PracticeConsultingInsight: US economics – State of the Union.

Insight: US economics - State of the Union.

Despite some dire economic forecasts American's don't seem ready to

Joe Burilla is doing what we all want to do a lot more of these days, he is spending a lot more quality time with his family.

Unfortunately he isn’t making a lifestyle choice, he has been laid off.

Joe was a production line worker at New Process Gear, a massive car parts manufacturing company, based on the outskirts of Syracuse in up state New York. New Process Gear supplies several of the large car companies in the USA and Joe wasn’t alone in losing his job.

Four hundred other workers also went with the slowdown in the motor industry and more will lose their jobs in the near future. DaimlerChyrsler alone has announced plans to get rid of 26,000 workers and the knock on effects of that will be felt in supply companies the length and breadth of the USA. That means people like Joe could hold the key to a question that is of great interest to us in the UK; is there going to be a recession in America?

The answer is that no-one knows, the best anyone can do is look at the evidence and make the best calculation or guess they can.

Joe Burilla may not know it but he is a bellweather of the American economy, not least because he lives in Syracuse, a town which is rather similar to Leeds or Sheffield in the UK.

This industrial and university town is so typically middle American that companies from around the world test out their products there. If they can sell things in Syracuse they can sell them anywhere in the States.

It might come as a surprise, therefore, to find out what Syracuse’s local economy is actually like. Unlike our image of America as being all dotcoms and Wall Street, Syracuse is a mixture. There are old manufacturing industries like oil, steel and the all pervasive auto industry and newer forms of business. High technology businesses are doing well in Syracuse, attracted by the excellent University.

But retailing is also on the up and it is rapidly becoming one of the biggest factors in the local economy. New Process Gear is the big cheese in Syracuse. It makes car and truck transmissions but it has been in the town so long that the first product it made there was a leather canoe.

It is also regarded as the best employer in the area.

Workers can earn good money on its production line, very good money considering most workers are semi-skilled school leavers. Joe Burilla, for instance, has a three-bedroom house in the countryside, two new cars and a holiday home in Florida. But now Joe is turning his back on the auto industry, he is using his redundancy money to retrain as a webmaster, for him the internet is the future.

‘Right now I am up in Syracuse University, taking a three-year web administrator programme,’ says Burilla.

‘I think the internet is going to be my ticket, the way I’m going to go. The internet is the future. It’s the way many companies are going and without being on the internet you’re not making yourself marketable,’ he adds.

Considering all the fuss about the collapse of the dotcom bubble you might think that Joe is being overly optimistic. But the high tech revolution in America has not just been about whiz kids setting up companies whose names start with an ‘e’ and then raising and losing massive sums of money.

Danny Stroud is president and CEO of Applied Theory, a home-grown Syracuse success story. Essentially his company runs and maintains information superhighways across the internet, linking businesses and other organisations across the US. This is a real business, contributing to the massive increase in American productivity that has been seen in recent years.

Stroud is dismissive of many of the dotcoms that have already gone to the wall. ‘I don’t think it is controversial to say that some of the dotcoms’ business strategies were hair brained at best and didn’t deserve to exist as a company. It isn’t necessarily anything to do with the internet, it is just bad business planning.’

And Danny is confident about the future, ‘Good business plans will survive and there are a lot of them out there. The internet gives companies much more flexibility, they can get to market faster, they can evolve and change much more deftly.’

Applied Theory is just the kind of company that is expanding while New Process Gear is contracting. Its computer centre on the outskirts of Syracuse is an anonymous, high security, air conditioned block, stuffed with the latest equipment and more importantly these days, the most up-to-date software.

Perhaps Joe Burilla’s faith in the future of the internet is well placed after all. For the population as a whole, confidence has been helped by two cuts in American interest rates and on the horizon there is the prospect of massive tax cuts.

During the election campaign the Republican’s pledge to slash taxes looked a bit rash, but it is an ill wind that blows no good. Now tax cuts seem to be just what is needed.

Professor Douglas Holtz-Eakin is head of the economics department at Syracuse University. He believes that enough has been done to prevent the US from slipping into a recession. ‘I think we will see growth of one and a half to two percent over the next year. That is deliberate: the Federal Reserve has worked very hard to slow this economy down and has succeeded. Now it is working equally hard to make sure that it doesn’t stop and I don’t think the economy will.’

Professor Holtz-Eakin sees growth continuing from the mix of old industries and new technology. ‘I think what we will see is continuing productivity growth in manufacturing, where we make more products with fewer workers.

Those workers are then going to be released into the high tech sector at the upper skill end, the trouble is for the low skill workers and what they are going to do.’

Unless like Joe Burilla, they go back to college, what low skilled workers are probably going to do in Syracuse, is work at the Carousel Centre.

This massive shopping complex on the outskirts of town is already one of the 25 largest in America. About the size of the Lakeside or Bluewater shopping malls in Essex and Kent, in the UK, the city council has just approved plans for it to treble in size.

The hope is that the Carousel Centre, with cinemas, hotels, restaurants and a theme park, will become a tourist attraction in its own right. It is a massive vote of confidence in the future of the American economy.

Bruce Keenan is a partner of the Pyramid Company, the company that plans this massive development. ‘We are planning a $900 million investment and looking long term,’ he says. ‘Sales here have doubled in the last ten years. Our expectation is that whether the economy is on the upturn or downswing, that a properly managed facility of this character and magnitude will do very well.’

That confidence seems to be reflected on the shop floor, or to be more precise the shopping mall floor. Not only do the overwhelming majority of shoppers seem convinced that they will continue to have money to spend but in the post-Christmas lull there have been surprisingly few shop closures.

Recessions have many causes but they start to pick up momentum when people decide to batten down the hatches and stay at home. At the moment there seems little sense in Syracuse that confidence has been fatally damaged by all the bad news. But then the bad news isn’t over yet.

In the coming weeks New Process Gear is expecting to lay off even more workers. Mike Bauer the Syracuse plant director thinks it is inevitable: ‘We are looking at another downscaling of roughly six percent right now (about 200 jobs), it’s just a softening of demand.’ That scale of job loss will of course have an effect on Syracuse’s local economy.

Similarly the job losses across the US motor industry will have an effect on the whole economy. But if the auto industry is still one of the major engines of the US economy it is no longer the driving force.

Manufacturing represents a smaller percentage of the US economy than it does of the UK’s. New sectors are springing up and taking up the slack caused by the long-term decline of traditional industry.

Even in Syracuse, manufacturing is no longer the only game in town. Perhaps that holds the key to the confidence that you find in America about the future of the economy.

After a prolonged and sustained period of economic boom American’s don’t seem ready to believe that the party is over.

Joe Burilla certainly doesn’t. This summer he is having a swimming pool built in the garden. Whether America manages to grow by one or two percent this year or shrink by a few percent will, to a large extent, depends on how resilient that kind of confidence really is.

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