Barron's Cover

SATURDAY, JULY 14, 2012

The Euro's Fate

By RANDALL W. FORSYTH

To resolve its debt crisis, Europe has to continue to cut social spending and reform its labor laws, but it must also engage in a massive stimulus program. Will the euro fall to parity with the buck?





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Against the intense media glare trained on crucial recent events of Europe, notably Greece's election and the latest summit of European Union leaders, one important development was all but obscured. Airbus, the European consortium that is the main rival to Boeing, recently announced that it will establish its first production facility in the U.S.



There, in sharp relief, is the tangible evidence of the crisis that besets Europe's economy; the only way Airbus can compete with the rest of the world is to move away from the Old Country. Just as BMW and Mercedes-Benz before it, Airbus is moving to America's Deep South in search of what it can't find in Southern Europe -- a highly productive, low-cost workforce that can compete globally, with the help of a competitive currency.




That's precisely what Europe, with unemployment levels not seen since the 1930s, needs -- and what it sorely lacks. The cure for deficits is growth. And the quickest way to spur growth is via monetary reflation.



A still-cheaper euro -- at parity with the U.S. dollar -- can restore Europe's competitiveness, end its debt crisis, and save its currency. It worked before, in the last decade, and we're now more than halfway to parity, from a peak of $1.60 in 2008 to around $1.22. After two years of haircuts and half-measures, the only way left to save the euro may be to debase the euro.


    Fabrice Dimier/Bloomberg News
To stay competitive, Europe's Airbus will build a production facility in Alabama.


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There is a growing realization that, as expensive a proposition as that might prove to be, it will be less costly than a breakup of the single currency, which Germany's Der Spiegel said would precipitate a horrific result: "All of Europe would plunge into a deep recession. Governments, which would be forced to borrow additional billions to meet their needs, would face the choice between two unattractive options: either to drastically increase taxes or impose significant financial burdens on their citizens in the form of higher inflation."




That is what forced European Union leaders to reach some consensus at last month's summit. And the crisis has produced an alphabet soup of new entities to deal with it -- the EFSF, the European Financial Stability Facility, to be succeeded by the ESM, European Stability Mechanism, which is to be given the ability to directly recapitalize the ailing Spanish banks.




But only the European Central Bank, led by Mario Draghi, has the capacity to print euros to buy assets like Spanish and Italian government debt without limit. And it will likely take yet another market meltdown to push that resolve. When it does -- and we expect it will -- it will mark a once-in-a-decade opportunity to buy already very cheap European stocks. But not before.



THE IDEA OF PRINTING MONEY is dangerous heresy to European authorities, not least the ECB itself, whose sole legal policy aim is for price stability, in contrast to the Federal Reserve's dual mandate to promote both low unemployment and low inflation.
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Foerster/Bloomberg News
ECB chief Mario Draghi



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Instead, European Union officials have pushed spending cuts and tax hikes as conditions for bailouts of Greece, Portugal, and Ireland, along with reforms of regulations that restrict job growth even in the best of times. But Richard Koo, the chief economist at Nomura Research Institute, sees the crisis from the vantage point of Japan's bust and stagnation of the past two decades. Europe suffers from a combination of pneumonia and diabetes. Adopting a regimen of healthy diet and exercise to contain the diabetes will be futile if the patient succumbs to pneumonia.




The Germans point out that they underwent productive, but painful, reforms starting in 2003 and emerged an economic powerhouse as a result. What they don't mention is that Germany then had the advantage of a hyper-competitive euro.



Koo contends that, more than the labor and health-care reforms launched by then-Chancellor Gerhard Schroeder in 2003, Germany benefited from stimulative ECB policies to offset the effects of the bursting of the technology bubble in 2000.




That's what's needed now for Europe: an even more stimulative policy by the ECB to bring down long-term interest rates for highly indebted nations, especially Spain and Italy, to sustainable levels and, most particularly, lower the common currency to something closer to parity with the dollar. The "pneumonia cure" would give time for the reforms to get a debt-ridden "diabetic" Europe on its feet.
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Michele Tantussi/Bloomberg News
German Chancellor Angela Merkel


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Europe's political leadership, led by German Chancellor Angela Merkel, contends that structural and fiscal changes are what are needed first, and that excess money and credit were the causes of the current problems. Simply revving up the printing press would only let Greece, Spain, and Italy off the hook. European leaders want to use the current crisis to force reforms that wouldn't be possible in normal times.



