(What’s Left of) Our Economy: Trade Wars’ Impact on U.S. Manufacturing Output Still Clouded by GM and Boeing

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If you read last month’s Federal Reserve report on after-inflation U.S. manufacturing output (for September), then there wasn’t much reason to read yesterday morning’s report on after-inflation manufacturing production (for October). For it described the same puzzling picture: American industrial performance clearly dragged down by the recently ended strike at General Motors (GM), but apparently completely unaffected by Boeing safety woes that have sharply reduced the aviation giant’s enormous exports.

The top-line figures released by the Fed were definitely gloomy. Last month, real U.S. Manufacturing output dropped by 0.62 percent sequentially – the worst such result since April’s 0.87 percent fall-off. Inflation-adjusted motor vehicle and parts output, however, plunged by 7.65 percent – its worst such performance since the 7.97 percent nosedive of April, 2011. Moreover, September’s previously reported 4.22 percent monthly automotive price-adjusted automotive decrease was revised all the way down to a 5.49 percent slump.

As the Fed observed, without the huge October monthly plunge in inflation-adjusted automotive output, the overall manufacturing production decline would have been just 0.14 percent – which obviously doesn’t show any strength, either.

But this is where the Boeing puzzle comes in. There’s still no sign of it in these Fed data. Most curiously, constant dollar production for aircraft and parts production rose a solid 0.57 percent on month in October. It’s down since March, when governments the world over began grounding its popular but now troubled 737 Max jet or banning it from their national air spaces.

But although Boeing’s exports have deteriorated sharply, too, the real output shrinkage has only been 1.48 percent since March, and since April (the first full data month since those March woes), after-inflation production of aircraft and parts has actually risen 1.15 percent. That’s considerably better than the output performance of domestic manufacturing as a whole during this period. And it’s much better than the output of key supplier sectors, although surely they’d been affected by the GM strike as well:

overall manufacturing: -0.19 percent

durable goods: -0.81 percent

primary metals: -1.62 percent

fabricated metals products: -0.60 percent

machinery: +0.37 percent 

It’s true that export sales and production don’t move in lock step for aircraft, or for any other industry.  But with foreign markets representing well over half of Boeing’s revenue last year, the former sinking while the latter keep growing isn’t easy to explain.

Something else that needs to be considered: Whatever the Fed data actually show, they’re not able to show much about how aircraft parts and production would have fared without the Boeing troubles. And they’re even less capable of showing such counterfactuals regarding how supplier sectors might have fared.

As for the impact of the trade wars, as usual, the consequences of the President’s tariffs on aluminum and steel are easiest to gauge, since they’ve been on the longest, and the major metals-using industries (the presumed leading victims) are so easy to identify. The table below represents the changes in their real output since April, 2018 (the first full month in which the levies were in effect), with the data for manufacturing overall used as a control group, and durable goods included because it’s the super-category in which most of the main metals-using industries are located:

                                          Old Apr thru Sept    New Apr thru Sept    Apr thru Oct

overall manufacturing:       +0.09 percent            +0.08 percent         -0.54 percent

durables manufacturing:    +1.25 percent            +0.87 percent         -0.32 percent

fabricated metals prods:    +1.85 percent             +1.63 percent        +1.42 percent

machinery:                            0 percent                 -0.96 percent         -0.81 percent

automotive:                        -3.92 percent             -5.53 percent       -12.24 percent

major appliances:               -2.19 percent            -2.03 percent          -9.14 percent

aircraft and parts:              +5.43 percent           +3.00 percent         +3.59 percent

In absolute terms, the results are still all over the place, and a GM strike effect is clearly evident for supplier industries like fabricated metal products and machinery. The interruption of GM production also seems to have aggravated – but not caused – the loss of relative momentum exhibited by the metals-users – meaning, that their production slowdown has gotten faster relative to that of overall manufacturing, even leaving out the cratering of automotive output. Interestingly, that momentum loss is now affecting aircraft and parts, too – whose September production figures were also revised down significantly.

Also noteworthy – the steep monthly production dive in major appliances in October. Yes, they’ve experienced their own product-specific tariffs (on large household laundry equipment) as well as the metals tariffs. Production of these products is pretty volatile, too. But the 7.26 percent real monthly output drop was the biggest since it plummeted 8.29 percent between September and October, 2013. Even stranger – the housing sector, which drives much appliance buying and therefore indirectly production – registered a major uptick in growth in the third quarter after six quarters of substantial decline.

