Comeback: Why the US Sits at the Brink of a New Boom
By Charles Morris
The man who predicted the crash of 2008 thinks energy and heavy manufacturing have the potential to fuel an economic boom not seen since the 1950s and 1960s. Photo courtesy of Jim R. Bounds/Bloomberg via Getty Images.
Paul Solman: In 2005, Charles Morris became convinced that a debt crash was inevitable. In 2006, he began his 10th book to make and explain his prediction. In 2007, he delivered the manuscript, and at the beginning of 2008, Public Affairs Books published "Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash," which received almost no notice at all until The Economist magazine wrote about it in March. Six months after that, the deluge.
What's remarkable is how well Morris' analysis of the crash, written before the crash, holds up half a decade after it. So when I saw that he was calling his newest book "Comeback," I felt obliged to take a look.
I'll let him take it from here.
Charles Morris: It's the best-kept secret in the economics media: The United States is on the brink of a period of solid, long-term growth rivaling that of the 1950s and 1960s. It is not a finance-driven, self-destructive boom, like the 2000s' housing bubble. No, the new economy will be durably grounded in energy and heavy manufacturing, even though it will take several years to come to full fruition.
Evidence? Dow Chemical has commenced a $4 billion development in new plastics manufacturing in Texas, for example, that will start coming on stream in 2015 and be fully operational only in 2017, but it will be productive for a very long time. This will be a growth cycle with staying power.
Why haven't you heard about the boom? Official economic forecasters, like the International Monetary Fund and the Congressional Budget Office, simply have not factored America's emerging new economy into their forecasts. Instead, they still see us limping along at an average of 2 to 2.5 percent real (after inflation) growth to the farthest horizon -- a hobbled, aging power, borne down by debts and deficits, shorn of its old bounce-back vigor, tottering along just fast enough to stave off out-and-out stagnation.
There is no question that the financial crash has left deep economic scars. But the fundamentals will turn in America's favor and when they do, annual GDP growth should kick back up to at least the 3.3 percent average real growth rate that has prevailed since 1950. That's far from a startling forecast for a recovery, but even at that level, the budget problems that have so paralyzed official Washington will shrink rapidly in the rear-view mirror as tax receipts grow, making debts and deficits shrink. The seemingly crushing post WWII debt -- 120 percent of GDP -- quickly dropped from the radar screens with growth in the 3-4 percent range in the 1950s. So what are the positive portents?
The Energy Boom Is Already Here
The most salient is the sudden emergence of the United States as a major energy producer. A recent U.S. Geologic Service study concluded that the Bakken Shale in North Dakota and Montana, already crowned as the U.S.'s largest-ever gas and oil reservoir, has far greater recoverable reserves than previously thought. At about the same time, a team from the University of Texas completed a well-by-well analysis of the Texas Barnett Shale -- the most intensively developed shale field in the world -- and confirmed that the fields can support decades of further development. The current official estimate -- that by 2020 or so the U.S. will surpass Saudi Arabia in oil output, and Russia in gas -- remains on track, and the country will be a major global energy producer far beyond that, which will do wonders for the U.S. trade deficit.
Energy production is a good job producer, offering classic blue-collar jobs at high pay to people without college degrees. Oil and gas rig workers can pull down $100,000 annual incomes before they're thirty. Daniel Yergin, a leading energy analyst, estimates that the sector now accounts for 1.7 million jobs, including energy production itself, its direct supply chain, plus the multiplier effects from the additional spending power.
Each shale well requires up to 100 tons of high-quality steel pipe; fleets of specially adapted trucks and trailers; a small hangar of earthmoving, drilling and other equipment; specialty chemicals, sands and ceramics; and some very high-end seismic and other underground imaging gear. Many of these products are now U.S. specialties. According to the annual Oil & Gas Journal survey, American oil and gas industry investments will total $348 billion in 2013, equivalent to about 2 percent of GDP, with much of the investment flowing in from overseas.
The collateral job creation is even more important, and it's just getting underway. The big attraction is the low price of natural gas, the lowest-carbon fossil fuel, which can be produced profitably at about a third the price per unit of energy as other hydrocarbons. That is particularly attractive to chemical companies. Natural gas is an ideal "cracking" fuel, generating the intense heat needed to break up and rearrange molecules to make usable chemicals. But it is also the raw material for plastics, Styrofoam, tires, sealants, adhesives, films, liquid crystal screens, nylons, polyesters -- nearly everything around us. Besides Dow's new Texas plant, it is building or rebuilding three others. Other big players, like Shell, Chevron, Bayer and Formosa Plastics, are both expanding current plants and starting new "greenfield" plants.
But it goes far beyond chemicals. Nucor is the world's most profitable steel company, and arguably the smartest. It has locked up long-term supplies of natural gas so it can shift to a highly efficient, but extremely energy-intensive, way of making iron that would not have been possible at the prices charged for conventional energy. Within a few years, all of its American plants will run on natural gas. U.S. Steel is experimenting with similar technologies.
Manufacturing Takes Off
The new American energy advantage dovetails neatly with other positive signs of an American manufacturing recovery. According to the Boston Consulting Group (BCG), Chinese worker compensation has been growing at an extraordinary rate: From 2000 to 2010, average wages in south China's Yangtze delta, a manufacturing hotbed, jumped from $0.72 an hour to $8.62. American wages are still much higher, but so is American productivity, and the costs and time of long-distance shipping, along with the scarcity of Chinese land and that country's endemic corruption, bring China and the U.S. to a rough competitive parity in all but the most labor-intensive industries.
