Different perspective on America's outsourcing

[lookout123]

I can't provide the link to this story because I don't have the ability provide a prospectus here on line. But this is the whole article, unedited. I include the author's short bio with only his company name edited out.

Anyway, I thought some cellarites would find this interesting.


With outsourcing issues again in the news, this discussion revisits the evidence from a different angle than previously. An earlier discussion (entitled, "Outsourcing / Off Shoring") examined the issue from the point of view of wage differentials and productivity. It concluded: (1) Because the United States has a high standard of living and a high wage structure, this country has long faced the challenge of inexpensive foreign labor. (2) The United States has increased its standard of living despite this challenge through rapid productivity growth to warrant its high wages and ongoing product innovation. (3) Most of the jobs lost to offshore activities probably would have lost to technology and innovation anyway, even in the absence of this foreign competition. This discussion takes a straightforward statistical approach to the question. By comparing the job losses by industry with swings in domestic demand, it shows that outsourcing overseas and foreign competition generally has played a relatively small role in America’s labor market during this recent period and is certainly not the threat to the economic recovery or the nation’s well being that many in the media have suggested.

Where the Jobs Were Lost
An examination of detailed jobs data by professional groups since the stock market bubble burst yields some surprising results that fly in the face of conventional wisdom. To be sure, production workers have suffered the greatest setback during this time, with job losses approaching 1.9 million. That fact has been well advertised in the media. What is unusual is that the second largest group to suffer losses in this period is management. The Bureau of Labor Statistics indicates that junior, middle and senior management positions fell by 1.1 million, proportionally far more than job losses in the production areas. Many other areas, such as business and financial services, health care, education, food preparation, personal care and social sciences, actually saw increases. Of the rest, the only categories that saw significant losses were office support and transportation, and these losses for the entire period registered less than 250,000 in the first case and barely 100,000 in the second.

Examining the job loss data by industry instead of professional group confirms that the greatest losses have been in manufacturing, which lost about 900,000 jobs a year on average during this time. The only other significant losses occurred in wholesale and retail trade and professional and business services, each with a loss of a bit over 200,000 jobs a year on average, and information, with a loss of about 150,000 a year. But though manufacturing suffered the most, the shock of change was greater in these other areas. After all, manufacturing lost some 500,000 jobs on balance through the 1990s. The drop since 2000 is much more severe, but the difference is one of degree, not kind. By contrast, the professional and business area and wholesale and retail area both suffered abrupt reversals of fortune. The former gained almost 6 million jobs on balance during the decade of the 1990s, while the latter gained some 3 million jobs before suffering the reverses since 2000. Natural resources, construction, utilities and transportation showed negligible losses after only modest gains in the 1990s, while government, leisure, financial, education and health care showed gains quite comparable to the 1990s. Government and health care even accelerated.

Foreign Influences
Before laying all the blame for job losses at the feet of foreign competition, it helps to consider the independent jobs effect of the mild recession suffered in the United States and slow recovery during most of this time up until last year. To do that this analysis compares jobs losses by industry with the pattern of domestic demand in that industry. Job losses in excess of domestic demand shortfalls could at least have a foreign root. This kind of statistical game is far from fool proof, of course. Outsized productivity gains, for instance, might bring greater job losses than any declines in domestic activity would seem to demand, while sub-par productivity gains might understate the losses that poor domestic demand would otherwise occasion. But such comparisons can yield at least broad-brush indications that give a sense of where and if outsourcing or other forms of foreign competition might have had a role.

On this admittedly crude basis, the worst effects of outsourcing and trade would seem to lie in two industries that are seldom singled out in this regard, chemical products and plastics. In chemicals, domestic demand growth would seem to have supported expanding payrolls. Since 2000, activity in the domestic chemicals industry increased by some 10 percent, in fact. But payrolls in this area have actually dropped by some 17 percent during this time. In plastics, the domestic situation would seem to explain job losses of about 5 percent, but the industry actually shed about 15 percent of its jobs during this time. Some of these job losses surely reflect the tremendous productivity advances registered among chemical products and plastics producers, but much also must reflect inroads from imports and outsourcing.

By contrast, the worst hit part of manufacturing, computers and electronic products, shows little foreign effect. This sector’s nearly 30 percent aggregate job losses mesh entirely with the drop in domestic demand during this time. The steep loss of jobs here fits with perceptions of the tech bust and needs no recourse to trade or outsourcing to explain it.

