June 4, 2008
It's Back To The Basics For U.S. Economy

WASHINGTON — This is not your economy. It's not even your parents' economy. To a surprising degree, this is your great-grandparents' economy.

Quietly, while attention has focused on the technology, finance and service sectors, businesses that stood astride 19th-century industrial America but then collapsed have been resurrected to meet the needs of a feverishly industrializing world. In the process, much of what Americans think they know about their economy is being upended.

Steel makers, railroads, mining concerns and agriculture — long considered part of a fading past — suddenly have bright futures. And segments of the economy long lauded as the wave of the future are undergoing an old-fashioned and very painful consolidation.

"The wheel has turned. What was up is down, and what was down is up," said San Francisco investment executive Frank Husic. "And it's all because an emerging world wants to eat, drive and live in houses — things we take for granted and have for well over a century."

Dan Basse, president of AgResource, a Chicago agricultural-forecasting company, agreed. "The tech industry offered us things to occupy our minds and entertain us. But we're moving back to a world of stuff, whether that's vegetable oil or copper or zinc or cotton. Stuff that you can hold in your hand and drop on your foot."

The twin turns of fortune for the nation's Old and New economies are letting once-struggling behemoths such as U.S. Steel put modern marvels such as Microsoft to shame. The price of U.S. Steel's stock has shot up 1,000 percent in recent years, while Microsoft's has essentially flatlined.

And the changes are lifting much of America's geographic middle at the expense of its coasts. Personal income in the nation's manufacturing, mining and farming states, which are concentrated in the heartland, has been growing at an average annual rate of 6.5 percent in the past five years. The rest of the country has managed only a 5.4 percent pace, according to government statistics assembled by Moody's

"The new trends in the economy bode well for the middle and very badly for the edges," Husic said.

There's one huge catch: While the heartland's revival is producing lots of new revenue and profits for Old Economy companies, and while it's pushing up the incomes of their employees, it's not generating lots of new jobs.

Still, those industries are doing substantially better than former high-growth sectors such as finance or retail, which are laying off workers by the thousands. And the fact that paychecks are fatter and employment steadier ripples throughout the heartland states, benefiting millions of people not directly involved in the booming industries.

The slow growth of new jobs does mean, however, that the spillover to the rest of the country will likely be quite limited, and the economy as a whole will have to keep relying on high tech and services if it is to experience new growth in income and employment.

U.S. steel production has risen almost 5 percent over the past five years, according to the American Iron and Steel Institute. But steel employment has fallen 10 percent, according to the Bureau of Labor Statistics.
Corn production has jumped 30 percent during the same time period, while farm payrolls have fallen by nearly the same percentage, Agriculture Department figures show.

There's also a mitigating element in the revival. As the value of the dollar has dropped sharply over the past five years, the prices that foreigners pay for our pelletized iron ore, steel plates, corn and coal has also declined.

Once the overall U.S. economy recovers, the dollar is likely to head back up, erasing part of the advantage that U.S. farmers, miners and manufacturers now have.

Few analysts think, however, that the weak dollar alone is what's powering the comeback of the Old Economy, and few expect it to fade when the dollar recovers.

"We're in the midst of 2 to 3 billion people around the world rising out of abject poverty and demanding they have a better living standard," said Daniel DiMicco, head of Nucor, now America's largest steel company. "That means we've got a 20- to 30-year bull market in basic stuff."

Added Basse, "This is called globalization. It turns out we have some things foreigners want, too."

The new vitality is reflected in a major surge in exports of U.S. goods, up about 80 percent over the past five years — to $316 billion in the first quarter of 2008 from $176 billion in the first quarter of 2003, government figures show.

Foreign demand has helped drive U.S. Steel from a $420 million loss five years ago to a nearly $880 million gain last year. Mining giant Freeport-McMoRan's profit is up 1,539 percent, from $181.7 million to nearly $3 billion. Fertilizer maker Mosaic's earnings went from $54 million for all of 2003 to $521 million for just the three months ended in February.

Contrast these performances with those of former darlings of finance and tech. Insurance powerhouse American International Group swung from an $8 billion profit five years ago to an almost $8 billion loss last quarter. Chip maker Intel, although still in the black, has seen its profit slide.

And the high-tech sector is experiencing the kind of consolidations — and job reductions — typical of a maturing industry, rather than a booming upstart.

Oracle has gobbled up PeopleSoft, Siebel Systems and BEA Systems, for instance, while Hewlett-Packard agreed to acquire Electronic Data Systems for a whopping $13.9 billion this month and Microsoft is edging toward another attempt to gobble up Yahoo.

"We'll see more consolidation, not less," HP Chief Executive Mark Hurd said at a technology conference in San Francisco last fall, predicting that a handful of companies would end up with the capability to offer a full array of hardware, software and services to customers in all segments of the market.

Meantime, the comeback of America's codger industries is flipping some of Americans' most prominent notions about the nation's economic past and future on their heads.

Consider that when he ran the Federal Reserve in the 1990s, Alan Greenspan liked to imagine how the actual physical weight of what the United States produced was falling as the economy shifted away from heavy industry and into computers, microchips and the almost completely ethereal Internet.

But the country's economic weight loss, if it ever really occurred, is coming to an end, say Old Economy watchers, and with it near-total reliance on the promise of high tech.

Most Americans may also have assumed that, along with high tech, the future of the U.S. economy — and that of most other developed nations — lay with the service sector. That's why, until recently, investors snapped up companies like global fast-food giant McDonald's.

But as food prices have rocketed and agriculture has taken off, some investors have a new sweetheart: Potash of Saskatchewan, Canada, the world's largest supplier of a type of fertilizer that dates to the 14th century and is in increasing demand by farmers. Today, the little-known company is valued by the stock market at almost $64 billion, nearly as much as McDonald's.

Similarly, it's been widely assumed that U.S. costs would always be much higher than those of the developing world. But what do you find today?

"The United States has become one of the lowest-cost producers of steel in the world," said Michelle Applebaum, a former steel analyst with her own Chicago research company. Who's the high-cost producer? "China."

One reason is that the U.S. is rich in basic resources, especially those that go into steel. And many U.S. manufacturers have long relationships — and long-term, fixed-price contracts — with suppliers. As rising demand for raw materials has driven up world prices, American producers have been relatively sheltered.

"Nobody in America is buying ore at the inflated prices the Chinese are paying," Applebaum said.

The big exception is oil, but almost every country is paying its rapidly escalating price.

Perhaps the most fiercely held assumption about the economy has been that U.S. manufacturers could never compete globally because Americans earned vastly more than foreign workers.

During the past several decades, though, the wages of many American workers have not grown at anything like the rates they used to. In the past decade, they haven't grown at anything like wages in much of the emerging world. So the wage gap is narrowing.

Also, as rapidly industrializing countries such as China, India and Brazil demand more raw materials, driving up prices, labor costs are a dwindling factor in global competition.

"Forget about labor costs. That's all Kool-Aid talk," said DiMicco, steel company Nucor's CEO. "Hot-rolled sheet [one of the major products of the steel industry] is selling for $1,000 a ton today. Our labor costs for everything are under $10" per ton, he said. "It's become virtually insignificant."

And at least some Old Economy companies are hustling to stay out front. This month Nucor applied for permits to construct a $2 billion steel mill in St. James Parish, La. If approved, it would be the first integrated-steel plant built in the U.S. in about four decades, DiMicco said.

"It's back to basics," he said.

Source: Los Angeles Times, May 26, 2008

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