Lagging Behind the Wealthy,Many Use Debt to Catch Up - May 17, 2005

Lagging Behind the Wealthy,Many Use Debt to Catch Up
U.S. Borrowing Hits Record;Soul-Searching in UtahAs Bankruptcies Surge'Monster' or Sign of Progress?
By BOB DAVIS Staff Reporter of THE WALL STREET JOURNAL
SALT LAKE CITY -- In 1757, Benjamin Franklin wrote, "Better to go to bed supperless, than wake up in debt."
One of his modern-day namesakes hasn't heeded the admonition. Benjamin Franklin Baggett of Salt Lake City got his first credit card on his honeymoon in 1990 and promptly maxed out his $300 credit line. Mr. Baggett had grown up on tales of Franklin -- his father gave him a Franklin memorial coin and bought copies of Franklin's works. But he wanted to buy himself and his wife some new clothing and he hadn't saved enough to buy it outright on his $11-an-hour concierge job at a Doubletree Hotel.
The charges were the first of many for Mr. Baggett, now 38 years old. In 1995 he moved into a house in the Harvard-Yale section of Salt Lake, a tree-lined neighborhood near the University of Utah that is home to many doctors, lawyers and professors. Mr. Baggett used credit cards to furnish the home with the kind of carpets and furniture his neighbors and relatives could afford.
Second in a Series
Part One: As Wealth Gap Widens, Class Mobility Stalls 05/13/05
Wall Street Journal Video
WSJ's Bob Davis discusses growing U.S. household debt and whether the debt burden is a risk to the economy.
"I felt insecure; I was an hourly-paid worker in this fancy neighborhood," says Mr. Baggett. He says he was making $13 an hour for a time doing back-office work at a local bank while supporting two children.
Twice he used a home-equity loan to pay off his credit-card debts, and twice he ran up steep credit-card bills again. When his debts reached $30,000 and he ran out of home equity, he filed for bankruptcy in 2003. "We came to rely on credit as part of our income, even though it wasn't part of our income," says Mr. Baggett. "I looked at $1,000 on my credit card as disposable income." He now works at a foreign-exchange broker, and has sold his house and divorced.
More and more Americans are turning to debt to pay for lifestyles their current incomes can't support. They are determined to live better than their parents, seduced by TV shows like "The O.C." and "Desperate Housewives," which take upper-class life for granted, and bombarded with advertisements for expensive automobiles and big-screen TVs. Financial firms have turned credit for the masses into a huge business, aided by better technology for analyzing credit risks. For Americans who aren't getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment.
To some, the expansion of credit is a milestone of democracy, giving middle- and lower-income people financial flexibility that only the rich used to enjoy. Others see the borrowing binge as a way for average households to make up for sluggish growth in income over the past several decades. Since 1990, income for the median American household has risen only 11% after adjusting for inflation, while median household spending has jumped at 30%, according to an analysis by Economy.com. How could the typical family afford to spend so much? Median household debt outstanding leaped by 80%.
Utah vividly illustrates the changes credit has wrought in the U.S. Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah's rate a decade earlier, according to Economy.com, a West Chester, Pa., consulting firm. Utahns often get married early and have the largest families in the nation on average. That makes for a lot of young parents with modest incomes looking for big homes and cars. The median monthly mortgage payment in Utah equaled 45.3% of a worker's average monthly income in 2002, the fourth-highest level in the nation, according to the Utah Foundation, a Salt Lake City think tank.
In a conservative, largely Mormon state that favored George Bush over John Kerry, 72% to 26%, the surge in bankruptcies has led to soul-searching. At a conference of Mormon officials in April, Thomas Monson, the church's second-ranking leader, said he was "appalled" at advertising for home-equity loans that is "designed to tempt us to borrow more in order to have more." He repeated the words a Mormon elder spoke during the Depression: "Interest never sleeps nor sickens nor dies.... Once in debt, interest is your companion every minute of the day and night."
Americans spent half the money from refinancing their homes in 2001 and early 2002 to pay for home improvements, cars, vacations and other consumer expenses, the Federal Reserve reports. Many other consumers relied on credit cards. U.S. households with at least one credit card owed $9,205 in 2003, a 23% increase from five years earlier after adjusting for inflation, says CardWeb.com Inc., which tracks the industry.
Melanie Taylor, a 26-year-old French teacher in Kenosha, Wis., wanted to match the affluent lifestyle she had known as a young girl. Her father, a nuclear engineer, took his family of five out to eat several times a week, she says, and helped pay for her to study abroad in France. But she and her husband, also a Kenosha teacher, had to borrow heavily to afford similar extras. They ran up as much as $40,000 in credit-card and other debt to help pay for their wedding and outfit their home. Her husband flew to Toronto occasionally with his buddies to see Maple Leafs hockey games. "It was hard to put money away," she says.
After Ms. Taylor's husband developed a serious spinal illness, the couple decided recently to sell the lakefront home they had bought in 2003 to help pay off their debts.
Economists Fabrizio Perri of New York University and Dirk Krueger of Goethe University in Frankfurt, Germany, trace the credit surge to the widening income gap between the rich and the rest of U.S. society. The gap between the incomes of those at the top and the bottom widened substantially between 1970 and 2000, but the gap in consumption widened much less as moderate-income Americans turned increasingly to debt. Cornell University economist Robert Frank sees house sizes, which have grown 30% since 1980, as an indication that middle-income Americans are battling to keep pace with the wealthy homeowners who build king-size McMansions.
Despite the dicta of old sages, many economists -- led by Federal Reserve Chairman Alan Greenspan -- see the expansion of credit to lower-income families as a sign of progress. Some speak of the "democratization" of credit. In an April speech, Mr. Greenspan said that in colonial times through the late 19th century, only the affluent had access to credit and rates were high. In the early 20th century gasoline companies and retail stores started issuing credit cards, but cards didn't spread widely until the late 1960s when banks piled into the business. Now, Mr. Greenspan says, "innovation and deregulation have vastly expanded credit availability to virtually all income classes."