Comparisons for other sectors suggest a mix of influences with slow domestic demand as the larger influence, usually by far. Jobs in machinery, for instance, fell by about 21 percent during this time. About 18 percent of that drop has a ready explanation in the behavior of demand to domestic U.S. producers. Textiles and mill products lost jobs at about a 29 percent rate for the whole period. Of that amount, sub-par demand to U.S. producers answers for about 23 percent of the drop.

Apparel, often singled out as most vulnerable to foreign competition, actually seems to have gained ground during this time. The slow domestic situation that prevailed through most of this time would have justified job losses of some 45 percent. As it is, the industry lost 40 percent of its jobs. Clearly, there were some gains here against foreign competition. The jobs losses here have still been a horrific strain on those involved, but less than the domestic situation would have demanded by itself. This unique comparison in no way implies that no jobs in apparel were lost to imports or outsourcing during this time. On the contrary, anecdotal evidence suggests the opposite. These statistical comparisons only suggest that gains against foreign competition in some areas of the apparel business more than made up the losses in other areas.

Looking Forward
It would help complete the picture here to go on beyond manufacturing to continue the comparisons for services but, unfortunately, such data is not available. Still the manufacturing data make a strong case that only a small part of the job losses to date reflect foreign competition and, as a consequence, it is reasonable to expect the continued economic recovery to restore at least the bulk of the jobs lost during this time. These new jobs will not be in the same areas of their industries and probably will not fill the same functions in the same ways. But as the earlier analysis concluded, the popular notion that foreign competition will undermine American growth and prosperity is overstated to say the least.

Milton Ezrati, Partner and Senior Economic Strategist forXXXXXXXXXX, has been widely published in a wide variety of newspapers, magazines, and scholarly journals, including The New York Times, The Financial Times, The Asian Wall Street Journal, The Christian Science Monitor and Foreign Affairs, on a broad spectrum of investment management topics. Prior to joining XXXXXXX, Mr. Ezrati was senior vice president and head of investing in the Americas for Nomura Asset Management where he helped direct investment strategies for both equity and fixed-income investment management.

The opinions in the preceding commentary of Milton Ezrati, Partner, Senior Economic Strategist, are as of the date of publication, are subject to change and may not reflect his current views. This material represents his assessment of the market environment at a specific point in time, should not be relied upon by the reader as investment advice, for which a Financial Advisor should be consulted, and is not intended to predict or depict performance of any investment.

[xoxoxoBruce]

The only other significant losses occurred in wholesale and retail trade and professional and business services, each with a loss of a bit over 200,000 jobs a year on average, and information, with a loss of about 150,000 a year.

This sector’s nearly 30 percent aggregate job losses mesh entirely with the drop in domestic demand during this time

Comparisons for other sectors suggest a mix of influences with slow domestic demand as the larger influence, usually by far. Jobs in machinery, for instance, fell by about 21 percent during this time. About 18 percent of that drop has a ready explanation in the behavior of demand to domestic U.S. producers.

I have a feeling the slow recovery and drop in domestic demand with the layoffs that accompany it are the result of two phenomonon.
First the loss of manufacturing jobs. These were good paying jobs and the people that held them, traditionally spent their money which kept a lot of others employed.
The other is the loss of faith, by the great unwashed in business, thanks to ENRON and their ilk. And in Governments fiscal policy of blowing sums of money, we can't even comprehend. After all, much of capitalism runs on faith.

Ah well, you know me, "tooo much ti-me on ma hands..." So I googled the Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/empsit.pdf and came up with some tidbits of my own which I carefully jotted down to share with you.

As of most recent yearly quarter ending in August 2004

Decrease in real hourly compensation: -.2% to -2.3% depending on job class from the last quarter which also showed decreases which also showed decreases, etc.

Index of manufacturing growth: 11.3 - down from 33.3 four years ago when Bush first took office.

Employment in textile mills, textile related mills and garment industry: down -.3, -.6, and -1.9 percent respectively from the quarter before which also showed losses from the quarter before ad infinitum. Why your guy is so rosey about the clothing industry beats me, but he did mention the word "anecdotal" so go figure.

Unemployment in the financial sector: 2.3%
Unemployment in the production sector: 6.8% - nearly triple the above

Anyhow, I thought some cellurites might find this interesting.
(Just playing the role of the "loyal opposition" - nothing personal, Lookout. )

[xoxoxoBruce]

The trouble with most of these numbers is they're based on Unemployment Insurance. When your benefits run out, or take another job at 1/3 your former pay, you drop off the screen.