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Moreover, the Bank for International Settlements -- the central bank for central bankers -- warned last month in its annual report that the ECB, along with the world's other major central banks, including the Fed, the Bank of Japan, and the Bank of England, had reached the limits of their ability to boost economies. With interest rates at or near zero and the expansion of their balance sheets, the report continued, central banks risk harmful side effects of potential inflation and stoking asset bubbles, especially in emerging economies.



But there is reason to doubt the present policy prescription of budget austerity and reform will yield success. While there are signs of progress, the Bank Credit Analyst observed, "At this pace, it will only take another 30 years of debt deflation and mass unemployment before competitiveness in Greece catches up with Germany." To close the gap more quickly, inflation in Germany has to rise faster than in the periphery. "Germany may not want to accept higher inflation," BCA concludes, "but the alternative -- a collapse of the euro zone -- would be far worse."



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THIS CONUNDRUM IS THE COST of the single currency. Flexible exchange rates allow the adjustment for economies where inflation and productivity trends get out of whack. Devaluation offsets the loss of competitiveness for high-inflation, low-productivity economies.



Fixed exchange rates, meanwhile, force an "internal devaluation," in which belts are tightened literally and figuratively -- prices are lowered, wages and payrolls are reduced, and government budgets are cut -- in order to maintain the currency's value. These are painful steps that don't go down well in a democracy.




The fixed exchange rate across the euro zone is supposed to enforce discipline, and the conditions for the bailouts in Greece, Portugal, and Ireland have been austerity and a steep resulting recession. And last week, Spanish Prime Minister Mariano Rajoy unveiled new budget cuts of €65 billion ($79.3 billion). While this was applauded by the European Commission, the move angered protesters in Madrid, who threw rocks and firecrackers at police over cuts in subsidies. The police reportedly responded by firing rubber bullets at the protesters. This is how austerity plays in the streets.



An easier ECB policy would likely induce higher inflation in Germany, but in the periphery "excess capacity is abundant," so stronger demand would translate into greater economic activity, rather than upward pressure on wages and prices. "A more dovish monetary stance would also lower the value of the euro, giving the periphery's exporters a much-needed boost," the BCA report concludes.



While easy money is dismissed as a palliative, it "can facilitate structural adjustment," Sebastian Mallaby, the Paul A. Volcker senior fellow for international economics at the Council of Foreign Relations, similarly writes in Foreign Affairs.
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Mallaby concludes: "If the ECB prints enough money to hit its target of 2% inflation across the Continent, this is likely to mean zero inflation in the crisis countries, where unemployment is high, and 3%-4% inflation in Europe's strong economies, where workers are confident enough to demand wage increases. By delivering on its inflation target, in other words, the ECB can help Italy and Spain compete against Germany and the Netherlands, gradually eroding the gap in labor costs that lies at the heart of Europe's troubles. That would boost the competitiveness of the crisis economies against the rest of the world, further increasing the odds of an export-led recovery."



The problem, adds Mark Haefele, the head of investment at UBS in Zurich, is that in 2000-2009 labor costs rose 50% in Spain and 35% in Italy, versus 18% in Germany. It would take 10 years of adjustment to close the gap. But that risks unsustainable deflation in the periphery, which would worsen the crisis by raising the ratio of debt to gross domestic product.



CAPPING THE BORROWING COSTS of large debtor nations, such as Spain and Italy, also would play a role. Surging borrowing costs on sovereign debt that exceeds the sizes of their economies could result in the debt compounding at a faster rate than the growth of nominal gross domestic product. That is why a 7% yield on Spain's benchmark 10-year bond sets off alarm bells.



The ECB did this, to a limited extent, by buying those countries' bonds last year in its so-called Securities Markets Program, or SMP. But since then, the bank eschewed these purchases, instead providing €1 trillion in financing to banks through the LTRO, or long-term refinancing operation.



Purchases of government bonds could also be made through the ESM, the soon-to-be launched bailout fund, which will have €500 billion in capital. Of that, €100 billion will be injected into Spain's banks. How the rest of the money will be divided has yet to be determined.