Those who celebrate credit's new reach, such as University of Chicago economist Erik Hurst, talk about income "smoothing" -- the idea that debt enables people to borrow from their future earnings. In an earlier era, many people had no choice but to save first and spend later. Now, with credit, they can spend right away. For many young people, it's realistic to expect their earnings to rise. Their spending isn't just on baubles -- they may buy a house in a neighborhood with good schools, helping their children get ahead over the long term.
In Miami, April Danese, a 30-year-old grade-school teacher, used a mortgage that required her to make only interest payments for the first five years to buy her first home, a $140,000 condominium. The interest-only feature reduced her payments by about $400 a month, she calculates. By the time she has to start paying principal as well, she hopes to have finished a master's degree and be in line for a substantial raise. Failing that, she figures she could sell the condo for a profit if the mortgage payments get out of hand.
Yet many fear credit has spread so widely that many Americans are overextending themselves, leaving a growing number anxiously in debt and, increasingly, bankrupt. Outstanding household debt doubled to more than $10 trillion between 1992 and 2004, after accounting for inflation. Because of low interest rates, consumers' monthly debt burden didn't increase nearly as rapidly.
Economists disagree whether this relatively benign situation can continue. Interest rates are rising -- although long-term rates remain low -- and wage growth is sluggish. One danger: Housing prices could stall or decline, upending calculations such as Ms. Danese's in Miami.
Concern about out-of-control credit is especially prevalent in Utah. Last month, Jay Evensen, the editor of the editorial page at Salt Lake City's Deseret Morning News, wrote a column blasting "people who wield their Visa cards like swords as they cut through the jungles of greed on a shopping crusade."
By the time Jason Wadsworth graduated from the University of Utah in 1994, he was married with two children and he and his wife, Amy, had run up $60,000 in student loans. He ditched his dreams of becoming a music teacher and took a steadier job at the post office, where his father worked. To keep afloat financially and treat his growing family to occasional extras that many of his wealthier friends took for granted -- a video camera, DVDs, a stereo -- he eventually piled up an additional $15,000 in debt spread over a dozen credit cards.
The Wadsworths had two more children, and their debts became so onerous that they moved into the basement of Mrs. Wadsworth's parents' house for five years. Today they live in a tiny brick home with a carport a few miles from her parents, and are slowly paying down their debts, which include $45,000 in student loans and $7,000 in credit-card debt.
"Interest compounds and it becomes like a monster around the corner," says Mrs. Wadsworth. To bolster her husband's $60,000 annual income, including overtime, Mrs. Wadsworth started writing novels with a Mormon theme and now collects about $5,000 a year in royalties.
Robert Head, a Utah mortgage broker, reflects the state's ambivalence toward debt. He specializes in interest-only loans, which sometimes can leave people in over their heads. But at the same time he complains that too many Utahns suffer from what he calls "the Nephite syndrome," referring to a clan described in the Book of Mormon that was reduced to poverty through greed. Mr. Head says he also helps solve debt problems by restructuring high-interest loans.
One couple he counseled was Quinn and Miriam Stewart. Seeking a better life for their kids, the Stewarts have figured out how to use credit to their advantage. Mr. Stewart, 29, remembers how he and four brothers and sisters grew up jammed into a two-bedroom house outfitted with bunk beds and a single television set. With his wife, Mr. Stewart ran up more than $5,000 in credit-card loans to furnish their home in a run-down section of west Salt Lake. But they had their eye on a home in the suburb of South Jordan, near Mr. Stewart's childhood home, where every driveway seems to have a basketball hoop and the schools are considered top-notch.
Mr. Stewart, who has been moving up steadily at his job at Amsco Windows from a $10-an-hour production worker to a $16-an-hour computer programmer, wasn't able to find a buyer for his home. So he decided to refinance his mortgage, pay down his credit-card debt and rent the place. To pay for a three-bedroom $167,000 house in South Jordan, he found a mortgage that didn't require a down payment. Attending seminars on mortgages, Mr. Stewart says, "I was shocked at how many things you could do to get into a house." Once he refinishes the basement, he'll have enough space for his three boys to have their own rooms.
For others, using debt to try to move ahead has as many pitfalls as promise. Growing up in a small house crammed with as many as 11 kids, Winford Wayman, a 30-year-old construction worker, longed for privacy and open spaces. But he and his wife, Kristin, a 26-year-old bookkeeper, fell behind as they borrowed to buy pickup trucks. Mr. Wayman has purchased or leased four since 1999.
"I like trucks. They make them so damn good-looking. I see a good-looking truck and I have to have it," says the slender, goateed Mr. Wayman.
He keeps his green Ford F-150 SuperCrew in pristine shape, which he acknowledges is his way of trying to keep up with his wealthier younger brother, who favors diesel-powered trucks and owns the construction company where Mr. Wayman works.
Recently, the Waymans got interested in a $125,000 vinyl-side home in Tooele, a suburb in the Salt Lake flatlands abutting the snow-capped Oquirrh Mountains. They applied for an interest-only loan, but just as the loan was being finalized Kristin Wayman got cold feet. She feared the couple couldn't afford the mortgage payments. "We freaked. We didn't know what to do," says Ms. Wayman. They ended up going through with the house deal, fearing a lawsuit if they tried to back out.
Now the Waymans are trying to figure out how to finish the basement, an expense that may require additional borrowing. "I don't think I'm too glad that I have all these ways of borrowing," says Mr. Wayman.

