House Of Cards

SEARCH BLOG: ECONOMY

Trying to figure out the economy? The most obvious changes have been in two sectors: industrial and financial.

In the industrial sector, the U.S. continues to dominate, but is not nearly as vertically integrated as decades ago when basic parts... that became basic components... that became basic assemblies... that became finished products were produced in the U.S. The industrial network was based in the U.S. and the jobs pyramid was based in the U.S.

Now, the lower layers of the pyramid have become porous and weak. Towns and cities and states that used to hum along with the machinery of our industries have become shells of their former selves. More and more, we are employed "servicing" each other... selling at Walmart instead of creating tools or parts or new products.

Much of this change has been associated with productivity gains rather than outsourcing to other countries. I suspect the argument for productivity is somewhat overstated, just as the blame placed on outsourcing is overstated. Regardless, the shift to service sector jobs results in wages that are, on average, 8% less than manufacturing job wages.

The average for services, $11.79, was about the same as the overall average and was 92 percent of the average for manufacturing. [source]

If you take 8% more per year from a large sector of employment and add that to the economy, you do get a significant bump.

But the process of moving from manufacturing to service jobs has been going on for awhile, so the economy has adjusted to that. So have individuals who have lost their manufacturing jobs. Less money coming in means less going out or saved... on average.

Of course, if you have adjusted to an economy based on many at the lower levels earning less, then there may be less opportunity for further adjustment when the economy is impacted by sudden problems... especially when those problems are caused at the top.

A few years ago, we saw cracks in the financial world with hedge fund scandals. Now we are seeing further cracks with the sub-prime scandal. It seems that the mundane world of banking and investing has gotten caught up in the "get rich quick," high-risk mindset that accepts manipulation of markets as preferred paths to wealth. While there may be big reward with big risk, there is the big downside as well.

“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.” [N.Y. Times]

Is there a connection between lower paying service jobs, finance manipulation schemes, and the looming economic problems facing the U.S.?

Here are a couple of dots . . -- connect them.

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