[lookout123]

i have absolutely no interest in being an economist so i won't go do all the research on my own. but i think it is important to realize that individuals like Ezrati have no reason to twist numbers for political purposes. it is absolutely crucial that his information be correct. they are running $84B machine based in large part on this individual (and others) see as the direction of the economy. i would trust this type of source to a far greater degree than any government source.

[russotto]

Software and information technology have lost jobs; these particular figures are merely too coarse to show that, lumping everything together into business and professional services.

Outsourcing: It's often not a good idea, but you can't get financing without it.

Originally Posted by xoxoxoBruce

The trouble with most of these numbers is they're based on Unemployment Insurance. When your benefits run out, or take another job at 1/3 your former pay, you drop off the screen.

I checked and actually the figures are based on surveys of company payrolls, NOT the people who file for unemployment. I found it interesting to note how the real wage of the average American has steadily declined over at least the past 10 years (didn't look at figures before '92) and that's even if you stay with your same job, never mind having to take a lower paying one.

Originally Posted by Lookout 123

i have absolutely no interest in being an economist so i won't go do all the research on my own. but i think it is important to realize that individuals like Ezrati have no reason to twist numbers for political purposes. it is absolutely crucial that his information be correct. they are running $84B machine based in large part on this individual (and others) see as the direction of the economy. i would trust this type of source to a far greater degree than any government source.

Just curious. Aren't people more likely to make investments when they feel comfortable about the direction of the economy, rather than when they don't? I'm not trying to imply that you, personally, Lookout, would deliberately mislead clients, but might not some higher up see it as in the financial industry's best interest to paint an over-all rosey picture? When it comes to indivdual stocks, sure, its important to be as accurate as possible, but the individual you quoted seemed to be writng in a general sort of way. Without giving away valuable secrets, how would you advise your clients differently in a "the economy is going to hell" versus "everything is only going to climb to the skies" scenario? Based on the article you gave us, would you advise clients to buy stocks in any US textile company that by some miracle still does its manufacturing in this country? So if the financial community doesn't trust government sources, how does it get its data to make predictions? Isn't that frightfully expensive to use private research groups? These are all honest questions, not attempted jibes. I'm really puzzled as to how the whole thing works.

[lookout123]

Originally Posted by marichiko

Just curious. Aren't people more likely to make investments when they feel comfortable about the direction of the economy, rather than when they don't? I'm not trying to imply that you, personally, Lookout, would deliberately mislead clients, but might not some higher up see it as in the financial industry's best interest to paint an over-all rosey picture?

no - serious investors (read dedicated, not necessarily wealthy) are concerned about the long term, not short term. putting unrealistic expectations in an investor's mind is the fastest way to make sure they are dissatisfied and will pull their money rather quickly. the financial industry, as a whole, doesn't really care who is in office, or any of the other thousands of concerns that most of us think matter (i.e. unemployment, inflation, deflation, outsourcing, etc...) if they have accurate info they can make adjustments to the portolio and if they are properly balanced, it doesn't matter what the economy is doing they are poised to gain.

When it comes to indivdual stocks, sure, its important to be as accurate as possible, but the individual you quoted seemed to be writng in a general sort of way.

the article was not an in depth analysis meant to change anyone's course of action. it was just general info, one article in a series. more of a reassurance that "yes there are problems, but not as bad as you might think from listening to the talking heads" type of thing.

Without giving away valuable secrets, how would you advise your clients differently in a "the economy is going to hell" versus "everything is only going to climb to the skies" scenario? Based on the article you gave us, would you advise clients to buy stocks in any US textile company that by some miracle still does its manufacturing in this country?

i advise the same thing no matter the condition of the economy - balance. if an individual is properly balanced it doesn't matter what the economy does, they are going to come out ahead. balance and diversity are the key to successful investing. diversity doesn't just mean different though. one should be diversified by industry, sector, and category. it isn't hard, it only requires the discipline not to follow the crowd.
but to be clear - no one is saying that we are in a market boom period. we are, however, in a bull market.

So if the financial community doesn't trust government sources, how does it get its data to make predictions? Isn't that frightfully expensive to use private research groups?

government sources are used, but not exclusively. major money management firms have breathtaking research and analysis departments that do nothing but research particular industries and companies within the industries. they go directly to the sources - or as tw likes to say they go to people who are "where the work gets done". they don't have a political agenda in putting together their conclusions as government workers and pollsters often do, their only goal is accurate info so the decision makers can make solid decisions about what to do with their assets.

Thank you for clarifying those things for me. Everything you said actually made perfect sense to me. WOW!