As for the impact of the China tariffs on manufacturing output, since that’s much more difficult to gauge than the effects of the metals tariffs (e.g., because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries) it seems to make less sense than ever to examine them, given the possibility of the Boeing effect lasting months more.

And somewhat depressingly, I find myself wondering if that’s going to be true for following any manufacturing-and-trade-relevant data for at least a month or two more. (Though I’m sure I’ll keep soldering on!)

Making News: Podcast On-Line of Radio Interview on the China Trade Deal (Or No Deal?)

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I’m pleased to announce that the podcast is now available of a short-notice interview I did yesterday Moe Ansari’s syndicated Market Wrap radio program on the U.S.-China trade conflict.  To access this timely update on the on-again-off-again reports of a “Phase One” trade deal, click on this link.  Scroll down till you see “Listen to Market Wrap Online”  the left-hand column, and you’ll see a recording of the show.  My segment comes in a little after the halfway mark.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Speaking at a D.C. Conference Today on Antitrust and Trade Policy

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I’m pleased to announce that I’m scheduled to speak this morning at a conference in Washington, D.C. on the increasingly weird relationship between American trade policy and American antitrust policy.

The overall event focuses on the troubling rise of monopolies and oligopolies in general in the U.S. economy in recent decades, and is co-sponsored by The American Conservative and The American Prospect – two magazines pretty far apart on the political spectrum.  My own presentation will draw on my article earlier this year on the subject in the summer issue of American Affairs.  (Yes, yet another political publication!).

If you live in the D.C. area, the event will be taking place at the National Press Club downtown starting at 11 AM.  If not, I haven’t yet found anywhere where the conference can be seen live on-line.  But if I do before I actually mount the rostrum, I’ll try to send it out.  And of course, once a link to any video is posted, I’ll let you know ASAP.

In the meantime, wish me luck, and keep checking in with RealityChek for news of upcoming media appearances and other developments.

Im-Politic: Impeachment and the Mind of a Diplomat II

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Monday’s post detailed one reason for viewing skeptically the upcoming public impeachment testimony of supposed prosecution star witness William B. Taylor – evidence of his inability or unwillingness to make the crucial distinction between President Trump differing with him on a policy issue (dealing with Ukraine), and the chief executive committing an offense that warrants a House of Representatives indictment and possible removal from office by the Senate.

Today I’ll air a more serious challenge to his credibility – which I hope is highlighted into the testimony he’s scheduled to give this morning at the first session of open impeachment hearings. For whatever reason (the above failure, his crush on Ukraine), Taylor’s views on the crucial issue of uncovering U.S. campaign interference by Ukraine resulted in his taking an unacceptably one-sided position.

I can’t go so far as to accuse Taylor of deliberate partisanship – because I can’t read his mind. But his closed-door testimony to House investigators October 22 and answers to their questions showed unmistakably that his allegation of a Trump administration Ukraine military aid delay for partisan political reasons results from criteria that were capable only of producing partisan results.

Specifically, in his testimony last month, Taylor continually portrayed himself as a non-partisan career public servant who had single-mindedly pursued American objectives that lay beyond any legitimate controversy, and who was therefore determined to keep domestic politics out of U.S. foreign policy. That’s also how he’s been described by his admirers. But when it came to two such policy imperatives – uncovering election interference from a foreign government (Ukraine’s) and fighting the corruption that has crippled that country’s economy and democracy building efforts, and undermines American aid programs – Taylor’s record unquestionably skewed in favor of the Democratic party.

Despite pretty much universal American public support for preventing future foreign meddling in U.S. politics – which of course requires identifying as many sources of such previous interference as possible – Taylor not only displayed no interest in learning more about clearly documented meddling from Ukraine officials (including those remaining in power). By his own account, he seemed to refrain actively from learning anything about it.

/For example, Taylor acknowledged a deep “emotional” attachment to Ukraine and – in his words – “stayed engaged” with the country while serving in private sector positions for a decade before returning to Kyiv as a Trump administration envoy this past June. Yet he claimed that when he resumed an official role, he knew nothing about that country’s efforts to prevent Mr. Trump’s election even though the country’s ambassador to Washington had published an op-ed in The Hill newspaper in August, 2016 opposing Mr. Trump’s election bid (which was featured prominently on his embassy’s website), and even though these and other similar developments had been reported in August, 2016 by the Financial Times and in January, 2017 by Politico.