Trade LiberalizationEarns Mixed MarksAs Fighter of Poverty

May 16, 2005
By BOB DAVIS Staff Reporter of THE WALL STREET JOURNAL
The newest way to sell trade pacts is to trumpet how much they help poor countries. Thus, a new round of global trade talks is dubbed "the development round." And President Bush promotes a Central American trade deal as a way to bring "good jobs and higher labor standards" to the region.
While the pitch may assuage liberal guilt and make conservatives feel compassionate, trade liberalization has a mixed record as a poverty fighter. China and some Southeast Asian nations have lifted millions out of poverty through jobs created by foreign investment and exports. But Latin America, which has followed the same free-trade model, remains impoverished.
"Trying to sell trade policy as a high-powered way for helping the poor -- you can't do it with intellectual honesty," says Gary Hufbauer, an economist at the free-trade Institute for International Economics. Trade aids overall growth, he argues, but the benefits aren't targeted toward lower-income people.
A different policy would help: opening the borders of wealthy nations to more temporary workers. More work visas would equal more wealth for the world's poor. If rich countries allowed in enough temporary workers to increase their overall work force by 3%, that would raise global income by $150 billion annually, with the bulk of the gain going to low-income workers, according to calculations by World Bank economist L. Alan Winters. "Even a relatively small change in labor mobility is worth at least as much as any reduction in quotas and tariffs," he says.
Why? Decades of global trade talks have already slashed trade barriers, so there is less to gain by further liberalization. But bars on migration remain high and are frequently aimed at the poor; easing the restraints would produce big returns.
Migration helps the poor in a number of ways. Even when migrant laborers take dead-end U.S. jobs, they earn far more than they did at home. The North American Free Trade Agreement helped lift average Mexican wages by about 10%, says Gordon Hanson, an economist at the University of California at San Diego. But a Mexican who finds work in the U.S. earns, on average, about 2.5 times as much as he did in Mexico.
Migrant workers wire some of their salaries to their families, increasing spending and consumption in poor nations. Overall, migrant workers remit about $100 billion a year, the International Monetary Fund estimates, a sum that dwarfs foreign aid.
Some migrants also use the skills and outlooks they learn in wealthy countries to start businesses back home. Romania's strawberry-export business owes a lot to Romanians who once labored in Spanish fields, Harvard economist Devesh Kapur says.
The gains from migration come at a cost, of course. Many of those who leave poor nations never go back, draining talent from home nations. Families are separated for long periods of time when men migrate and their wives and children don't. Some families get so used to receiving checks from abroad that it can breed a welfare mentality.
A migration surge would also further undermine wages for low-skilled native workers in the U.S. and Europe, who compete for low-end jobs. That's one reason that political opposition to increased migration is fierce. When the U.S. agreed to a tiny number of work visas as part of free-trade agreements with Singapore and Chile, House Judiciary Chairman James Sensenbrenner was so angered that he warned U.S. negotiators not to include immigration policy in any future trade deal.
So far, the U.S. hasn't. The Central American Free Trade Agreement with El Salvador, Costa Rica, Honduras, Guatemala, Nicaragua and the Dominican Republic, which Congress will vote on shortly, doesn't deal with migrant workers, much to the consternation of regional critics.
The U.S. and Europe also are balking at proposals by India to increase visas for skilled workers as part of a world trade pact. Other poor nations want to increase visas for construction workers. A U.S. trade official says developing nations should ease restrictions first on workers from neighboring poor nations as a way to spur growth.
To have a chance of persuading politicians in the U.S. and Europe to increase work visas, negotiators would have to find better ways to ensure temporary workers actually go home -- rather than stay permanently as illegal aliens. Governments could withhold part of foreign workers' pay until they leave. Home countries could include work abroad in calculating Social Security benefits.
The top needed change would be for wealthy countries to better train their own workers for higher-paying jobs, rather than abandon them to fight immigrants for unskilled work. Part of the training's cost could come from taxing new migrants' employers.

