As the summer slid into August, gasoline prices fell a bit, back to about $3.79 per gallon here in the Midwest, and even that modest reprieve seemed to dispel some of the summertime blues. Traffic on the interstates around Lake Michigan was not quite up to normal August levels (on Sunday afternoon of the second weekend in August, we sailed through Chicago without ever coming to a standstill), but it had picked up from earlier in the summer.
As the November election approaches, the Bush administration will undoubtedly put some pressure on Big Oil, now reporting its third straight year of record profits, to lower the cost of gasoline a little more in hopes of giving a boost to the economy and improving the chances of Republican presidential candidate John McCain. But in the long run, 2008 will not prove another 1973 or 1979. Gasoline prices—energy prices in general—will continue to fluctuate, but they are not likely to decline significantly.
Fewer people are laughing at James Howard Kunstler these days, as “peak oil” is becoming a relatively common phrase. On the other hand, the number of people who are seriously discussing what all this will mean for the United States—economically, culturally, even politically—is still relatively small. It is not just the end, as I lamented a few months ago, of the automobile culture and the summertime activities that accompanied it. Higher energy costs are rippling throughout the economy. The Consumer Price Index will likely hit four to five percent this year, nearly twice the average rate over the last decade. Food prices are rising at an alarming rate, since most of what we eat has taken a double hit: The cost of production has risen, as has the cost of transporting the average food item 1,500 miles from the point of production to the point of distribution. And that is before we consider the increased cost of driving out to the edge of town to purchase a tasteless, watery pink tomato from the Wal-Mart that put the grocery store in your neighborhood out of business several years ago.
In the midst of this increase in energy prices, the continued recovery of manufacturing in Rockford (which I discussed in the July 2008 issue) may seem rather surprising. Green County, Wisconsin, home of General Motors’ doomed Janesville assembly plant, is already hurting from cutbacks in production 18 months before the scheduled shuttering of the facility, which manufactures Suburbans and light trucks. In the late 70’s and early 80’s, much of Rockford’s manufacturing crisis, including double-digit unemployment rates, could be traced to the close ties between the Big Three auto makers and local small manufacturers. So why is manufacturing in Rockford doing relatively well, when some financial analysts are calling for GM, with its relatively paltry $6.4 billion market cap, to be removed from the Dow Jones Industrial Average?
Dean Olson, the chairman of Rockford Acromatic and a member of the board of directors of The Rockford Institute, pointed me to the answer (which now seems rather obvious): Most small manufacturers in Rockford and elsewhere throughout the Midwest no longer depend on the Big Three for any significant portion of their business. Free-trade agreements and the decline in the strength of the United Auto Workers and other unions enabled the Big Three to cut those long-standing ties and to outsource much of their component production. Since the mid to late 90’s, the proportion of foreign-made parts in your “American-made” car has increased steadily. In most cases, “American-made” amounts to not much more than “American-assembled” these days.
In other words, manufacturing in Rockford and across the Midwest is doing a bit better than we might expect right now because of the previous recession in manufacturing that I have discussed extensively in this column over the past eight years—a recession that was caused, in part, by the redistribution of production overseas. Those companies that survived might still make parts for the auto industry, but few of them are joined at the hip to one of the Big Three anymore.
That is not to say that small manufacturers are out of the woods. Continued weakness in the auto industry will obviously have an effect on companies such as Rockford Acromatic, which makes after-market auto parts (though such manufacturers may also benefit from those who opt to repair their older cars rather than to buy new ones). And many older factories are still in desperate need of new equipment but too cash-strapped to purchase it. Higher energy costs mean tighter margins, which move such purchases further out into the future.
There is little reason to suspect that either presidential candidate will offer manufacturers much relief. Tax incentives for updating equipment and processes, for instance, are likely to be lower on John McCain’s list than federal funding for embryonic stem-cell research, and far below federal funding for abortion on Barack Obama’s.
This election year, small manufacturers will have to make their own future. Taking advantage of this small reprieve to make capital investments, especially those that allow them to diversify their production, can insulate them against the economic shocks that are sure to come, no matter who is elected president.