Economic Growth

Employment statistics along with other economic indicators are generally improving. Dennis thinks he may know why.

Wilmington NC – [Click the Listen button to hear Dennis' commentary.]

That the American economy is ticking along at a pretty good pace is old news. Perhaps the most impressive indicator has been the employment statistics. With three straight months of strong gains, more than 1.2 million workers have been added to payrolls so far this year. This reverses the 3-year trend of job losses that continued well after the last recession ended in late 2001.

Particularly impressive, employment has finally turned upward in the hard-hit manufacturing sector. The nation?s factories have added new jobs for four consecutive months, hourly earnings are now increasing, and the average factory workweek has risen to more than 41 hours.

Accompanying the good employment news have been reports of increased business investment, strengthening consumer spending, and rising consumer confidence. To quote Wells Fargo chief economist Sung Won Sohn, these numbers ?are convincing evidence that the economic recovery is here to stay.?

To this economist?s inquiring mind, however, the question quickly arises, what is behind this upturn, particularly in the manufacturing sector. Labels stating ?Made in China? ? or any number of third-world countries ? still seem to dominant most of the manufactured goods I see on retailers shelves.

The Bush Administration, of course, will readily give credit to its three massive tax cuts ? putting more spending money in the hand of ordinary Americans, so goes the rhetoric. Mr. Greenspan and the Federal Reserve can cite the effects of low interest rates. Certainly, both lower taxes and cheap interest have stimulated consumer spending. But with the wide availability of reasonably good, relatively low-priced consumer products from abroad, what explains the sharp up-turn for American manufacturers?

To paraphrase a former president, my answer is, ?it?s the war, stupid.? While there is little hard data, an impressive array of anecdotal evidence suggests that much of the growth in factory employment has been due to defense spending. The military does, after all, ?buy American.? At a factory in Ohio, for example, heavily-armed Humvees, designed to withstand roadside bombs, are being put together around the clock, seven days a week. The plant turned out about 600 vehicles two years ago, about 850 last year, and roughly 1,000 so far this year. Nearby, thirty new workers are producing bullet-proof glass; employment among other direct suppliers has more than tripled.

Similar stories appear elsewhere. New kilns in California bake ceramic body armor. Apparel plants in Arkansas, Alabama and Florida struggle to fill new uniform orders. Once-idle South Carolina textile mills spin camouflage fabric. A Texas army depot has increased employment nearly 30 percent to rebuild wheeled vehicles damaged in the war. And on it goes.

It is impossible to know how many of the new manufacturing jobs are war-related, as the government does not track defense-contractor employment. But, military spending is up about 16 percent so far this year. Considering that defense accounts for less than 4 percent of the overall economy, it seems clear that war-related spending has been a major factor behind the growth in industrial employment.

Of course, there are economic down-sides. Coming on top of tax cuts, war spending is driving the Federal budget deficit deep into the red. This will eventually have to be repaid ? meaning some combination of higher taxes, reduced government services and benefits, and a depreciated dollar.

And, there is the worry that all this work will disappear as quickly as it materialized. War, after all, is a pretty inefficient way of building an economy. It creates few long-lasting assets. Much of what is bought is soon lost to enemy attack, rapid wear, or it simply explodes.