Kiplinger Connection
China • The Economy • Human Resources

China: Cooling growth makes it bad for U.S. too.
The Economy: Job market even worse than it looks.
Human Resources: Furloughs over layoffs—be careful.

China
Adding to economic woes in the U.S. ...
Hard times in China. Growth is slowing, to 6.5% this year, enviable by any U.S. standards, but far below last year’s dazzling 9% growth.

U.S. exporters are already being slammed, especially firms that sell semiconductors and the equipment needed to manufacture them, plus plastics, machinery, construction equipment, IT products, steel, iron, chemicals, and aluminum.
The impact on U.S. trade will be massive. China is America’s third largest foreign market, taking 6% of U.S. exports ... some $68 billion worth. Add to this decline a drop in sales by U.S. affiliates in China, and the toll on U.S. firms is even greater.

On top of that ... an ugly ricochet effect.
China’s other trade partners are suffering.
So they can’t buy as many U.S. goods. Among those affected: Japan, South Korea, Taiwan, Singapore, Brazil, and Australia. In total, they absorb approximately 16% of goods exported from the U.S.

China will also slow its purchases of U.S. bonds, pushing up interest rates. As the U.S. buys less from the Asian leader, it will have fewer dollars to invest here.
But don’t fear a mass withdrawal of China’s capital. It’s out of the question. China is by far the U.S.’ biggest foreign creditor, with assets over $1.3 trillion. If it were to try to sell too much, too quickly, the dollar would just collapse, making Chinese holdings in dollar-backed securities worthless. It would be suicide.

Though China’s growth rate will soften, its economy won’t shrivel. There’s no chance of the Asian giant falling into the kind of recession the U.S. is in.
China has plenty of tools to fight its slowdown, including fiscal stimulus. Chinese debt ... at the government, corporate, and household levels ... is minimal, so there’s plenty of room for China to spend more without driving up interest rates. Beijing is ramping up investment not only in infrastructure projects to provide jobs, but also in health care, education, pensions, and transfer payments to households.
Plus it’s forcing banks to lend more. Beijing owns the financial institutions, so, unlike Washington, it needn’t rely on persuasion or incentives to get its way.
And China is subsidizing consumer goods. ... cell phones, freezers, cars, etc. It also has lifted many of the recent barriers to real estate acquisitions. Imposed to deflate China’s property bubble, the restrictions wound up bursting it.

Will all that help? Yes, enough to shorten its downturn, though not enough to prevent it. Expect 8%-9% growth to be the new norm when recovery finally comes. That’ll help the U.S., but not nearly as much as those years of double-digit growth.

The Economy
Obama will get the stimulus he wants ... but the endgame won’t be pretty. Look for a final tab of about $800 billion, with about 40% in tax cuts. House Democrats will have to accept less spending than they want on education and some energy programs. As for how many GOPers will go along, it’s up in the air.

Help for the housing industry ... via a juicier credit for buying a home. When stimulus legislation is finished, it’ll include a tax credit of up to $15,000 or 10% of the purchase price, whichever is less. The credit won’t be limited, as the current $7,500 one is now, to first-time buyers or require repayment to the feds over 15 years. But a phaseout for higher-incomers can’t be ruled out.
The new credit will kick in when the bill becomes law and apply to residences purchased within 12 months of the date Obama signs the legislation. If you’re about to settle on a new home, dragging your feet could save you plenty.

The job market is even weaker than unemployment numbers indicate.
Companies are also cutting the hours of workers who still have their jobs. Average hours worked per week by nonfarm laborers fell to 33.3 in Dec., the lowest since recording began in 1964. The lowest in any previous recession was 33.7 ... in 2001. What’s more, workers who were able to secure only part-time jobs ... not those working part-time by choice ... hit 8 million last year, up 73% from 2007. Adding that to unemployment of 7.6% puts the “underutilized” rate at 15.4%.

Payroll numbers will continue to be slammed for a few more months.
Even more worrisome: Odds are employment won’t bounce back quickly after the economy starts to grow, as it did following recessions in the 1970s and 1980s. Instead, another “jobless” recovery, more akin to the aftermath of the 2001 downturn, only starting from a much higher unemployment rate. The high was just 6.3% then.
This time the quality of employment will take a hit as well. In the past, when workers ... particularly factory workers ... were rehired, they were likely to get the same pay and benefits received before layoffs. Following this recession ... fewer rehires, and more of them will see reduced benefits and possibly lower wages. Not just in old-fashioned industrial sectors, either, but throughout the economy.
Many high-paying factory jobs won’t return at all, especially in autos. Also in residential construction, mortgage finance, and other financial services.

Online sales will buck the downward trend plaguing most retail outlets.
Likely growth of 7% to 8% in Internet sales this year looks astronomical compared with an expected 1% drop in the value of overall retail sales. Of course, that’s a far cry from the double-digit gains in online sales for the past few years. Accelerated growth won’t return until an economic recovery is in full swing in 2010.
In some ways, online sellers are benefiting from the weak economy. For cost conscious shoppers, the Web is well suited to researching purchases and comparing costs. And with battered bricks-and-mortar stores paring inventories, consumers in search of less common wares are going online. So Wal-Mart, for example, directs shoppers to its Web site to find toys that aren’t available in its stores. Specialty outlets, such as handcrafts market Etsy, are also poised to pick up sales.

Human Resources
More employers are turning to employee furloughs in this recession than in past downturns. They see mandatory unpaid time off as easier on employee morale than layoffs, spreading the pain over a broader base. In addition, employers figure they’ll save on rehiring and training when the economy picks up.
If your firm is considering them, keep in mind some legal constraints: For exempt workers who are paid a salary, requiring a weeklong furlough is the way to go. Under federal law, if any part of a week is worked, the whole week must be paid. Making workers draw down accrued vacation leave ... a milder version of a furlough, which doesn’t cut payroll but may let a business close its building for a period ... can be tricky, with some states regulating the practice. Take care also to check laws on how much notice is required for furloughs. And if your business is a union shop, confirm that furloughs are OK under your collective bargaining agreement. In fact ...

Many new union contracts include economic distress clauses ... provisions that allow layoffs or furloughs triggered by a drop-off in billable hours, revenue, orders, or some other specific measure. Unions aren’t happy about them but acknowledge that an employer may need that flexibility to keep a business afloat in tough times.