BCG also estimates that the United States can undersell firms in Japan and Europe by as much as 25 to 45 percent, and that it may also have the world's best trade logistics capabilities.
The true costs of outsourcing often don't show up on earnings statements. For example, when General Electric, a pioneer of the original offshoring movement, began moving its appliance manufacturing back from China, they discovered how badly their designs had stagnated. With their production and design teams in the same plant and speaking the same language, they realized a 20 percent overall savings over their Chinese costs on their first "reshored" appliance by making big reductions in material and labor inputs.
Onshore production also makes it easier to keep up with today's just-in-time delivery mandates and ever-more-rapid product cycles. And like all American companies, GE has become wary of the Chinese propensity to knock off market-leading product designs. Manufacturing jobs also tend to have the highest employment multiplier effects. Lawyers and high school teachers are pretty much solo acts, but each new manufacturing job, especially in heavy manufacturing, creates as many as 1.3 to 1.8 additional jobs. A steel mill, for example, is at the center of a vast extraction, transportation, fuel, equipment and servicing network -- mining and smelting iron, converting it to primary steel products, distributing it to fabricators of metal products, and much more.
Citi GPS, Citigroup's economic analysis group, estimates that by 2020, America's energy revolution will support as many as 3.6 million jobs, both in the energy sector itself, and including the new manufacturing development it will support. The Financial Times recently reported on the concerns in European economic ministries at the rapid pace at which heavy industries are shifting operations to the United States to take advantage of its reasonable labor costs and inexpensive energy.
Dow Chemical recently compiled a list of 108 major manufacturing projects, from more than 80 different companies, either under construction or in development here, with planned investment of nearly $100 billion. About a third are already underway or due to start construction this year; 60 percent are scheduled to be under construction by 2015.
There has already been a visible recovery in manufacturing jobs, up by more than 500,000 since the recessionary low point in early 2010. Some economists have scoffed at that as merely typical of historic recoveries. But manufacturing jobs did not increase at all during the relatively strong 2003-2007 recovery, and while the current recovery has been exceptionally weak, manufacturing job growth rivals that in the halcyon years of the late 1990s. So while it's too soon for definitive statements, something does appear to be going on. And it will only build as long lead-time plant developments start coming on stream.
Can Nothing Go Wrong?
With this unusual flood of good news, you might be asking yourself the question: can nothing go wrong? To which the obvious answer is: Of course it can. For one thing, the energy industry can fail to tighten up its environmental game.
Shale-based fuel production should be one of the most benign forms of energy production. It uses the least water of any mode of hydrocarbon production and generates the lowest CO2 emissions. And there is only one documented case where the "fracking" -- the process of opening up deep underground seams in the shale rock by hydraulic pressure to facilitate product flow -- has contaminated underground water supplies.
The reason why the public reaction against shale oil and gas drilling has been so strong is because it is unusually intrusive. Shale rock may underlie as much as two-thirds of the country, and the hydrocarbons are thinly distributed -- 6 percent gas and oil content is a reasonable average. So unlike coal mining or conventional oil drilling, which are usually confined to specific geographic areas where they dominate the local economies, shale production often rubs right up against residential areas with no history of gas and oil extraction.
It takes a year or more to develop a typical shale-rig "pad," usually with about 10 wells. Once they're in operation, they are unobtrusive -- the piping is all underground and the operation is silent. But the development period is a 24/7 onslaught of floodlights, water tanker traffic, airport-level diesel noise, and much too frequently, chemical spills or toxic storage tank overflows. Understandably, it drives locals crazy, and generates indelible impressions of vast waste and pollution. The widely documented contamination of well water around shale developments has virtually all been from poor surface fluid handling and careless spills, not from the actual process of fracturing.
But this is a very young industry. Its first profitable well came in hardly more than a decade ago. It was jump-started by brilliant entrepreneurs focused single-mindedly on producing marketable hydrocarbons. As neophytes, they have often done a poor job of managing leak controls, fluid disposals and other environmental and safety issues. But over the last few years, the industry has been consolidating into much larger companies, often owned by the oil majors. Their executives have seen the environmental movement stop the nuclear industry in its tracks, and most have long experience in raising their own operational standards and suffering major fines and losses when they failed to. They are likely to make the necessary fixes, but how soon will they do so?
One early priority will be to reduce methane emissions. Methane is a powerful greenhouse gas emitted, often intentionally, from shale production sites, but there are no reliable data on the seriousness of the problem. Nine major companies have joined with two universities and the Environmental Defense Fund to conduct a rigorous end-to-end audit of methane emissions, with the objective of cutting them as near to zero as practicable. Admittedly, however, these are merely first steps, and the industry has a long way to go before the public will take its assertions of clean operations at face value.
Another way the industry could place the boom at risk is to win its battle for unrestricted natural gas exporting, a danger I have spelled out in detail elsewhere.
So yes, there are real and future threats to the economic comeback I envision. We could indeed throw it away. But the opportunity is at least as real: the United States can secure solid economic growth into the foreseeable future -- and well beyond.