Labor Costs Rise at 2.2% Rate,Creating Inflationary Pressure - May 6 2005

Pickup Marks TurnaroundFrom 2002, 2003 Restraint;Grounds for More Tightening
By JON E. HILSENRATH Staff Reporter of THE WALL STREET JOURNAL
Labor costs are creeping up modestly for U.S. companies, providing a source of some inflationary pressure.
The Labor Department reported that unit labor costs -- a measure of the labor cost attached to each widget a company produces -- rose at a 2.2% annual rate for nonfarm businesses in the first quarter, a pickup from the 0.4% increase registered in all of 2004. The increase was driven in part by higher compensation costs. While wage growth remains restrained for many workers, high benefit payments are also a source of compensation increases.
The government also reported that the productivity of workers -- measured as output per hour worked -- grew at a 2.6% rate in the first quarter. That marked a pickup in productivity growth from the two previous quarters, though the pace is no longer at the lofty rates that prevailed shortly after the recovery took hold, when companies were cutting costs aggressively to boost the bottom line.
"Businesses are more focused on looking for growth opportunities now that they've recovered a little bit from the effects of the downturn," said Martin Baily, a productivity expert at McKinsey & Co.
The growth in unit labor costs marks a turnaround from 2002 and 2003, when companies were able to squeeze labor costs by restraining wages and hiring even as they increased the output of existing workers.
Labor costs are an important component of inflation and one in which Federal Reserve officials take great interest. As labor costs rise, executives have an incentive to push prices higher to protect profit margins. Because wages remain restrained and other measures of compensation are tame, it isn't clear that labor costs will move much higher. But economists said the latest report gives the Fed, which raised its key short-term rate to 3% Tuesday, more reason to keep nudging rates higher.
A slowdown in productivity growth is also at hand. Between the end of 2001, when the recovery started, and the second half of last year, productivity grew at an annual rate of around 4.5%, the strongest stretch of growth in nearly 40 years. But recently it has settled to a growth rate well below 3%. While still a healthy rate, it means companies aren't able to push their work force as much as they had been.
Another government report showed the number of workers filing first-time applications for unemployment benefits rose last week for a second week in a row. Initial jobless claims increased by 11,000 to 333,000, the Labor Department said. But economists said that didn't change their view that employers expanded nonfarm payrolls by about 200,000 jobs over the course of April.