Only the European Central Bank has the unlimited firepower to stop a destructive rise in bond yields. Bond traders know the EFSF (and its successor, the ESM) has limited resources, and they will sell when they see the bailout funds will be tapped out. But if the ESM is made into a bank -- with the ability to borrow from the ECB and to issue debt that the ECB can buy -- it will have unlimited resources.
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How much it will cost to fix Europe is anybody's guess. For example, the Federal Reserve thought $1 trillion would be enough to right the U.S. economy, then came back with another $600 billion for QE2 and even instituted Operation Twist. Ultimately, it will depend on the market's response.



THE ONGOING DISASTER IN SPAIN offers "the best hope" for debt monetization by the ECB through the back door of the ESM, writes Christopher Wood, strategist of CLSA, in his widely read Greed & Fear newsletter. Only "sharply lower share prices" would induce the Germans to go along with debt monetization and "the ECB is not going to act independent of the politicians, most particularly those in Berlin," he adds.



The notion of actively devaluing the euro goes against consensus opinion. Haefele notes that it could raise the specter of so-called currency wars, as Brazil's finance minister accused the U.S. of starting in 2010 with the Fed's QE2 of money printing. In that regard, central banks around the globe all have been easing monetary policy to boost flagging growth -- including Brazil, which last week slashed interest rates to record lows.



Others doubt the efficacy of devaluation. Mark Grant, managing director of corporate syndicate and structured products at Southwest Securities, who was way out in front in his January 2010 prediction of Greece's default, thinks the euro will fall to $1.18 and ultimately reach parity with the dollar. But if the ECB prints money, which violates its current statutes, it could "send European credits into a tailspin."



BUT BCA SEES A "happy ending" after a "market riot" that forces "risk mutualization" through issuance of joint eurobonds and bank-system backup -- making Europe more like the U.S. Then the ESM could be made into a bank and issue its own triple-A bonds, which the ECB could buy without limit, printing euros and effectively ending the crisis. That would provide investors with an opportunity to buy deeply oversold European equities and peripheral bonds.



Even though European equities are at their lowest valuations, relative to their U.S. counterparts, in 40 years, BCA says the time to buy is when the markets plunge and force the European authorities to act. When that happens, investors can avail themselves of exchange-traded funds that provide broad exposure to European equities.



The $6 billion Vanguard MSCI Europe ETF (ticker: VGK) has Swiss food giant Néstlé (NSRGY) as its largest holding, followed by global bank HSBC Holdings (HBC) and BP (BP), the oil major and British-based telecom Vodafone Group (VOD).



The SPDR Euro Stoxx 50 (FEZ) has French oil giant Total (TOT) as its largest holding, followed by French pharmaceutical company Sanofi (SNY), and German industrial giant Siemens (SI), world-class companies that sell at stunningly cheap valuations.



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Total, also a top-10 holding of the Vanguard ETF, trades at just 6.6 times this year's earnings, and offers a 6.7% dividend yield, numbers akin to what was seen in the 1970s when interest rates were in double- digits, rather than at record lows. That's far below ExxonMobil's (XOM) 10.8 times price/earnings multiple and more than twice its 2.7% yield. Royal Dutch Shell (RDSA), also provides a higher yield, 5.0%, at a lower valuation.



Daimler (DDAIF) has slumped along with U.S. auto stocks, but its shares trade at just 7.0 times earnings while paying out a 6.1% dividend yield, cheap valuations that contrast with its upscale Mercedes-Benz passenger cars. (Daimler, Royal Dutch, Sanofi, and Vodafone were among Barron's top stock picks in our Dec. 12, 2011, cover story, "Our 10 Favorite Stocks for 2012.")




A lower euro won't benefit Daimler's Tuscaloosa County, Ala., operations, but it will deter other companies from following Airbus' flight from Europe. Moreover, a euro at parity with the dollar would boost the whole European economy by easing the debt crisis that weighs on the entire world economy and markets.


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Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved


America’s economy
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Points of light
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Amid the gloom there are unexpected signs of boom, especially in energy
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Jul 14th 2012
HAHNVILLE, LOUISIANA, SHANGHAI AND WASHINGTON, DC      

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THE half-finished Shanghai Tower is a hulking concrete wedding cake, rising out of a dusty building site in the central business district. But when it is finished in 2015 the glittering spiral tower will be China’s tallest building and one of its most striking, with two exterior glass skins enclosing nine different climate zones. It will, the developer boasts, “symbolise the dynamic emergence of modern China.”






Less obviously, it also symbolises modern America. The tower owes its design to an American firm of architects, Gensler. Its structural engineer is another American firm, Thornton Tomasetti.


