-Caveat Lector- From http://www.iht.com/cgi-bin/generic.cgi?template=articleprint.tmplh&ArticleId=68756
Copyright � 2002 The International Herald Tribune | www.iht.com A bounty of supply in America is paid for with lost jobs Steven Pearlstein The Washington Post Monday, August 26, 2002 WASHINGTON To understand why the U.S. economy cannot seem to muster a stronger recovery, it helps to look for clues in Victorville, California, where 500 unused and unwanted passenger jets - some of them brand new - sit wing tip to wing tip in the desert. Or in Detroit, where the Big Three continue to churn out large numbers of passenger cars that they sell at little or no profit just to keep their factories busy. Or in nearly every major metropolitan area, where office vacancy rates are still rising after 18 months and have reached 25 percent in Dallas and 18 percent in San Francisco. But perhaps the best explanation can be found in those falling prices that shoppers find for clothing, televisions, hotel rooms and cellular phone service. While the bargains are great for American consumers, they are being paid for with continued corporate layoffs, lackluster stock prices and a sky- high trade deficit - in short, an economy that is having trouble building up a head of steam. Economists refer to this phenomenon as overcapacity, which is really nothing more than too much supply chasing too little demand. And it can be found these days across a wide swath: agriculture, autos, computer hardware and software, financial services, steel and telecommunications, just to mention a few. In almost every case, it is accompanied by prices that are flat or falling. Overcapacity is a feature of every recession. A slowdown in consumer spending and a decline in business investment suddenly leave too many companies with too many workers, underutilized plants and underperforming stores. In most cases, it is only after most of that excess is cut back, and supply and demand get back into some rough balance, that businesses begin hiring and investing again, laying the foundation for another period of economic expansion. This time, however, that process is turning out to be longer and more drawn out than in the past, making for a slower and weaker recovery than forecasters, executives and policymakers had expected. There are some economists, such as Alan Blinder of Princeton University, who say the problem now is insufficient consumer and business spending - "demand," as economists call it. But increasingly, economists are coming to realize that heavily indebted consumers are not likely to significantly increase their spending. And with stock prices well off their highs, businesses are still slow to resume capital expenditures, even as profits have begun to rebound. The big culprit in the supply-demand mismatch was the investment boom of the late 1990s, arguably the longest and most exuberant since the 1920s. Flush with cheap money made available by Wall Street, businesses of all sorts rushed out and expanded their capacity. When the economy slowed, they suddenly found themselves with more capacity than they could profitably employ. "In hindsight, it's now clear that we invested too much in plant and equipment during the last boom - maybe 20 percent to 25 percent too much," said Jerry Jasinowski, president of the National Association of Manufacturers. "We were looking at things in an analytically flawed way." Ironically, another reason this recovery may be so weak is that Washington policymakers moved so quickly to prop up the economy when it became clear a recession was in the offing. By all accounts, those policies helped to make the recent recession one of the shortest and mildest in recent decades. But according to Stephen Roach, an economist at Morgan Stanley, it also meant that the necessary task of working off all that excess capacity has been only partly done. "Like it or not, the post-bubble excesses of the U.S. economy remain largely intact," Roach said. "That's the unfortunate outcome of a mild recession - it doesn't result in a major purging of long-standing imbalances of the economy." The degree of excess capacity in the economy is difficult to measure. In the manufacturing sector, where reliable data are available, the Federal Reserve calculates that U.S. plants were operating at 74.4 percent of capacity last month. That is closer to the low point of 73 percent last December than the 81 percent average of recent decades. Recently, one bright spot for the economy has been the auto industry, which has posted near-record sales for cars and light trucks. But according to industry executives and analysts, such encouraging numbers obscure the fact that U.S. auto manufacturers still suffer from serious overcapacity that will require painful restructuring, beginning around this time next year. One reason it has not happened already can be found in the labor agreement the United Auto Workers union reached with General Motors, Ford Motor and Chrysler that requires companies to pay the workers their full salaries through the end of the contract, whether they are working or not. Because of that provision, it makes more sense for the Big Three to produce and sell cars even at a small loss than to shut down plants. All of that will probably change when the UAW contract expires in September 2003. Industry executives determined to return to sustained profitability are already preparing the list of plants they intend to shut down, even if it means giving up market share to imports and "foreign" cars, such as Toyotas and BMWs, that are produced at nonunion U.S. plants. A similar dynamic is already at work in the airline industry, which has only recently come to the conclusion that a modest economic recovery will not be enough to return it to profitability. In the past week, US Airways, American Airlines and Continental Airlines all have announced plans for another round of layoffs and route reductions, and United Airlines has threatened to join US Airways in bankruptcy court if it cannot quickly win major wage concessions from its unionized workers. Obviously, part of the airlines' problem is the lingering effects of the terrorist attacks of Sept. 11, which continue to affect the willingness of people to fly. But an even greater impact has come from the growth of low-fare airlines such as Southwest and JetBlue, which have been driving down fares. The result is an industry where supply and demand, cost, and fares are out of whack. The industry as a whole lost a staggering $11 billion last year and is on track to lose $7 billion more this year. So far, all this turmoil has been good news for price-conscious airline passengers, but the implications for the economy are not so positive. Along with the airlines, the hotel industry is lowering its expectations for the next year. Although the industry began to slow construction of new hotel rooms beginning back in 1998, excess capacity in most major cities has now forced down room rates to levels that discourage the building of any new hotels. The retail sector is also in for another few years of restructuring as more efficient and effective competitors such as Wal-Mart, Target, Kohl's, Lowe's and Home Depot continue to expand rapidly, taking share from specialty chains and department stores that in many cases are now fighting for survival. Although calculating capacity rates in service sectors is difficult, one proxy is the market for office space, which nearly all service businesses use. And so far the data show that there are still more companies moving out of space than there are companies moving in. And that's been going on now for the past 18 months. "Right now we're swimming in excess space," said David Shulman, a real estate analyst with Salomon Smith Barney. Shulman reports that a lot of service companies have held off getting rid of their unused space in anticipation that the economy would bounce back by this summer. Now that it has not, he said, he is expecting a lot of additional office space to be dumped on the market in the coming months. In the high-tech sector, meanwhile, recent data and company reports indicate that the bottom may have been reached as businesses begin to invest again in personal computers, software and networking equipment - not so much to increase capacity but to improve efficiency, lower costs and improve product quality. Nowhere is the plague of overcapacity more evident than in the once high-flying telecommunications sector. The unprecedented overbuilding there has created a vicious downward cycle in which price wars beget bankruptcies and bankruptcies beget more price wars, dragging down weak and strong companies alike. 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