Factory Orders PostUnexpected Gain for March - May 4, 2005

Factory Orders PostUnexpected Gain for March
By JEFF BATER and KEMBA J. DUNHAM Staff Reporters of THE WALL STREET JOURNAL
Amid recent indications of slowing growth in manufacturing, demand for U.S. factory goods rose for the first time in three months during March, propped up by a surge in the value of orders for nondurable items like petroleum.
The report on March demand surprised Wall Street and economists, who had expected a decline of as much as 1.2%.
Factory-goods orders inched up 0.1%, following a revised 0.5% decrease in February, the Commerce Department said yesterday. February orders were originally estimated as rising 0.2%. Orders were flat in January and rose 0.5% in December.
Factory orders are considered a leading indicator of economic activity because they can translate into demand for future output.
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Read the full text of the Commerce Department's report on factory orders, and analysis from Briefing.com.
The government raised an estimate issued a week ago for March durable-goods orders. Demand for such goods, designed to last at least three years, fell 2.3%, compared with an earlier estimate of a 2.8% decline.
Orders for nondefense capital goods excluding aircraft -- a proxy for business-investment demand -- slipped 4%, after easing 2.1% in February. Economists said this indicates that capital spending had very little momentum at the end of the first quarter and hints at further slowing in the second.
The surprise among analysts on the factory-orders report stemmed from somewhat negative data during the past week. Besides the decline in durable-goods orders, the Institute for Supply Management on Monday reported that its index of manufacturing activity retreated in April to the lowest level since July 2003, sliding to 53.3 from 55.2 in March, and the new-orders index slowed to 53.7 from 57.1. Readings above 50, however, indicate expanding activity. Analysts said higher oil prices are hurting manufacturers.
Higher prices for crude oil also may have helped prop up the nondurables segment of factory orders. Yesterday's data showed nondurables, which include petroleum, rose 2.8%, after falling 1% in February.
But that "doesn't tell us much about the strength of underlying real demand for factory goods," said David Resler, economist at Nomura Securities in New York.

Pace of GrowthIn ManufacturingSlowed in April - May 3, 2005

May 3, 2005Economy-->
Economy
By KEMBA J. DUNHAM Staff Reporter of THE WALL STREET JOURNAL
In the latest sign that U.S. economic activity is moderating, the Institute for Supply Management reported that the manufacturing sector grew in April at the slowest pace in nearly two years.
The ISM, which polls purchasing managers at more than 400 industrial companies, said its index of manufacturing activity slipped to 53.3 last month, down from 55.2 in March and 55.3 in February. April was the fifth consecutive monthly decline in the index, which peaked at 61.6 last July and has trended lower ever since. A reading above 50 indicates that the manufacturing sector is expanding; a reading below 50 indicates that the sector is contracting.
While the decline in the ISM index was widely viewed as disappointing news, some economists were quick to note that the reading doesn't mean that the economy is heading for recession. "The current ISM number is down quite a bit, but it's still pretty good and consistent with pretty decent growth in the economy," says Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa.
Norbert Ore, chairman of the ISM's survey committee, also down played the recent decline. He said that after 23 consecutive months of expansion in the manufacturing sector, a slowdown was inevitable. "It's important to note it's the longest run of growth in manufacturing in 16 years," he said. "There has to be some expectation that the rate of growth will decline." He attributes the slowdown to a decline in demand for durable goods and to inventory excess in the automotive sector. The new-orders index, for example, fell to 53.7 in April from 57.1 a month earlier.
The ISM index is closely watched by economists and investors because it provides an early look of economic activity in the preceding period and tends to track changes in the health of the U.S. industrial core. But it isn't clear whether the report will have any influence on members of the Federal Reserve's Open Market Committee, who are scheduled to meet today to map out monetary policy. The central bank is widely expected to raise the target for the federal-funds rate, charged on overnight loans between banks, to 3% from 2.75%. While the economy appears to have softened in recent months, Fed officials seem to be more focused on keeping inflation from accelerating than on keeping the pace of economic growth from slowing.
Of the 20 industries tracked by the ISM, 14 reported growth in April, including the wood, furniture and chemical industries. The five industries that reported decreased activity were apparel, paper, electronic components, textiles and printing and publishing. Petroleum was the only industry reporting the same level of activity as the previous month.
One slightly positive reading came in the prices-paid index, which was 71.0 in April, down from 73 in March. The employment index declined to 52.3 from March's 53.3, which shows that companies are adjusting to the slowdown by keeping hiring down.
Economists were encouraged by the export-orders index, which rose to 57.2 in April from 55.4 a month earlier as the weaker dollar continues to be a driver. But overall, many thought the report was disappointing, but not unexpected. "It was consistent with the general picture that says we're going to get another quarter of economic growth that is pretty lackluster," says Joshua Shapiro, an economist at MFR Inc., a New York economic-advisory firm.
Separately, the Commerce Department said U.S. construction spending increased 0.5%, faster than expected, to a seasonally adjusted record annual rate of $1.052 trillion. Spending rose a revised 0.5% in February compared with the previously reported 0.4%.