In addition, Taylor testified that he was never briefed on these matters when he took charge of the U.S. embassy in the country, and evidently never sought a briefing, either. The only meddling-related subject he had some prior knowledge of, and was briefed on, was the successful effort by a Ukraine political reformer and parliamentarian to expose off-the-books cash payments in 2005 to future Trump campaign chief Paul Manafort when he was advising and lobbying for the pro-Russian political factions.

Even so, Taylor proceeded to justify his ignorance by insisting that these activities were only undertaken by “some Ukrainians, a couple of Ukrainians….none of those were in” the country’s current administration with one exception – the powerful Interior Minister. (Actually, the envoy who published the 2016 anti-Trump article stayed in office through this past summer.) And when asked “isn’t it fair to say that, if you’re aligned with the Trump administration, isn’t it legitimate to have a good-faith belief that Ukrainians were operating against you in the 2016 election?” Taylor replied diffidently, “You could have that opinion, that some were.”

Stranger, and flimsier, still were Taylor’s stated reasons for dismissing as “help with a political campaign” and a bid for “domestic political gain” Trump administration efforts to the probe Democratic presidential candidate Joe Biden’s son’s lucrative dealings with a Ukraine energy firm while the former Vice President served as the Obama administration’s point man for the country.

These included a bizarre claim that rather than focusing on “individual cases” – like Hunter Biden’s service on the board of the Burisma company – America’s longstanding anti-corruption policies in general concentrated on “the importance of honest judges, of the selection process for judges, the selectjon process for prosecutors, the institutions.” And evidently, he saw no reason to make an exception even when the individual case raised the possibility of influence-peddling at the highest levels of an administration only a few years out of power.

They included the even more disturbing contention that the “irregular channel” of Trump administration Ukraine policy headed by former New York City Mayor Rudy Giuliani was illegitimate because it, in his view, it “wanted to focus on one or two specific cases, irrespective of whether it helped solve the corruption problem, fight the corruption problem” – meaning that Taylor ruled out chance that a “specific case” involving the family of the former Vice President of the United States and the government of a country he insists is a vital strategic partner of the United States could warrant any special attention.

They included the confidence that Giuliani’s sole interests were strengthening influencing the upcoming presidential election rather than corruption fighting based largely on a New York Times article reporting “that Giuliani was interested in getting some information on Vice President Biden that would be useful to Mr . Giuliani’s client,” along with Taylor’s refusal to answer the question of whether it’s “possible that the request to investigate interference with the 2015 election was not to influence a future election?”

They included Taylor’s additional statement that the Trump-Giuliani probe was ipso facto inappropriately political “Because as I understood the reason for jnvestigating Burisma was to cast Vice President Biden in a bad light” – which amounts to the unacceptable position that corruption suspects should be immune from official investigations if they decide to run for office.

And they included Taylor’s attempts to avoid opining on whether “A reasonable person could conclude that there ‘is a possible perceived conflict of interest” raised by Hunter Biden’s employment at Burisma. His performance is so comically evasive that it’s worth presenting in full (starting on p. 316 of the hearing transcript and beginning with a question from a Republican committee staff member):

Q: “ You would agree that, if Burisma – if their motivation for engaging Hunter Biden for their

board was not related to his corporate governance expertise but, in fact, was hoping to buy some protection, you would agree that’s worthy of investigating, right?

A: …I don’t know why Burisma got him on the board.

Q: But if Ukrainians were engaged in misdeeds or wrongdoing with regard to putting Hunter Biden on theirboard, that could be something that could be worth investigating, right?

A: I don’t know. I don’t know. I don’t know the relationship that he had with the board. I don’t know.

Q: Okay. And, at the time, the Vice President had a you know, policy supervision of Ukraine on some respects.

A: He was very interested in policy with Ukraine, yes.

Q: Okay. So do you see a perceived conflict of interest there?

A: I’m a fact witness. I ‘m not giving opinions on –

Q: Okay.

A: – this thing, but – so I –

Q: Is it reasonable to see a perceived conflict of interest there, or is that crazy?

A: I’ve said other things are crazy.

Q: A reasonable person could conclude that there is a possible perceived conflict of interest there, right?”

