As November’s very heated election approaches in a continuing climate of economic malaise, desperate politicians are pointing the finger of blame anywhere and everywhere but at themselves.  The nation is rightly disgusted with its banksters but is growing immune to the long and continuous public bludgeonings of their ilk.  In search of another scapegoat the thundering congressional herd lurches eastward – “Blame the Chinese! – after all they don’t vote in our elections.”

Chinese workers have been striking (or just not showing up) and demanding higher wages.  Frankly, good for them – they were being paid a pittance and many had pretty lousy living conditions.  I’m all for an increase in the purchasing power of Chinese factory workers.  That said, a dramatic upward currency revision, as many in Washington are calling for, could have all sorts of unintended consequences.

China is NOT sucking up as many U.S. jobs as is touted by the pandering vote grubbers.  Low end (toys, sneakers, small appliances, et al.)  manufacturing left our shores long ago and is not coming back.  You can’t make these goods in the U.S. and still meet “the Wal-Mart price”.  Even in these dire economic times no one will accept a wage low enough to make widespread U.S. consumer goods production feasible.  Well, except maybe in Detroit.  “What about cars?” you ask.  “Building cars isn’t low end manufacturing.”  Yes, they are building cars in China but they are not shipping them here.  Those cars are for Asian consumption.  By the way, part of “they” is “us”.  U.S. auto manufacturers are building cars in China for Asian consumption as well.

If the U.S. political class is able to harangue China into a significant upward revision of their currency, it will cost U.S. jobs.  American companies who have their products manufactured in China will have higher costs, and because it is very difficult to budge retailer’s price points, will therefore have smaller margins.  An environment of diminishing margins is not likely to spur additional hiring.  Companies will not be looking for additional sales marketing or product development staff.  This is especially true of smaller private companies where owners tend to view the cost of each additional employee as coming straight off the bottom line – which translates to straight out of their pockets.  A rising yuan doesn’t support these small businesses which are supposed to be the engines of American job growth.

In taking a country from the 12^th century to the 22^nd in the span of a mere fifty years, China’s leaders have to deal with far bigger problems than the U.S. Congress.  They are going to move slowly and do what they think is right for them – whether what they think is right, actually is right or not.  Them, of course, being the Communist Party, which is committed to maintaining power whether the country is communist or not.  What we will likely see is a few small gestures such as the past two weeks 1% rise in the yuan in an attempt to mollify the situation until after the U.S. elections (now only six weeks away) when everyone’s attention will be focused elsewhere.

One of the factors that is really holding up job growth in the U.S. is uncertainty.  Business owners like predictability.  They determine what profit margin they want in order to make an enterprise worthwhile.  Then they try to project sales (always tricky) and try to set costs at a level that will give them that margin or better.  Costs are supposed to be the easy side of the equation to figure out.  Unfortunately, we are currently in a situation where no one knows what health care costs will be or what climate change legislation costs will be.  No one even knows what the tax rate will be.  The tide may turn either for or against the business community but once we know what the rules are we can decide what to do about them.  Until we know the costs we can’t even do the calculations, therefore many things are being put on hold . . . like hiring.

In the current economic climate it’s time to scrap blindly chanting ideology and focus on the pragmatic.  Just so you know where this is coming from – I consider myself socially liberal and fiscally conservative but most of all a pragmatist.  “People can believe in whatever they want, I want to do what works.”  I know, I just painted a huge target on my back and expect to be pelted from all sides by Nerf missiles when I arrive in Dallas for the Fall Toy Preview.  In any case, what seems to be pragmatic in that it would help the economy and can also actually be passed and signed into law is to extend all Bush tax cuts for a period of two years and then review them two years on.  This is not the time for a 700 billion tax increase.  I think it’s likely that is what will happen.  Obama doesn’t have the votes to do what he wants and everybody realizes it will be disastrous if taxes increase for everyone at the end of 2010.

Upcoming tax certainty isn’t the only positive as the economy continues to slowly (very slowly) improve.  There are other “reasons to be cheerful”.  Despite the hot summer doldrums, retail sales for July and August slowly but steadily increased, coming in ahead of expectations.  August saw an acceleration in manufacturing in both the U.S. and China.  Growth was slow but again it was positive.  However, we should temper our enthusiasm on this particular metric.  It is completely natural for production to ramp up in July and August as seasonal goods are manufactured for late August/September pre-holiday delivery to retailers.  While sell in is good, the ultimate question is sell through.

Average hourly earnings – which decide how much money people have available to spend – were up by 0.3 percent.  There was also a rise in temporary employment which is often a prelude to the creation of permanent jobs.  A better than expected 67,000 private sector jobs were added in August and there were upward revisions to data for the previous two months.  True, the government shed 114,000 temporary Census workers but that was expected.

The September stock market has been strong and most economists are de-emphasizing the chance of a double dip recession.  Warren Buffett last week stated:  “I am a huge bull on this country.  We will not have a double-dip recession.  I see our businesses coming back almost all across the board.”  After all the gloom and doom of the summer it seems that we find ourselves in a situation where the economy is not collapsing but rather heading in the right direction though at too slow a pace to drive unemployment down.

The toy industry has several things going for it.  Most toy companies have focused this year on producing low cost goods.  While retail sales have been creeping upward, shoppers have been hesitant to purchase big-ticket items like autos, furniture, appliances. In fact, electronics retailers are revamping their aisles to focus on handheld gadgets to try to excite consumers who have grown weary of their traditional big-sellers:  televisions and personal computers.  After all, how many big-screen TV’s do you need?  Handheld devices are still pricey compared to toys.  The toy industry may find itself in the pricing sweet spot for the 2010 holiday season.

The growth of Toys’R’Us pop up stores is also exciting.  Last year Wal-Mart only had to deal with the competitive impact of 90 somewhat hastily assembled Toys’R’Us Express locations.  This year Toys’R’Us is planning 600 express stores with 300 of the locations already up and operating.  More locations, more shelves to fill and more competition for a Wal-Mart whose toy department will be 25% smaller this year, are all positives for toy companies.

As for toy company jobs, the annual late August/September hiring bounce has been somewhat muted for a number of reasons.  Retailers continue to order late in an attempt to shift as much liability as possible onto toy manufacturers.  The trouble is that factories have been relocating inland and north.  It takes longer to get goods to the coast, there has been a shortage of shipping containers and also massive traffic jams on roads leading to the ports.  Later ordering combined with longer lead times is not a recipe for success.  Over my three decades in the business, I have noticed that toy companies feel better about themselves and start hiring once their goods hit the retailer’s loading docks.  Later shipping has caused many companies to delay pulling the trigger on hiring decisions.  Also, all of the uncertainty over government rules, regulations and taxes has been a considerable factor.  Make no mistake about it some companies have begun hiring and we have begun a number of searches, but there are also a lot of companies talking about their staffing needs but dragging their feet rather than getting going.  Like the economy, things are moving in the right direction but slowly, slowly.

Still Muddling Thru,

Tom Keoughan

P.S.  Wow, sorry about the long tirade.  There must have been some “pent up demand”.  I guess the main difference between me and the Washington gasbags is that I have not yet learned how to talk in bullet points.  See y’all in Dallas.