12/6/12 – Despite the Cliff, Still Lots of Good Out There

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 6, 2012 8:47:33 AM

and tagged Fiscal Cliff, Market Updates

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Today, we will talk a bit about the cliff, but I wanted to lead off with recognition that, despite the short-term risks, there is still a lot of good out there, and the stories keep coming to prove it. A front-page article in the Wall Street Journal, “US Gas Exports Clear Hurdle,” and similar story on the front business page in the New York Times, “Exporting Natural Gas Has Merits, Study Finds,” both talk about a Department of Energy study, which concluded that exporting natural gas would be an economic plus, overall.

Such exports would help enormously with the trade balance; they would also create many jobs for people involved in constructing and operating the infrastructure to facilitate such exports. The costs would include the potential for higher prices domestically, as well as the possible erosion of a domestic cost advantage for manufacturers.

But, in the end, the U.S. economy would win either way. The U.S. would retain a cost advantage in energy regardless, due to lower transit costs, and jobs would be created under both scenarios. The timing would also be of benefit to the U.S., as the jobs created in the infrastructure construction/operation would come in the near term, supporting the ongoing recovery.

Given the magnitude of the cost differences between U.S. gas markets and international markets, expect the industry to fast-track this after federal approval. This is just one more area that can be expected to support the economy in the next couple of years—potentially in a big way.

Domestic energy production is one of the pillars of re-shoring, which I have discussed before as a major factor in the employment recovery over the next couple of years, and the preceding stories support that. The other major pillar is the cost competitiveness, on a productivity-adjusted basis, of U.S. labor costs with other areas of the world. Yesterday’s productivity figures indicated continuing strong gains in U.S. labor productivity, and a story on page A10 in today’s WSJ, “Southeast Asia at a Crossroad on Wages,” suggests that wages in Asia will continue to rise, making the U.S. even more competitive.

These are long-term, positive developments and therefore tend to get much less press coverage than the more immediate negative ones. Even as the fiscal cliff drama plays out, slow structural changes are continuing that will support a medium- to longer-term recovery, despite any shorter-term damage inflicted by the government.

Even the fiscal cliff is showing some signs of possible progress. After the conservative roasting of Boehner in the press yesterday, that story has flipped again. The NYT has “Boehner Gains Strong Backing of House GOP” on the front page and “No Deal, No Break, Cantor Says,” on page A20; both articles highlight the determination and ability of the House Republicans, as a group, to cut a deal. The WSJ has “Plan to Limit Tax Breaks Gets a Push from Boehner” on page A20, again about how Boehner is looking for a way to cut a deal. Despite the noise from both sides, with the conservatives defending their deductions yesterday and charities doing the same today (see page B1 in the NYT), we may be seeing progress. Then again, perhaps the noise is because of the progress. Let’s hope so.

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