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Indeed, American companies have left their mark all over Shanghai’s skyline. Ray Yu, a local supervisor for Thornton Tomasetti, points to the nearby Jin Mao tower and then to the Shanghai World Financial Centre across the street, rattling off the names of their architects and structural engineers. All are American.



China has no shortage of architects and engineers; foreign firms are required to partner them. But they have less experience with super-size high-rise towers, says Mr Yu: “We solve problems for them.” China also solves problems for the Americans. Two decades ago, foreign fees were just a sliver of Thornton Tomasetti’s business; now they make up 15-20%, and are dominated by Asia, a vital source of growth at a time when the market at home and in Europe is moribund.




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This is a microcosm of a much larger picture. From 1982 to 2007, America’s consumers were the engine of the country’s economy. Their spending on goods, services and houses rose from 67% of GDP to 74%. The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result.



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One of the first imbalances to be corrected was lack of capital in the banks. As the price of being bailed out, they were forced by the Treasury to raise enough capital to deal with exceptionally dire scenarios of recession and loan write-offs. Five of America’s biggest banks wrote off almost $500 billion in the aftermath of the financial crisis and raised $318 billion in fresh capital. As a result, their equity ratios now exceed 10%above both pre-crisis levels and those of euro-zone banks.




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Consumers are now engaged in a long, hard process of shedding debt and learning to live within their means. This is essential, but it has a price: an uncommonly feeble recovery. In the three years since the recession ended, GDP has grown by an average of 2.4%. This year it may not reach even that. On July 6th the government reported that jobs figures, excluding jobs on farms, rose by just 80,000 (less than 0.1%) in June, the third straight month of meagre growth, and unemployment remained at 8.2%.




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Emerging markets are slowing, Europe remains in crisis, and at home businesses worry that political deadlock will force dramatic tax increases and cuts in federal spending at the end of the year.
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Although America’s overall growth may indeed by unimpressive, its components show some intriguing shifts. Consumer spending and housing contributed just 65% of growth. Exports contributed 43%, one of the strongest showings in any recent economic recovery (see chart 1). Other components, such as business investment, imports and government spending, added to or subtracted from growth, roughly offsetting each other.




The sluggishness of consumer spending is mostly the result of weak employment. But the lack of jobs reflects mostly the reversal in household finances. As consumers borrowed heavily either against their houses or to buy houses, their debts rose to 133% of income (see chart 2). House prices have since collapsed, to the point where they are now 19% below fair value: among the world’s cheapest, according to The Economist’s own indices. With many old mortgages defaulted on and written off, and new ones harder to get, debt burdens have shrunk considerably.
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The strength of exports is more of a surprise. When Barack Obama in early 2010 set a goal of doubling exports in the next five years, “a number of people said, ‘You’ll never make it’,” says Rebecca Blank, his acting secretary of commerce. “We celebrated the halfway point a couple months ago.” Despite that, the trade deficit, while slimmer than in 2006, remains stuck at about 4% of GDP. Ms Blank points out that it would have narrowed further, but for two things beyond America’s control: the slowing world economy and the rising price of oil, America’s largest import.




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At your service



As America shifts from a consumer-focused economy to a more outward-looking one, what businesses sell, and how and where, will change too. And all sectors will be affected: services, manufacturing and commodities. This is most obvious in the geographical pattern of American exports. Sales to traditional markets in the OECD, a rich-world club, have risen 20% since the end of 2007. But they have risen 51% to Latin America and 53% to China, which is now America’s third-largest market after Canada and Mexico.





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Services have long been an American strength, consistently making up 30% of its exports. Within that sector, though, the share held by lower-value tourism and travel has slipped, while royalties and so-called private services—such as scientific, engineering and other consulting, plus financial services—have advanced. Exports of such services to Brazil, India and China nearly doubled between 2006 and 2010.




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This trend has been pushed on by digital technology, which makes effortless the sale of many services across borders. Michael Mandel of the Progressive Policy Institute, a think-tank, reckons there are now 311,000 people employed making applications, games and so forth for smart devices such as Apple’s iPhone, and for Facebook. Zynga, one of the largest makers of online games and mobile entertainment applications, recorded $1.1 billion in revenue last year, largely from the sales of virtual goods in its games. A third of this came from players who live outside America.






As recently as a few years ago, American manufacturing was in full retreat. It had shed jobs almost continuously from 1998 to 2010, first because of outsourcing to places like China, then because of collapsing sales of cars, appliances, furniture and houses during the recession.