At this point, one of Taylor’s personal lawyers interjected:

You asked him that question earlier, at the beginning, about 7-1/ 2 hours ago. It was one of the first questions you asked him. He’s already answered it.” 

Again, Taylor has every right to prefer Biden’s views on Ukraine to Mr. Trump’s, and essentially to define that country’s unmistakable interference with the 2016 U.S. elections out of existence.  But holding these positions while professing political neutrality take gall and sanctimony to an entirely new level.  And Americans will have reason enough to be thankful for the impeachment proceedings if they indicate how widespread these views have been lately among the nation’s so-called foreign policy professionals.       

 

Im-Politic: Impeachment and the Mind of a Diplomat I

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When the House of Representatives’ public impeachment hearings open this week, one of the star witnesses for the prosecution – and perhaps the star witness – is expected to be William B. Taylor, former chief U.S. envoy to Ukraine. His appeal to President Trump’s opponents is easy to understand, since he was both deeply involved with Ukraine policy when the alleged actions that ostensibly triggered Mr. Trump’s latest round of troubles took place, and since he’s compiled such an impressive record of service to America, especially as a decorated military veteran.

I haven’t yet made up my mind as to whether Taylor’s remarks at his October 22 closed door appearance before House investigators will seal or significantly strengthen the case for impeachment. (So far I’m leaning “No,” for reasons I’ll detail soon.) What is clear to me is that Taylor’s opening statement, and answers to questions from the Democrats and Republicans involved, put on full display a syndrome long common among America’s diplomatic corps (and broader foreign policy establishment) whose pervasiveness should disturb anyone who believes that the nation’s approach to world affairs should prioritize American interests.

The syndrome is called “Client-itis”. As the name suggests, it’s applied to foreign policy officials who fall in love with the countries they’re focused on, and who act as if their chief responsibility is championing that country’s interests in U.S. corridors of power, not vice versa. And last month, Taylor both came off as a prime example, and strongly suggested that his real beef with the President (and the real beef of the foreign policy Blob in general) concerns Mr. Trump’s doubts about Ukraine as a vital U.S. interest worth antagonizing Russia over, not about any supposed Trump improprieties.

Taylor’s Ukraine-philia emerged right off the bat in his prepared statement before the investigators: “While I have served in many places and in different capacities, I have a particular interest in and respect for the importance of our country’s relationship with Ukraine. Our national security demands that this relationship remain strong.”

But Taylor also eventually made clear that far more than cold strategic calculations underlay this view. As he explained, also at work was an “emotional piece,” that “is based on my time in Ukraine in 2006, 2009, when traveling around the country, I got to know Ukrainians and their frustrations and difficulties and those kind of things. And then coming back and seeing it now where they have the opportunity, they’ve got a young President, a young Prime Minister, a young Parliament, the Prime Minister is 35 years old. This new government has appealed to young people who are so idealistic, pro-West, pro-United States, pro-Europe, that I feel an emotional attachment, bond, connection to this country and these people.”

Is it possible that Taylor nonetheless was able to distinguish American from Ukrainian interests anyway, despite these strong feelings? Sure – but the closing passage of his statement justifies such strong doubts that it’s worth quoting in full:

There are two Ukraine stories today, Mr. Chairman. The first is the one we are discussing this morning and that you have been hearing for the past 2 weeks. It’s a rancorous story about whistleblowers, Mr. Gjuliani, side channels, quid pro quos, corruption, interference in elections. In this story Ukraine is an object.

But there’s another Ukraine story, a positive, bipartisan one. In this second story, Ukraine is the subject. This one is about young people in a young nation struggling to break free of its past, hopeful their new government will finally usher in a new Ukraine, proud of its independence from Russia, eager to join Western institutions and enjoy a more secure and prosperous life.

This story describes a Nation developing an inclusive, democratic nationalism, not unlike what we in America, in our best moments, feel about our diverse country – less concerned about what language we speak; what religion, if any, we practice; where our parents and grandparents came from – more concerned about building a new country.”

Taylor returned to the strategic argument, but not for long, concluding his statement with “This second story, Mr. Chairman, is the one I would like to leave you with today.”