U.S. Exporters Face Harsh Climate - May 2, 2005

Sluggish Growth AbroadSqueezes Manufacturers;Canada Hits 'Weak Patch'
By TIMOTHY AEPPEL Staff Reporter of THE WALL STREET JOURNAL
Slower economic growth in parts of the world is translating into fewer exports for many U.S. manufacturers, who had counted on strong foreign sales to help fuel expansion.
The problem is linked mainly to Europe's and Japan's sluggish growth, which is curbing the appetite for U.S.-made goods in those regions. But Canada is a concern, too. U.S. exports of goods and services grew 7% in the first quarter, according to the Commerce Department, up from 3.2% the quarter before. However, export growth was stronger in the early part of last year and then moderated sharply. As a result, most economists are predicting export growth for all of 2005 will fall well short of last year's overall performance.
Cliff Waldman, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va., group that represents large manufacturers, recently cut his projection for this year's export growth to 5.7% from 8% and cautioned that he sees "downside risks" in this area. He blames Europe and Japan but also has growing concerns about Canada, the U.S.'s largest trading partner. "Canada is entering a weak patch and it could turn into something worse," Mr. Waldman said.
Softer export growth is only one problem facing U.S. manufacturers. Rising energy prices have dragged U.S. economic growth to a two-year low. Since the bulk of what U.S. factories produce is sold domestically, that means fewer sales at home. U.S. gross domestic product, the broadest measure of all goods and services produced, rose at a disappointing 3.1% annual rate in the first quarter, down from 3.8% in the fourth quarter. Durable-goods orders fell 2.8% in March.
Slower export growth will make it that much tougher for the U.S. to rein in its trade deficit, though most economists say surging imports are the crux of that problem. Even rapidly growing exports are unlikely to make a dent in the deficit until the U.S. curbs explosive import growth. U.S. exports grew 8.6% last year.
The U.S. is increasingly an exporter of capital equipment, so weaker growth is hitting many equipment makers. Nordson Corp. of Westlake, Ohio, recently cut its revenue target for its fiscal second quarter, ended April 30, and for its full fiscal year, pointing to softer-than-expected international sales, particularly in Europe and Japan.
"World-wide demand for capital goods has decelerated," said Nicholas Pellecchia, the company's vice president of finance. Nordson makes machines that apply adhesives, sealants and coatings in factories, so it is highly sensitive to trends in business investment. Mr. Pellecchia said companies in Europe and elsewhere suddenly appeared to grow more cautious about investing around January. Demand in parts of Asia outside Japan has also moderated, though it remains robust, he said.
Mr. Pellecchia added, however, that Nordson sees "this more as a short-term issue of a...pause, rather than a longer-term structural issue." The company doesn't expect export growth to continue decelerating.
Another example is Rockwell Automation Inc. of Milwaukee. The maker of factory automation equipment says a "systematic slowdown" in Europe is hurting its exports. James Gelly, the company's chief financial officer, said that during Rockwell's fiscal second quarter, which ended March 31, business grew 33% in China, 57% in India, and 22% in Latin America, while Europe declined 1%. Germany, Europe's largest economy, was especially troubled, with a decline in the double-digits for the period.
Rockwell also believes export growth has slowed but will stabilize at a lower level. Based on the number of engineering studies under way -- the planning processes that precede major automation projects -- the company expects global strength stretching into 2006, Mr. Gelly said.
Richard DeKaser, chief economist with National City Corp. in Cleveland, said aggregate demand in the rest of the world simply isn't strong enough to pull in more U.S.-made goods. "That's been neutralizing the favorable effect of the declining dollar," he said.
Some companies continue to see surging export growth. Haas Automation Inc. of Oxnard, Calif., said its exports of machine tools to Europe have increased 40% so far this year. "Driving the growth, in part, is the favorable exchange rate," said John Roth, Haas's director of customer service. But the company has also expanded its sales and support efforts in foreign markets.
Write to Timothy Aeppel at timothy.aeppel@wsj.com