Car sales have since rebounded nicely, and house sales are crawling off the bottom. Meanwhile, a falling dollar and restrained pay-scales in America have combined with rising wages in China to make outsourcing less attractive. A few companies have even brought jobs back to America. Manufacturing employment has risen steadily for two years now.






Ethan Allen, a company based in Connecticut that makes and sells upmarket furniture, was deeply battered by the recession, closing several stores and factories and eliminating 1,500 jobs. It has since sought to remake itself as “a vertically integrated interior-design company,” says Farooq Kathwari, the company’s boss: it has added back 800 jobs, including 200 interior decorators who help customers choose furniture, which is then made to order in small production runs at its six American and two overseas factories.






In hopes of replicating the model abroad, Ethan Allen has changed its chairs, beds and tables to give them international appeal, in particular in China, where it has opened 25 stores in the past year (to make 69 in all). Chinese customers, the company thinks, will be willing to pay a premium for American style and quality.






Visitors to the flagship store in a fashionable district of Shanghai are greeted by videos of workers in Ethan Allen’s factories in North Carolina and Vermont turning out furniture. On a recent afternoon the store drew a Chinese couple who recognised the Ethan Allen name from their home town of Chongqing. They liked the style, and thought they would buy pieces for the flat they hoped to get in Shanghai. The Chinese-brand furniture available nearby, the man confided, wasn’t his style; it was the sort of thing people over 40, such as his parents, would buy. “I’m still young,” he said.






Traditionally, America’s largest companies, such as Boeing and Caterpillar, have dominated exports. Small companies find distribution, regulation and language barriers overwhelming in foreign countries. But with a big prod from the federal Export-Import Bank, more are trying to sell goods there. According to the Census Bureau, 293,000 companies exported in 2010, up 19% from 2006. Small companies (with fewer than 500 employees) accounted for 34% of exports in 2010, up from 29% in 2006.






A decade ago Air Tractor sold almost all its crop-dusting and fire-fighting aircraft in the United States, leaving it vulnerable both to America’s business cycle and its weather.
Now, helped by federal financing, it has increased foreign sales to about half its total. Employment has more than doubled, to 270. From its home in Olney, Texas (population 3,285), Air Tractor this year will sell 40 aircraft, a fifth of its annual total, to Brazil, which needs bigger crop-dusters to expand grain sales worldwide. “If we can do it from a town that has three stop-lights and one Dairy Queen, it can be done by anyone,” says David Ickert, the chief financial officer.



Gushers of output


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Emerging markets have also revived America’s role as a big commodity producer. Soaring grain exports have raised farmers’ incomes to record levels, and regulators fret about incipient bubbles in agricultural land. At the same time, surging oil prices have triggered a gusher of new output.



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In 2011 crude-oil production reached its highest level since 2003, of 5.7m barrels a day (b/d). Production in the Gulf of Mexico is almost back to the levels reached before the Deepwater Horizon oil spill of 2010.



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In recent years, techniques have been discovered to release gas from densely layered rock formations known as shale. These techniqueshorizontal drilling and hydraulic fracturing, or fracking—have released so much shale gas that its price has tumbled. Now the same methods are being applied to race after oil.
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In 1999 North Dakota’s rig-count stood at zero after small pockets of conventional oil had run out. Now the Bakken oilfield is pumping out more than 550,000 b/d of shale oil, and Williston, the town at the centre of the field, is booming. It used to take five minutes to cross town; now the weight of oil traffic means it takes 20, according to one resident of this remote corner of a thinly populated state. At Walmart, crowds of shoppers have pressed all the trolleys into service; and its vast car park, like many other similar sites in town, provides a temporary home for fleets of camper vans housing workers flooding to the region’s oilfields. New homes, hotels and “man camps”—row upon row of workers’ huts—are springing up all around.




This year shale oil should contribute some 720,000 b/d to America’s total production. And shale-oil deposits in Texas, Ohio, Nebraska, Colorado and Kansas could eventually contribute as much as 5m b/d, according to the most optimistic forecasts. The Bakken field may well hold more than people think, and Ohio’s Utica shale has barely been tapped.
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America is the world’s third-largest oil producer. The deep waters of the Gulf of Mexico could yield substantially more oil (perhaps 1m-2m b/d on top of the 1.3m b/d currently produced).
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America has plenty of other places where it might look if unfettered drilling were allowed, such as the east and west coasts and restricted parts of the Gulf of Mexico. Oil production in Alaska could also be expanded. America now imports 9m b/d; by “going back onshore” and exploiting all its options, optimists think it could produce 7m more b/d in a decade or so. Daily net imports of crude oil this year are the lowest since 1995, and will probably keep falling in the coming years (see chart 3).