The problem is, however moving this description of the new Ukraine, none of these considerations mitigating for viewing that, or any, country as a “subject” – i.e., worth helping because of its alleged virtues – should be standing at the forefront of U.S. policymakers’ worldview. If such support can contribute to America’s freedom, security, and prosperity at costs and risks deemed acceptable by the American political system (meaning, ultimately, by voters), then their pursuit becomes entirely legitimate. But their intrinsic nature is secondary. That is, an “object” of U.S. interests is precisely what must remain first and foremost for the U.S. government and its officials when dealing with foreign countries and regions.

Taylor is absolutely correct in noting that aiding Ukraine has been a strongly supported bipartisan American policy goal. But as he and his Democratic questioners also made clear, Donald Trump wasn’t sure about Ukraine’s relation to America’s well-being at all. And Mr. Trump is not only the current Constitutionally elected President of the United States. He also ran – and won – on a platform that emphatically opposed a foreign policy made on Taylor-like bases.

That is, an “object” of U.S. interests is precisely how the President views Ukraine. And it’s a decision whose legitimacy Taylor has unquestionably overlooked. Let’s hope that in their impeachment proceedings, the House and Senate don’t.

In my next post:  Taylor’s testimony and the case for clearing Mr. Trump. 

(What’s Left of) Our Economy: Trump-Like China Trade War Advice – from China!

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When I first entered the trade and manufacturing world, I worked for a fellow named Clyde V. Prestowitz, Jr., who was shaking up American attitudes on international economic policy (in a good way) with sharp critiques of the prevailing dogma and often ingenious ideas for reform and even transformation. (The most complete statement of his views – this 1988 book.

And one of his most intriguing thoughts held that died-in-the-wool protectionist Asian governments like Japan’s would much rather deal with an openly economic nationalist U.S. President than with a standard preacher of free trade. So imagine my (pleasant) surprise to see this morning that a former senior Chinese economic official who still clearly retains much influence express substantial agreement – and in the process light the way for an American approach toward China’s trade transgressions that moves from what might be called a “Trump Lite” strategy that only partly reflects the President’s sharpest instincts to a much more thoroughly America First-oriented policy.

These views can be found in an interview in Hong Kong’s South China Morning Post describing the views of Long Tongyu. This retired Vice Minister led China’s successful decade-and-a-half effort to join the World Trade Organization (WTO) – a top Beijing priority because membership provided the People’s Republic with valuable insulation from unilateral and other foreign efforts to retaliate against its wide range of predatory practices. And although he’s no longer on active duty, he would never, ever make public statements at odds with the beliefs of current Chinese leaders. In fact, folks in his position often float trial balloons for the regime and serve in other ways as unofficial spokespeople.

According to the Post, Long stated that “We want Trump to be re-elected; we would be glad to see that happen.” And why would Beijing prefer to deal with a President who’s imposed tariffs on hundreds of billions of dollars worth of exports on which China depends to achieve adequate growth rates, rather than with Democratic rivals who oppose such measures?

As Long explained, “Trump talks about material interests, not politics.” Further clarifying, he contended that “He makes the US decision-making process efficient and transparent, because he basically says what it is. The pros of [having Trump] outweigh the cons. We don’t need to spend so much time figuring out what Americans want any more, or search for each other’s real thoughts in the dark, like we used to.”

Even more specifically, according to the Post‘s paraphrase, “Despite his fickleness, Trump is a transparent and realistic negotiator who is concerned only with material interests such as forcing China to import more American products, on which Beijing is able to compromise….”

Although Long didn’t use this phrases, it’s clear that he was lauding a Trump trait denounced by the President’s globalist critics – an approach to foreign policy described as “transactional.” In other words, Mr. Trump is more interested in securing relatively immediate, tangible, specific goals when dealing both with allies and adversaries than with more ambitious objectives valued by globalists for their supposed potential to promote U.S. interests most effectively over the long term, whatever the short-term risks or costs – like preserving American alliances and international institutions, and keeping other relationships (i.e., with China) on an even keel. (See this early post-Cold War article of mine for a more complete analysis of such conceptual differences.)

In the process, it’s clear that Long was also endorsing Prestowitz’ belief (which he based on his own personal experiences as a U.S. trade negotiator during the 1980s) that Washington could not hope to succeed with fundamentally different systems like Japan’s (his interlocutor) or, by extension, China, by demanding that these governments agree to American demands for more openness to imports, or broader structural changes that would lead indirectly to better sales for U.S. products and services.

