Baldwin Investment Management, LLC

 

“HOLLOWING OUT”

 

Each week on Thursday, the government delivers employment statistics which for quite some time have not been terribly encouraging.  The democrats make “political hay” by incessantly reminding voters that over 2,000,000 jobs have been lost since President Bush has been in office.  Manufacturers have “cried foul” and insist that they cannot compete with cheap Chinese goods.  The U.S. stock market frets about employment statistics, worried that consumers will lose their confidence and no longer be the vital engine of the United States’ economic growth.

 

            What is troubling is that the jobs that have been lost over the past couple of years are manufacturing jobs because they are typically well paid.  Unfortunately, for those who are unemployed, quite a few of these jobs will never come back; this is what typically happens in an open market economy.  Interestingly, as jobs have gone away, manufacturing output has increased rather dramatically.  In fact, since 1970 America’s manufacturing output has doubled, and even after the recent recession American manufacturing output is almost 50% higher than it was in 1992.  Manufacturers have cut jobs because they have invested in more sophisticated processes, i.e. they have replaced labor with capital.  In 1947, according to the Federal Reserve Bank of Chicago, 35% of America’s workers were employed in manufacturing.  By 2002, this figure had fallen to just 12%.  Nevertheless, America’s output has soared.  In other words, America has become far more productive over the years.

 

            Unsettling markets recently have been clamoring for currency realignment to help the U.S. to redress the unemployment issue.  In particular, various politicos have focused on the Chinese yuan saying that it is massively undervalued because of its peg to the dollar.  Over the past few years the Chinese have built large trade surpluses and hold huge U.S. dollar reserves.  For those seeking political office it is rather a simplistic and popular argument to make that Americans are losing their jobs to the Chinese because of their cheap labor and undervalued currency.  It is important that firms find lots of reasons to keep jobs at home.  Factories in high labor cost countries like the U.S. employ fewer workers and thus labor costs are no longer make or break decisions on where to put a factory.  In fact, the National Association of Manufacturers calculates that payroll costs account for just 11% of overall manufacturing costs in America.  As an example, shipping costs and speedy distribution are more important than relative wages; Dell builds its computer assembly plants near its customers, both in high labor cost and low labor cost countries.  In addition, there are analysts who would claim that companies who blindly seek low labor cost countries in which to manufacture often overlook transportation costs, the cost of extra inventory and political and security risks.  These are hidden costs which do add up and in many cases overcome the advantage of lower labor expense.

 

            The U.S. economy is going through a period of adjustment.  In the late 1990s there was massive capital investment which has lead to increasing productivity growth.  In the long run, this is very good news for the U.S. economy.  In the short run, it is not good news for those who have been displaced by better manufacturing techniques or lower cost laborers in other parts of the world.  This has happened before and it will happen again.  As our economy continues to pick up steam, people will be employed in other jobs.  Unemployment should not be a statistic which rattles the marketplace on a weekly basis.

 

 

PREDICTIONS FOR 2003                                                                           COMMENTS

 

Fed will not allow deflation                                                                                Still the case – Inflation currently at +1%

 

U.S. fiscal & tax policies will be expansive                                                        Defense spending, Homeland spending, Highway
                                                spending, Tax reduction enacted $500 billion budget

                                                                                                                        deficit.

U.S. economic growth will be at 3%+                                                               Looks Good – predictions are as much as 5%+ for Q3

 

Oil prices will drop to low “twenties” per barrel                                                 Oil prices dropped, then rebounded.  OPEC surprised
as Iraq & Venezuela get “sorted out”                                                             the market with a cut in production in face of new

                                                                                                                        production from Venezuela, Iraq, & Russia – Still in

                                                                                                                        the high 20’s

Japanese yen devaluation will be controlled                                                       So far yen has been a little stronger than expected – at

                                                                                                                        112 per U.S. dollar.

 

Euro will remain strong–at parity to the dollar or better                                      So far - $1.15 per Euro

 

North Korea will not “explode”                                                             Lots of rhetoric but no explosion (lost Women’s World

                                                                                                                        Cup game to U.S.)

 

Osama will be “sold out”                                                                                   The #3 guy has been captured-still expected

 

Politics in the Middle East will lean to the West                                      Still believe this will be the case but still a very

                                                                                                                        troubled area

 

Markets will not be down for a fourth consecutive year                                      Still hopeful – S&P return for YTD +14.7%

(Dare we say this?)

A FINAL THOUGHT

 

 

 

 

 

 

“The motion has been made and seconded

that we stick our heads in the sand..”

 

 

 

 

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The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

 

The reported numbers enclosed are derived from sources believed to be reliable, however, we cannot guarantee their accuracy.  Past performance does not guarantee future results.

 

A list of our Proxy voting procedures is available upon request.

 

A current copy of our ADV Part II is available upon request or at www.baldwinim.com/disclosure.htm                                                                                  9/30/03