Not so long ago, terminals were still being built in America to import liquefied natural gas (LNG). Now the country is enjoying a bonanza of domestic gas.



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Americans pay less than $3 for 1m British thermal units, where Europeans and Asians often pay more than $10. Accordingly, America is now planning to send the stuff abroad. Michael Levi of the Council on Foreign Relations thinks that exports of 60 billion cubic metres a year would yield revenue of $20 billion, though higher imports of other goods would offset the benefit to the trade balance.
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Downstream benefits



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The biggest beneficiaries of the fibre-optic boom a decade ago were not the sellers of cheap bandwidth, but its users. In the same way, the biggest impact of the shale-gas boom will be felt downstream. It is a primary feedstock for ethylene, the building block of countless other products, such as plastics and tyres. Surging gas prices in the early 2000s prompted petrochemical manufacturers to move capacity from America to the Middle East, contributing to the loss of roughly 140,000 jobs in the American industry, according to the American Chemistry Council, a trade group.
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In 2009 Dow Chemical announced plans to close an ethylenecracker” (as the facilities that crack gas molecules are called) on the banks of the Mississippi just outside New Orleans. Last year it announced that the plant would be reactivated. Now blue-helmeted construction workers, some of roughly 2,500 contractors, crawl over the scaffolding that covers its two towering boilers and rusted red funnels, labouring to get the cracker back into full production by the end of this year. It will eventually employ 40 Dow workers and 20 contractors full-time. The reopening is “a huge morale-booster for employees and for the community”, says Laura Ambrose, the site manager.



Dow recently announced that it would build a brand-new ethylene cracker in Freeport, Texas, one of several dozen expansions or new facilities along the Gulf coast. Most of the new output will be turned into more refined products at other Dow plants in North America and, eventually, Latin America as well, making its own useful contribution to the trade balance.



The industry is also moving inland. Shell plans to build a petrochemical refinery near Pittsburgh to process gas from the nearby Marcellus shale. The American Chemistry Council has counted $30 billion-worth of new investments that will boost ethylene capacity by a third. It reckons this could generate, at a conservative estimate, 17,000 permanent jobs directly and many more indirectly. Such jobs pay well: Ms Ambrose reckons her new hires will start at around $50,000 and, with overtime, could earn up to $100,000.



Petrochemicals are only the start. Industries as diverse as glass, fertiliser and plastic bags could all benefit from cheap, plentiful natural gas. Nucor, a steelmaker, is building a plant to make iron from natural gas and iron-ore pellets in Louisiana.




These trends have yet to result in an improved trade balance, because the volume of net imports has been swamped by the rising price of petroleum. Assuming, however, that oil prices do not continue to rise so rapidly, energy is likely to exercise less and less drag on America. Last year, for the first time in decades, America became a net exporter of refined products such as petrol. By early next decade, according to projections by the Energy Information Administration, it will be a net exporter of natural gas. BCA Research, a financial-analysis firm, reckons these factors could slash America’s trade deficit by $100 billion by 2020, and boost total economic output by 0.2%-0.3%.
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Still seeking work


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Promising though this rebalancing of the American economy is, it will bring problems of its own. One is inequality, which is already at a troubling level.


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America’s most successful exporters employ relatively few people. The Commerce Department reckons that even though exports last year were 14% higher than in 2008, the number of jobs supported by those exports was slightly lower.



More than ever before, too, America will depend on the health of the rest of the world. The euro crisis is an obvious danger. But troubles lie farther afield. Emerging markets may have survived the 2008 crisis largely unscathed, but their growth is now succumbing to their own financial excesses.


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Nor are they an easy place to make money. China’s government, in particular, often forces foreign companies to share with local partners the ideas that give them their competitive advantage.



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Shanghai has been a gold-rush town for Western architects and engineers. Now the commercial-property market is slowing, and the local partners of eager Western firms will soon be their competitors. “Eventually they will be as good as we are,” says Dennis Poon, the vice-chairman of Thornton Tomasetti. “We’ll have to reinvent ourselves.”