This country has undergone many changes to manufacturing industries, big business, and small business alike. With past news of layoffs by the major automotive manufacturers, cities like Detroit, Flint, and surrounding suburbs have suffered greatly. The situation, nationwide, was made even worse by headlines of AT&T, Citigroup, and Merrill Lynch cutting back 16,000+ jobs.
The fact of the situations is that we are now in a global marketplace, more-so that we ever have been. Our businesses have to compete with countries like China, Taiwan, and India who can provide very cheap labor rates which can always offset (and more) the costs of doing business in a foreign country. It’s cheaper to employ 500 people in China than even 100 people in the United States. Health benefits, retirement benefits, and general average pay is much greater than other developing countries. The people in these countries, like China and India, live very cheaply and do not live up to the American lifestyle of spend more, play harder.
It’s a known fact that the problem our country faces today with our failing economy is that for the past decade; consumer spending is, on average, higher than income. That means that most people are spending more on disposable goods than they have spendable income. As this trend continues, so does consumer debt on revolving credit. As this debt goes up, so does the possibility that the spending will have to stop eventually. Once the spending stops, the profits for the retailers and manufacturers stop. Once the profit stops, the employment cutbacks need to be made. The trouble starts there and ends with consumer bankruptcy. As people lose their jobs and cannot find a replacement right away, the interest and late fees on revolving credit build up and soon payments are not being made.
Now that bankruptcy laws are more strict so that credit providers will not totally lose out, people are forced into selling cars, homes, and anything they have just to pay back some of the debt and new payment plans are made for a percentage of the rest. Once this happened, a flood of new homes were hitting the market. This is where the housing market took a major turn for the worse. It wasn’t long before banks were advertising new loan programs to get people into houses they could have never afforded in the first place. People with income that would only allow a $150,000 house were taking out interest only loans on $250,000 houses and just making payments on the interest. This was a great idea because houses always go up in value. The problem with that theory is that a house is only valued by how much someone will pay for that house. Realtors and property brokers continuously drove up the prices of houses by taking into account what the seller needed to get out of the property and then adding a percentage for themselves. Sometimes, this was much more than what the property was really worth. It was common for “house flippers” to buy houses for what they were really worth, spending 20% more to do upgrades, and then expecting a 50% or more profit. Naturally, realtors would agree and list houses for that amount, especially if other realtors in the area were doing the same thing. If there is no choice, people are forced to pay that amount if they want to live in that area or “fall in love” with that house.
For years, this price jumping and incredible inflation of home prices continued. When those very low payments, interest only, loans started to expire and people needed to refinance, the homes went back up on the market to make a “quick profit”. Unfortunately, because so many homes went up on the market, the bubble burst. Homes stopped selling, loan payments doubled and tripled, and people could no longer afford to make the payments. Tie that into a slowing economy where large businesses were cutting back on employees and the recipe for disaster was baking in the oven. The amount of foreclosures today is incredible. Banks are dumping off properties for anything they can get. Since these house prices are sliding down hill fast, so are the surrounding property values. Even if a property could still be reasonable priced at $200,000, the 3 houses down the street that can’t even sell for $100,000 bring that $200,000 house down to their level of $100,000. Remember that the price of a property is relative to the prices of similar property surrounding it.
This situation is made worse by the fact that most of the manufacturing personnel that is unable to find a job will be unable to find a job in the future. This isn’t a temporary situation, but more of a permanent situation caused by the migration away from manufacturing into technology, education, science, and health care. Since manufacturers are forced to send jobs overseas, employees with no or outdated skills will be permanently unemployed unless they go for re-education or update skills for newer more efficient manufacturing processes. Unfortunately, even these newer manufacturing processes require less general laborers, so even fewer people will be required.
Now that the unemployed will need re-education or updated skills, the educational industry will add more teachers and administrators to their payroll. More people will seek out professions that are current, which means more engineers, medical professionals, and information technology personnel. It is estimated that by the year 2012, the United States will have a deficiency of 800,000 registered nurses. In Michigan alone, there are 84,000 jobs that go unfilled due to no qualified candidates, even in an economy that is the worst in the nation. These jobs are not skilled or non-skilled laborer positions. These positions are for medical, information technology, and scientific companies. The majority of the unemployed in Michigan are general laborers from automotive companies that have drastically cut back on their operations.
Big businesses are scaling back while small businesses are cropping up. Currently, small businesses account for 70% of the new jobs created today. Unfortunately, these jobs are for less pay and benefits that are found in larger corporations. This trend is going to lead to considerable less consumer spending and add to the rising costs of products and services. This double edged sword is here to stay.
In the future, it is hoped that credit providers become more aware of the financial needs of their customers and better financial planning is taught to young people so that consumer debt is avoided.