Manufacturers Belie Slowing Pace - Apr 15 2005

Capital Goods Sell Briskly,But Consumers' DemandFor Autos, Furniture Drops
By TIMOTHY AEPPEL Staff Reporter of THE WALL STREET JOURNAL
Evidence of declining consumer demand keeps mounting, even amid upbeat economic developments.
Major U.S. manufacturers, despite high energy and raw-material costs, are continuing to see firm growth in orders, aided by the weaker dollar and the continuing move to replace equipment bought during the investment boom of the 1990s.
The strength is visible more among capital-goods producers and less among consumer-oriented manufacturers. Furniture makers and others in the latter category are seeing the impact of slowing job growth, a decline in consumer confidence and low household savings rates. Indeed, noticeably absent from the rosy projections are auto makers and their suppliers, who have cut expected profit and production plans.
At the same time, U.S. business inventories rose in February, expanding 0.5% to a seasonally adjusted $1.288 trillion, while sales fell 0.4%, the steepest decline since April 2003, the Commerce Department said yesterday.
Combined with the reports earlier this week of a record February trade deficit and disappointing March retail sales, the data added another indication that America's 2005 economic growth may be weaker than the gradual slowing many economists have anticipated from last year's 4.4% pace.
Meanwhile, a top Federal Reserve official said yesterday that persistently high energy prices may finally be taking a toll on consumer spending, though economic growth should remain solid.
"Increases in energy prices are siphoning purchasing power of both households and businesses" to foreign oil producers, leaving less money for domestic purchases, Federal Reserve Governor Donald Kohn said. While last year's rise in energy prices only damped spending to a "limited extent," the "persistence of higher prices may have a cumulating effect on spending, early hints of which might now be showing up in the latest reading on retail sales."
The bright spot for manufacturing appears among companies that feed off the heavy-equipment market, from tractors to railcars and trucks, as well as defense, aerospace and automation. There, the outlook remains strong in large part because of the rush to replace machines bought during the technology boom.
"Those things are all five, six, seven years old and are coming up for replacement," says Jim Meil, chief economist at Eaton Corp., of Cleveland. "That's sustaining pretty strong domestic demand." Yesterday, Eaton said its first-quarter profit rose nearly 40%, aided by surging sales of electrical equipment, and it expects the second quarter to beat the year-earlier period.
Likewise, Al-Jon Inc., a heavy-equipment maker in Ottumwa, Iowa, is at maximum production, making machines that crush cars -- a business that has boomed with demand for scrap metal around the world -- and giant machines that compress waste to make more space in landfills. The company's order books continue to grow, and it now expects to finish this year with record sales of $40 million, $5 million higher than last year.
Kendig Kneen, Al-Jon's president, says he has been able to pass through higher steel prices on machines for the scrap-metal industry, but not as much on trash compactors.
"While there are concerns about the impact of higher oil prices -- and higher prices for other commodities -- the general view is that these are going to moderate," says Donald Norman, an economist with the Manufacturers Alliance/MAPI, an Arlington, Va., research group.
Mr. Norman surveyed 67 of the nation's largest manufacturing companies and found that executives expect new orders, investments and profits all to remain at high levels by historic standards. For example, the vast bulk of respondents, 85%, said they expect new orders to be higher for all of 2005, compared with last year, while 55% expect investment to increase, compared with last year. Those comparisons are particularly significant, since last year was such a strong year for manufacturers.
Many manufacturers also are benefiting from the dollar, which, despite hitting a two-month high yesterday against the euro, remains relatively weak. When the dollar weakens, profits earned overseas by U.S. producers translate back to dollars at a higher rate, and producers in the U.S. are better able to compete against certain foreign producers, both at home and abroad. The weaker dollar has boosted exports for capital-goods makers such as Deere & Co. and Boeing Co.
Companies such as Navistar International Corp. are even facing parts shortages in the face of booming demand for more trucks and buses. The Warrenville, Ill., truck and bus maker yesterday reported first-quarter net income of $20 million, or 27 cents a share, compared with a loss of $14 million, or 20 cents a share, a year ago. It said it doesn't expect the parts shortages to hurt 2005 earnings.
Daniel Ustian, chairman and chief executive, says he expects business to remain strong for at least the next 12 to 18 months. The backlog of orders for the company's heavy trucks is up 40% since December, and it is expanding capacity to produce a wider range of diesel engines.
The Commerce Department report on inventories offered some room for optimism. The February business inventory-to-sales ratio rose to 1.31 from 1.30 the previous month. The ratio was at 1.33 in December. The gauge refers to how many months a business would need to sell all current inventory.
"It looks as though we've made a turn on the inventories-to-sales ratio. And with the auto sector cutting back, that is probably going to ripple through other parts of the economy and lead to a lower desired level of inventories," said Paul Kasriel, chief economist with Northern Trust in Chicago.
Mr. Kohn, the Fed governor, told a meeting of directors of the Federal Reserve Bank of San Francisco that the "economy is likely to remain on a path of solid growth," thanks to steady job growth, rising business confidence and still-low interest rates.
The Labor Department reported yesterday that the number of U.S. workers filing first-time applications for unemployment benefits fell last week to a three-week low. Initial jobless claims fell by a seasonally adjusted 10,000 to 330,000 in the week ended April 9, the department said.
The four-week average, which smooths out weekly fluctuations, rose slightly to 338,000. Economists say averages below 350,000 typically indicate net job creation.
Mr. Kohn also said inflation still is contained, thus "our best guess, for now," is that interest rates will rise at a "measured" pace. "Measured" has come to mean no more than a quarter percentage point a meeting.
There are "hints inflation pressure may be intensifying," he noted, but by citing restraints on growth such as high energy prices, he suggested he saw little urgency to move from quarter-point to half-point rate increases for now.
He indicated, however, that the "measured" pace may be abandoned without notice. The Fed's verbal guidance, he said, "cannot and will not deflect us from changing our strategy whenever we believe doing so to be necessary to meet our objectives."
--Campion Walsh and Joseph Rebello of Dow Jones Newswires contributed to this article.
Write to Timothy Aeppel at timothy.aeppel@wsj.com