Instead, Washington was much better advised to seek less grandiose but more concrete commitments – specifically, to increase imports by specific amounts.

This shift to “managed trade” or “results-oriented trade” ostensibly horrified the U.S. policy establishment. But the Prestowitz proposal was adopted by former President Ronald Reagan in 1986 in negotiations with Japan over semiconductors, and achieved its objectives of expanding American companies’ share of Japan’s market.

Further, Prestowitz’ main rationale was also echoed in Long’s remarks. He didn’t justify managed trade mainly for the relatively easy verification challenge it presented – although he did emphasize that Washington would be much better able to monitor promises to boost buys of specific products than foreign promises to convert to free trade principles. Nor did Prestowitz stress that such sweeping U.S. demands were unrealistic, and that protectionist countries would respond by simply stonewalling.

Rather, Prestowitz contended that Asian protectionists were genuinely bewildered and frustrated by standard American positions, primarily because the ideas behind them were so alien to their experiences. Similarly, and in line with Long’s views, they didn’t comprehend how negotiations could resolve or bridge differences that ultimately are philosophical or ideological. They much more clearly understood pragmatic haggling over quantities, and Prestowitz argued quite sensibly that superior U.S. leverage could be counted on to persuade these export-dependent economies to treat American imports more generously.

As a result, the implications for Trump trade policy couldn’t be clearer. The United States should drop its demands that China change its policies fundamentally, whether on the intellectual property front or the technology extortion front or the illegal subsidy front or various other non-tariff barrier fronts. (As I’ve previously written, there’s no chance of verifying even genuine Chinese compliance satisfactorily.)

A much better response would be a combination of (1) severely punitive tariffs to make sure that Chinese products benefiting from these practices don’t enter the American market, and harm American-owned producers; and (2) other threatened or imposed tariffs aimed at obliging Beijing to purchase much greater amounts not only of agricultural products, but the full array of advanced manufactured products.  The first set of tariffs would center on those advanced manufactures, the second on more labor-intensive Chinese products – which Beijing relies on heavily to keep employment high enough to keep China’s masses content economically.  

That first set of tariffs would not only prevent U.S.-owned producers from having to deal with heavily subsidized and/or copycat Chinese competition. It would surely prompt China to send these exports elsewhere – and finally pressure the rest of the world to get its own act together in responding to China’s excess capacity building and dumping, rather than relying on the United States to soak up these surpluses.

The second set of tariffs would need to be accompanied by a resolve not to let Beijing off the hook with claims that its own economy simply can’t absorb greater supplies of American goods across the board. Rather than enable China to use free market-oriented excuses after decades of (continuing) state planning and other interventionism, Washington should tell Beijing that, for all the United States cares, it can stick these products into warehouses if genuine customers can’t be found.

This new approach shouldn’t represent the totality of a smarter new U.S.-China economic policy. In particular, the Trump administration should keep sharply restricting Chinese purchases of American hard assets, whether defense-related or not – because why should a basically free market economy welcome state-controlled and bankrolled entities that can only further distort free market forces? And controls on exports or other transfers of advanced technology to Chinese entities will need to be further tightened.

But a shift to managed trade is nothing less than essential. And assuming that Long Tongyu reflects Beijing’s thinking, with enough American consistency and resolve, China would go along before too long.

Our So-Called Foreign Policy: Time to Test U.S. “Allies” on China

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President Trump’s globalist critics in the foreign policy Blob (the Washington, D.C.-centered complex of former diplomats and military officers, genuine academics, think tank hacks, and their Mainstream Media mouthpieces) think they’ve uncovered major new proof that the administration’s America First-type foreign policies and trade policies are failing catastrophically. Actually, the developments they’ve seized upon make clearer than ever the dangerous folly of their own outdated strategies, and the urgent need for a Trump-ian course change.

What’s gotten the globalists excited: Reports that America’s allies the world over are turning their backs on Washington and either moving into China’s orbit or cultivating better relations with the People’s Republic.

In the Asia-Pacific region, fifteen countries, including American treaty allies Australia, Japan, and South Korea, have decided to join the Regional Comprehensive Economic Partnership (RCEP) – a Chinese spearheaded trade agreement that doesn’t include the United States. Although Washington is apparently free to join, RCEP’s progress is seen as a big defeat for the United States, and for Mr. Trump in particular, because for years Beijing has been pushing it as an alternative to the Asia-Pacific-focused Trans-Pacific Partnership (TPP) deal signed by former President Barack Obama but nixed by President Trump on his first full weekday in office.

