During the Valve Manufacturers Association’s last Market Outlook event, one of the issues raised was who the new chairman of the Federal Reserve would be and what that would mean for the economy. As this article is being published, the swearing-in of Ben Bernanke’s replacement, Janet Yellen, has taken place. This occurred in the same week as the State of the Union Address, where other issues affecting those connected with the valve industry were addressed.
While the politics behind these events are beyond the scope of this article, both the actions of the Federal Reserve and the policies put forth in the State of the Union address are likely to have repercussions that could affect the economic health of our readers. So, as you plan the upcoming year, here are some points for your consideration.
Tapering and the Federal Reserve
During the Market Outlook Workshop in August 2013, economist Alan Beaulieu of ITR Economics (pictured) discussed quantitative easing—the practice whereby the Fed buys U.S. Treasury notes and mortgage-backed securities as an expansionary monetary policy designed to lower interest rates and spur economic growth. At the time, Beaulieu expressed concern about this practice, because it could have unintended consequences for inflation by keeping interest rates too low. “If Yellen waits longer to raise interest rates,” he said, “that means inflation will have a stronger hold on the U.S. economy, and then it takes even more of a rise.”
Since 2012, the Fed had been purchasing $85 billion in bonds every month. They reduced that to $75 billion in January, and now to $65 billion for February. In light of this tapering and the installation of Yellen, we asked Beaulieu for his comments. He said, “I am glad to see the Federal Reserve Board begin the tapering process. It is overdue in my estimation as it is doubtful that there has been much, if any, positive effect from quantitative easing for some time now. The Fed is likely to pursue a slow, careful tapering process in the light of a strengthening U.S. economy. We are in uncharted waters here, but our estimation is that the Fed’s actions will not have a negative impact on the U.S. economy given our projection of a long, slow glide slope.”
It’s certain this will be addressed again during VMA’s 2014 Market Outlook event Aug. 14 and 15 in Boston.
The State of the Union Address
We have extracted several segments of the speech that are relevant to the valve and attendant industries. Some organizations connected with these sectors published formal reactions to the speech, and speakers at VMA meetings have also addressed these issues in the past. Where they are applicable, we have inserted them in the commentary. (These statements are made by industry organizations and experts outside VMA; they do not necessarily reflect the opinion of VMA or VALVE Magazine.)
Energy Production and Economic Power
In his fifth official State of the Union Address, President Obama made several references to the energy industry, especially with respect to job creation.
“Today America is closer to energy independence than we have been in decades,” he said. “One of the reasons why is natural gas. If extracted safely, it's the bridge fuel that can power our economy with less of the carbon pollution that causes climate change. Businesses plan to invest almost a hundred billion dollars in new factories that use natural gas. I'll cut red tape to help states get those factories built and put folks to work, and this Congress can help by putting people to work building fueling stations that shift more cars and trucks from foreign oil to American natural gas.”
The Marcellus Shale Coalition made this statement in response:
“Tonight, President Obama once again underscored the critical and increasing role that America’s abundant, clean-burning natural gas resources continue to play in boosting our economy and growing jobs, especially in the manufacturing sector. … Affordable supplies of oil and natural gas, driven by tightly-regulated shale development, have catapulted America from a period of energy scarcity to a new and more prosperous era of energy abundance. And the results are clear: a plunging trade deficit, stronger geopolitical standing, cleaner air and significant consumer savings.
“Aside from the tens of thousands of good-paying jobs created by shale production and CO2 emissions being slashed as more natural gas is used to power our economy, the importance of this domestic resource is on national display right now. As so many Americans continue to face record-shattering cold temperatures, natural gas heats half of all U.S. homes.”
In his address, the President said, “In this past year, more oil was produced at home than we buy from the rest of the world. That’s the first time that's happened in nearly 20 years.” Despite this growth in fossil fuel production, he said, “Over the past eight years the United States has reduced our total carbon pollution more than any other nation on Earth.” He also pointed out that this is “the first time in over a decade, business leaders around the world have declared that China is no longer the world's number one place to invest; America is.”
This is another area that Beaulieu addressed in the 2013 Market Outlook when he said, “According to the EIA, U.S. carbon dioxide emissions are down to 1995 levels, even though we did not sign the Kyoto accord. This country has led the way in reduction of CO2 emissions, but nobody is celebrating or congratulating the U.S. for reducing carbon dioxide footprint. Because the U.S. is a major producer of energy, firms are leaving other nations, including China and Europe, to come to the U.S. This is creating jobs and will continue until other countries in Europe decide to explore more options.”
The president urged leaders to “get it done” and said, “If we're serious about economic growth, it is time to heed the call of business leaders, labor leaders, faith leaders, law enforcement—and fix our broken immigration system. Independent economists say immigration reform will grow our economy and shrink our deficits by almost $1 trillion in the next two decades. And for good reason: When people come here to fulfill their dreams—to study, invent, contribute to our culture —they make our country a more attractive place for businesses to locate and create jobs for everybody.”
This issue is one that has been addressed several times in VMA events, including by Dr. Alan Abramowitz, professor of political science at Emory University. Abramowitz said at the Leadership Forum in January that immigration reform is one of the biggest challenges facing Congress this year.
Beaulieu, in the 2013 Market Outlook said, “The answer to the problem of not having enough young people to support an aging population, the answer to the debt problem and the health care problem in the U.S. lies with immigration. Say to foreign students who come to U.S. to study, once they graduate, offer them residency to allow them to stay, put their degree to work, pay taxes and be a productive member of society.”
While there are certainly organizations and individuals who would argue to the contrary, the push toward immigration reform has been supported by the Congressional Budget Office (CBO), which found that certain reforms would reduce the deficit by anywhere from $897 billion to roughly $1.2 trillion in the 20 years after its enactment and the Cato Institute, which in a 2012 report asserted that immigration reform would add $1.5 trillion to the GDP (Gross Domestic Product) over the next 10 years.
Workforce—Wages and Training
The president urged Congress and industry to work toward raising employee wages and announced an increase in the minimum wage to be paid to employees of federal contractors. He also addressed one of the most serious issues facing manufacturers, repair facilities and end users: the lack of skilled workers.
He said, “So tonight, I've asked Vice President Biden to lead an across-the-board reform of America's training programs to make sure they have one mission: Train Americans with the skills employers need, and match them to good jobs that need to be filled right now. That means more on-the-job training, and more apprenticeships that set a young worker on an upward trajectory for life. It means connecting companies to community colleges that can help design training to fill their specific needs.”
The National Association of Manufacturers responded to the speech this way:
“Manufacturers welcome the President’s focus on developing a 21st century workforce through training programs and immigration reform. The focus on infrastructure investment and permitting, enhanced trade and natural gas development all carry the potential to boost jobs, competitiveness and open countless opportunities for manufacturers in the United States.”
While it is far beyond the scope of this article to analyze all of the points of the address, the bottom line is, every political and economic action has a corresponding reaction in the world of business. We encourage you to do your own research on the various proposals and see how they could affect your business.