Bill Jamieson: US puts its foot back on the gas

Green shoots of recovery appear in America as the Eurozone flounders

YOUNGSTOWN, Ohio, was the setting for one of the most moving books about America’s Great Depression. A booming Midwestern industrial town in the 1920, its factories and businesses ground to a standstill. Its banks, one by one, began to fail.

The collapse of Youngstown was stoically recorded in a diary by Benjamin Roth, a local young Herbert Hoover supporting lawyer. The diary tells how he became a proselytiser for New Deal programmes while in the evenings he filled his diary with forebodings on how the plunge into deficit spending would end. Even by the time of America’s entry into the war, Youngstown seemed a shadow of its former self.

Today Youngstown is telling a different story. It is heading to be the home of what could well prove a great American recovery. This is where Vallourec & Mannesmann is building a new $650 million steel mill that will employ 400 construction workers and create many permanent new jobs.

Today’s veteran diarist, Ed Yardeni, records that no government money or “New Deal” spending or Washington-based job-creating scheme is involved. Instead, the region is experiencing an energy boom as new “fracking” technologies permit tapping into huge reserves of oil and gas embedded in shale. The new plant will build steel tubes for the energy industry.

An Economic Impact Study released last month set out how developing the Utica shale gas formation in eastern Ohio could create more than 200,000 jobs by 2015, boosting wages and tax revenues. A land rush is already under way. As gas wells require lots of concrete and steel, north-east Ohio’s steel producers, including Canton-based Timken, US Steel in Lorain and V&M Star in Youngstown itself, are already seeing rising demand.

I set out the potentially huge impact of shale gas in this column back in May (‘Hail Shale for Future Fuel’, 8 May, 2011). Significant quantities of shale gas capable of extraction were found in Texas in the 1990s. The Barnett Shale in the Fort Worth basin now produces more than 300 billion cubic feet a year, or about five per cent of America’s natural gas supply.

A further major field was opened up in Pennsylvania and by December 2007 it was producing 22 million cubic feet of gas per day. By 2011 estimates of the gas recoverable had reached 716 trillion cubic feet, equivalent to 25 years’ US consumption and worth potentially $2 trillion (£1.2 trillion).

Though much depends on the price of gas and technological change, the Marcellus field is likely to prove the largest gas field ever discovered in North America.

Not only does the discovery of vast quantities of shale gas and its successful extraction so far with little sign of widely-aired environmental concerns over water pollution and seismic disturbance, present a great opportunity for a stricken economy, but it also puts at America’s disposal very cheap domestic sources of energy. This, together with the decline in the relative cost of labour in America “are already”, says Yardeni, “starting to re-industrialise America”.

This month, the country’s mighty car union, the United Auto Workers, signed a deal with Chrysler, raising the wages of newly-hired workers. It includes a profit-sharing plan that would align the interests of the union with the company. The deal was ratified with the union membership last week.

Chrysler responded by confirming plans to invest an additional $1.3 billion to re-tool and upgrade plans for the production of new products, bringing the company’s total US investment to $4.5 billion. In addition, Yardeni notes, Chrysler Group states that it may offer up to 2,100 new jobs in addition to the more than 2,500 jobs previously created. Yardeni cites this as an example of a manufacturing homecoming to America after decades of flight to the low-labour-cost countries of India and China.

Now, one swallow does not make a summer, and markets would need to see much more evidence of a turnaround before daring to speak of an American recovery. But the most recent economic and business data flow has been better than feared, culminating in the release late last week of third quarter GDP numbers showing a return to solid economic growth.

An annualised 2.5 per cent rise in GDP, led by encouraging growth of investment and consumption, met the best market expectations. It was the fastest rate of growth since the third quarter of last year and eased fears that the world’s largest economy was falling into recession. In fact, predictions of a “double dip” are now effectively off the table.

That’s a notable turnaround in sentiment compared with the late summer when the budget gridlock in Congress and falling business and household confidence rattled Wall Street and sparked fears of a renewed downturn.

For the record, consumer and business spending have surprised on the upside and Citigroup economists are forecasting that the US economy, after a significant fall-back in the growth rate from 3.0 per cent to 1.8 per cent this year and a pedestrian 1.9 per cent next, should see a pick-up in momentum to 2.5 per cent in 2013 and 3.3 per cent in 2014. Distant though that recovery may look, it is notably more pronounced than the group’s forecasts for the UK and the Eurozone.

Much of this encouraging news has been lost from view under the menacing dark clouds of the Eurozone debt crisis. As always with preliminary data, caution is advised, and the big problems haunting America’s economy have not gone away.

Congressional gridlock continues to impair progress towards a credible programme to bring down the budget deficit. And there are signs of a policy split within the Federal Reserve as to whether its Quantitative Easing “twist” programme designed to bring down long-term yields is having much effect.

Three board members of the Fed have indicated a willingness to consider a third round of straightforward QE that they say would do more to revive economic growth and lower the unemployment rate. Does this mean “Operation Twist” is already seen as a failure? And might a further resort to QE compound the problems evident the first time around – pushing up food prices and inflation, thus hampering the ability of consumers to lead a domestic demand upturn? Some fear that on this basis QE could end up doing more harm than good.

On the US Budget, Congress has until a deadline of 23 November to agree some $1.5 trillion in deficit cuts over the next five years. The political deadlock, reports Kevin Logan, chief US economist for HSBC, “has not been broken; Republican and Democratic parties remain far apart on these issues”.

If the Congressional select committee fails to approve recommendations by this date, across-the-board spending cuts called “sequestration” will be imposed from January 2013. The promised improvement in the deficit outlook, he warns, may prove illusory and a further negative credit rating agency judgment cannot be ruled out. American recovery is still in the balance.