Low-Wage U.S. JobsGet 'Mexicanized,'But There's a Price - May 02 2002

By JOEL MILLMAN Staff Reporter of THE WALL STREET JOURNAL
SAN YSIDRO, Calif. -- Here at the world's busiest international crossing point, 50,000 Mexicans enter the U.S. economy every day. They are permanent workers with green cards who commute from Tijuana, and stay close to Mexico by toiling, legally, in San Diego County as janitors, landscapers and hospital aides.
The border also attracts thousands of illegal job seekers every day, few of whom work locally. Rather, they merge into the U.S.'s growing underground economy, whose pool of workers includes an estimated five million undocumented Latinos. With each passing year, many other parts of the U.S. far from the border come to mirror the San Diego labor market.
According to a study being released today by the Pew Hispanic Center, a think tank in Washington, Latino workers accounted for 40% of the 2.5 million jobs created last year, despite comprising barely 15% of the U.S. work force. Even more striking, 88% of the one million new jobs filled by Latinos went to recent immigrants, mainly from Mexico. Dozens of U.S. job categories have become "Mexicanized." Today, nearly half of all plasterers and stucco masons are foreign-born Latinos, while immigrants hold at least 40% of all jobs in such occupations as garment pressers, drywall installers and ceiling-tile installers.
The surge in hiring comes at a price, the Pew report reveals -- falling wages. In 2004, Latino workers' median weekly earnings were $400, down from $411 in 2003 and $420 in 2002. "No other major group of workers has suffered a two-year decline in wages," says Rakesh Kochhar, author of the report.
Why are jobs increasing, but wages falling? Mexican immigrants are changing destinations, bypassing high-cost cities on the coasts and flocking to small towns in rural America. There, they manage to find work in low-wage industries, but their greater numbers make it easier for employers to keep salaries low.
"Fifteen years ago nearly 60% of Mexican immigrants worked in California," says Gordon Hanson, economics professor at the University of California at San Diego. "Today it's barely 40%."
The "Mexicanization" of the U.S. job ladder's lower rungs raises important political and economic questions. Will support diminish for minimum-wage increases when most low-wage earners are immigrants who can't vote? As industries like construction, food service, lodging and landscaping grow dependent on imported labor, will they face labor shortages if border security is tightened.
The Pew study supports the theory that immigrants are supplementing the U.S. work force, not pushing native-born Americans out of jobs. Native-born U.S. workers have become better-educated and more ambitious in the past four decades. The percentage without a high-school diploma has dropped to about 9% from 52% in 1960. And these U.S. workers are looking for higher-skilled, higher-paying jobs.
So opportunities abound for low-skilled Latino immigrants. Even where illegal immigrants do compete with native-born workers, the larger labor pool may produce more jobs overall. That is because "employers are forgoing labor-saving machinery to rely on more laborers," says Ethan Lewis of the Federal Reserve Bank of Philadelphia. "That has the effect of saving jobs."
The flip side of lower wages for workers, of course, is a boon for employers, who can use the savings to keep prices lower. Consider the interstate motel business.
When Hasmukh P. Rama opened his first motel in 1973, he had no Latino workers. Today, his JHM Hotels Inc. employs nearly 1,000 people across six Southeast states, 300 of them Spanish speakers. "In an industry where labor shortages are endemic, we have stability" because of additional immigrant labor, says Mr. Rama, who pays entry-level hires $6 an hour. "We're not all fighting for the same employees and bidding up prices."
Harvard economist George Borjas, who is a Cuban immigrant, warns that the U.S. economy's dependence on imported labor obscures many costs. Besides the expense of assimilating immigrants, businesses may be slower to innovate if they can make do with cheap labor.
Mr. Borjas cites Japan as an example of a developed economy that was forced to become more productive because of its anti-immigrant policies. Americans may delight at the Japanese mania for vending machine and other quotidian gadgets, but the economist says that shows a Japanese willingness to mechanize, in contrast to the U.S. choice to Mexicanize.
"Japan chose to robotize," Mr. Borjas says. "Mexican immigration has given us a very labor-intensive economy."
Write to Joel Millman at joel.millman@wsj.com