GE's (GE) Flawed Vision Of The New Economy

GE’s (GE) CEO Jeff Immelt wants the US to focus on rebuilding its manufacturing economy in the hopes of expanding the American export base. The notion is laudable, but financially impossible.

GE will launch a national ad campaign about the role of manufacturing in the company’s future.

According to Reuters, “The U.S. should work to have manufacturing represent about 20 percent of employment, more than double its current level, he said.” Immelt believes that revenue for the financial services industry will not be adequate over the long term to drive a permanent revival of national fortunes and that consumer spending will also not make a large enough contribution to future GDP growth.

Immelt is right, but his solutions are not possible. The economy may not advance beyond a 1% or 2% GDP growth for the next several years. Unemployment at 10% or better, especially for any prolonged period, will make a rebound in consumer activity nearly impossible.

The trouble with rebuilding the American industrial base is simple. It would be unimaginably expensive. The Administration’s stimulus package only devotes about 10% of its spending to true infrastructure building. The is a modest amount of at $787 billion package. It will help rebuild a portion of the nation’s roads, schools, broadband and energy grid systems, but that does nearly nothing to recreate the factories and assembly lines which once produced goods for the US and the world. Those facilities are now in places like Mexico and China.

To give an idea of the order of magnitude of the costs of erecting new production facilities, Chinese investors will spend as much as $6.5 billion to create a hybrid electric car plant that will eventually employ 25,000 people in Tennessee. Converting America back to a manufacturing economy that could be a net exporter of goods would cost in the trillions of dollars. This would have to be done during a period when the national budget is already remarkably stretched and large corporations are unlikely to make massive capital expenditures. It would have to be done with a large decrease in the cost of US labor, which would undermine consumer spending by cutting American wages.

US businesses and the government only have two ways to sharply improve GDP. The first is to rebuild the financial services industry as quickly as possible. The industry may end up being more regulated, but if it can perform the majority of the functions that it did two years ago. It has the ability to create millions of jobs, throw off hundreds of billions of dollar in profits, and once again make America the financial center of the world though banking, investment services, and corporate finance and M&A work.

The other sector that has been a huge engine of economic growth in the American economy is technology, even though much of the hardware for the industry is built overseas. US companies are still the major providers of software around the world. The most successful online companies are almost entirely US based. The tech consulting business is a major part of the American employment and tax base.  A large portion of the world’s medical and aerospace industries are still in America. Most of the premium media content comes from US studios and television properties.

The alternative to rebuilding the industrial base is to work off the most successful parts of the American economy to rebuild GDP. This involves the government giving incentives and capital to the tech and services sections in the same measure as it is to the firms that will build nuclear or solar facilities. It means that the US government will have to do more to protect the intellectual property of software, high tech, and content creation companies in nations such as China steals tens of billions of dollars of American IP each year undermining US GDP expansion and the federal and state tax base.

The manufacturing and industrial part of the American economy has been leaving the country for decades. It is impossible to raise the capital to create it again. By encouraging growth of the sectors of US businesses that are still doing well, and protecting their interests worldwide by the rule of law, the American economy can rebound strongly and  have an opportunity for sustained GDP growth.

Douglas A. McIntrye