’s 307-year-old union with Britain.
A U.S. survey of leading business professors said Scotland would have suffered “extreme economic pain” had it voted in favor of independence. Thankfully, cooler and wiser heads prevailed and the United Kingdom, which has been a steady ally of the U.S., remains whole.
Are there cultural differences between the Scots and the English? Of course, just as there are between Texans and New Yorkers. But never so much as to bust up the union. That remains sacred ground.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.
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