(Editor’s Note: The following article was originally published in a recent issue of the Hardwood Review and is reprinted here with permission.)

By George Barrett

Editor, Hardwood Review

            We hate to burst anyone’s bubble, especially this early in the year and while most folks are riding an emotional upswing, but you have to wonder whether some of the optimistic statistics that are presented each week are just plain wrong.

            We study economic news and trade information every week to try to better inform our readers of happenings that might impact the hardwood industry. Headlines are currently bursting with good news of a rebounding economy and record-breaking Gross Domestic Product growth.

            Below the surface of these headlines, however, the picture is often murkier than the spin-doctors would have you believe. We don’t disagree that the economy and the industry are looking at a good year in 2004, but after reading this article, we hope you’ll see that things are not always exactly as they seem.

Productivity, Wages

and Employment

            The beauty of statistics is that they demonstrate realities that would otherwise only be anecdotal. The problem with statistics is that they can be manipulated to make just about any point you like. Oftentimes, people can argue opposing viewpoints with the same set of numbers (as often happens between environmental extremists and the forest products industry). Consider the following examples.

            A recent report from the Institute for Supply Management (ISM) stated that December 2003 was the manufacturing sector’s best month in 20 years -- much of it due to the strength of new orders, which were at their highest rate since July 1950.

            Just four days later, the Department of Commerce reported that factory orders in November dropped 1.4% -- the steepest decline since April!

            Both of these reports generated headlines in the business press, but what are we to think about the health of U.S. manufacturing?

            The record-setting statistics published by the Institute of Supply Management do not include the fact that many of the orders may have actually gone to China or other overseas producers. How?

            U.S. corporations report new orders to the ISM, but they do not indicate which of their factories will produce them, so the statistics are somewhat meaningless. As companies moved more production offshore, building their own plants and hiring workers, no one took into account that orders were going overseas with them. Factory orders to U.S.-based companies may indeed be way up, but the Department of Commerce numbers suggest that less and less of the actual manufacturing is done at home.

            An even closer look at the ISM manufacturing growth numbers reveals that they are very similar to reports from China that show industrial production running 19% above a year ago. New orders are coming in so fast to Chinese manufacturers that they are actually having trouble keeping up. Many U.S. corporations that are reporting increased sales are actually producing those orders overseas.

            Employment and unemployment figures are also statistics that are easily manipulated -- often by politicians seeking to bolster their own or tear down their opponents’ performances.  If you want a positive spin, total private employment has risen from 108.5 million jobs in January 2000 to 109.3 million jobs, and the government added another 1.4 million jobs. The more depressing statistic is that we’ve lost 2.7 million U.S. manufacturing jobs during that same period. So, is the employment picture improving or not?

            We all know that these displaced manufacturing workers won’t land equally paying jobs in government or service sectors. Don’t we?  If that’s the case, how is it that the Department of Labor reports that the average hourly wage of private workers (including service workers) has grown by 13% since January 2000 to $15.46 an hour? Even in real terms, the wages of private workers have increased almost 4% (that’s above inflation).

            Sure, you say, some people are making more money, but look at how many more people are out of work. (Remember, the earlier paragraph documented a net loss of 500,000 jobs). But wait: if we’re losing jobs, how can the unemployment rate be declining?

            The truth is, at least as best as we can figure it, the national employment picture has changed very little over the last decade, regardless of political bantering and front-page headlines. Maybe the most telling statistic is that the employment-population ratio (the percentage of the U.S. population 16-years and older that is employed) has hovered between 62.0% and 64.8% every month for the last decade, and is currently at 62.4%.

World Financial,

Economic Forecasts

            Recent headlines almost universally proclaimed that 2004 would be a banner year for the U.S. economy.  We agree and think that the lumber industry will benefit and come out of its three-year recession (or depression).  But again, we caution you to read all of the headlines, stories and statistics with a healthy dose of caution.

            Here’s an example of double-speak unveiled. In a letter-to-the-editor of a newsletter to which we subscribe, one astute observer highlighted a recent Citigroup-Smith Barney annual forecast that predicted low capital investment yet rising national output. He commented, “These glowing reports do not distinguish…what is invested or manufactured overseas. Obviously, the reporting process skews the data to make it appear that, in spite of shutting down a large percentage of our manufacturing capability and laying off 3 million workers, ‘our national output and income have grown.’ This is not possible.”  The Smith Barney forecast reportedly concluded that, “Those who have lost jobs in recent years will find employment in future years.” In response, the letter-writer asked, “Doing what?”

            China, again with the help of the Wall Street crowd and large corporations, has managed to fool everyone into thinking that their economy is booming. Chinese companies are selling ‘stock’ (actually American depository receipts) to Americans to subsidize their money-losing businesses. In 2003, several of the largest increases in stock values on the U.S. exchanges were for Chinese-owned companies (although a number have sold minority shares to U.S. investors).  The government banks of China are peddling their bad debts to U.S. banks who think they can collect a portion of them. Lots of luck. Like the dot-com debacle of 2000, the bubble will burst.

            No one wants to acknowledge that China precipitated the economic disaster throughout Asia when it devalued its money on New Year’s Day 1994. In an instant, a generation of hard work and thrift were destroyed and South Korea, Indonesia, Malaysia, the Philippines, Taiwan, Japan, Singapore and Hong Kong were unseated as low-cost producers with strong private business sectors. It is quite possible that China will yield to external pressure and increase the value of its currency, making it a higher-cost producer overnight.

            Remember what happened to the centralized Soviet economy after the Berlin Wall and Communism fell in 1989? It collapsed. We found out that they had been overstating their Gross Domestic Product by more than 50% per year.  They were bankrupt, and the same scenario could occur in China. Like the Enron and Parmalat shell games, those who reap profits in China today will be forced to accept losses when the bubble bursts.

            Instead we hear only about the booming Chinese economy driving increased consumer demand for cars, phones and so on. There’s no doubt China’s economy is booming, but taken into perspective, the U.S. economy is some $9.75 trillion larger. Even if China grew at twice the rate of the U.S., it would take many decades to close the gap. Finally, consider that China could capture every remaining manufacturing job in the U.S., Latin America, South America, Japan and Europe and still not have enough work to satisfy its growing population.

Import-Export Statistics

            Closer to our industry are the sometimes confusing data we see on exports and imports. Recently we were studying trends in hardwood flooring imported into the U. S. Much to our surprise, Argentina became the largest exporter of hardwood flooring to the U.S. in 2003, with shipments totaling 4.5 million square meters -- more than the combined total shipped from the three next largest shippers, Indonesia, China and Sweden.

            Never mind that Argentina typically ships us less than 10,000 square meters annually, 2003 must have been a great year! In reality, the Foreign Agricultural Service statistics are obviously incorrect, as they were several years back when they reported that the volume of yellow poplar shipped to South Africa rose by 1,000%. This is a funny, extreme example to underscore that even unbiased government statistics can be misleading.

            Less obvious but buried in those same statistics, we recently discovered some anomalies in the export statistics for cherry lumber. It seems that a growing volume of surfaced cherry lumber has been flowing to the United Kingdom (totaling 1.7 million board feet so far in 2003 alone, more than the volume classed as “rough”). If that’s not strange enough, this dressed cherry lumber sold for an average of just over $1,100 per MBF. Just another example of the need to be ever vigilant in this “age of information” and not to blindly accept all the information you’re fed.

            Hearing good news may make you feel good, but take it with a grain of salt. Take the time to dig under the headlines and see what’s really going on.

            And, don’t believe all that you read -- even from us.