TPP was touted as a counter to RCEP that was vastly preferable for the United States because its protections of the environment and labor rights, and its curbs on state-owned enterprises, created standards that China could not hope to meet any time soon. Therefore, the agreement allegedly represented both a means of containing Chinese power and a powerful inducement to the kinds of Chinese reform long sought by Washington (and at least nominally sought by the President).

In other words, it supposedly was a globalist masterstroke that was foolishly trashed by Mr. Trump. And he’s now getting his richly deserve comeuppance via the Chinese-developed RCEP, which, it’s said, doesn’t address the above issues nearly as effectively as TPP, but which has nonetheless attracted many other signatories also spurned by the Trump rejection.

As known by RealityChek regulars, the anti-China case for TPP was bogus from the start, along with its claims to promoting the kinds of reforms throughout the Asia-Pacific region that would benefits American exporters. For the agreement contained a wide open backdoor for numerous products with high levels of Chinese content, which would have enabled Beijing to realize many of TPP’s benefits without incurring any of its obligations. Nearly as bad, for all their lofty ambitions, those obligations would have been impossible for Washington to monitor and enforce adequately, as most signatory governments’ bureaucracies, along with their national industrial bases, were too large (and in the case of the governments, secretive) to track.

Moreover, these glaring TPP weaknesses raise questions that hardly strengthen confidence in globalist views both of the agreement and, just as important of U.S. Allies. Specifically, TPP’s China back door and verification shortcomings weren’t exactly secrets. And they surely reveal that the Australias, Japans, and South Koreas of the world were never very interested in containing China or pressuring it to reform in the first place. The decision of these countries to go along with an RCEP that doesn’t even try seriously to achieve these goals casts even deeper doubt on their reliability for any future American efforts to work multilaterally to cope with China.

And as for the inevitable counter-argument that the Trump TPP pullout gave these Asia-Pacific countries little choice but to accept a second-best deal more advantageous to Beijing, it doesn’t withstand scrutiny. After all, all these countries had years to work with the George W. Bush and Obama administrations to develop regional trade arrangements that could realistically hope to achieve their intertwined China and reform objectives. They all (along with those globalist Presidents) completely blew the opportunity.

On the other side of the world, the Associated Press has just reported on a similar shift by the European Union, that huge economic bloc that also contains many countries allied with the United States through the North Atlantic Treaty Organization. In an article titled “Europeans look to China as global partner, shun Trump’s US,” correspondent Sylvie Corbet wrote that “When France’s president wants to carry European concerns to the world stage to find solutions for climate change, trade tensions or Iran’s nuclear ambitions, he no longer calls Washington. He flies to Beijing.”

She added that on his recent visit to Beijing, Emmanuel Macron portrayed himself as an envoy for the whole European Union, conveying the message that the bloc has largely given up on Trump, who doesn’t hide his disdain for multilateralism.”

In the process, though, the author made a powerful, if completely unwitting, case for American unilateralism. For according to Corbet, Macron and Chinese dictator Xi Jinping “issued a ‘Beijing call’…for increased global cooperation in fighting climate change and better protecting biodiversity. Both countries have deplored the U.S. withdrawal” from the Paris climate change accord.

Macron apparently stood by as Xi “said the two leaders were sending ‘a strong signal to the world about steadfastly upholding multilateralism and free trade, as well as working together to build open economies.’”

And for good measure, the French president touted China’s record of helping to reduce tensions in the Persian Gulf, and potential contributions to using diplomacy to persuade Iran to return to full compliance with the nuclear proliferation deal rejected by Mr. Trump. In addition, he touted China’s ability to help “develop stable and cooperative trade rules at the international level.”

To which the only serious reply from the American standpoint is, “If Macron and anyone else in Europe really believe this nonsense, and assume that they’re better off aligning with China than with the United States, then America is better off without them.” And this holds not only for trade but for security issues like Iran.

It’s been unconvincing enough for globalists to insist that the United States has no choice but to maintain alliances with countries famous for being defense deadbeats and free-riders, and fence-sitters in the campaign to create a truly open world economy (as opposed to one that winks at all instances of protectionism except America’s). But it’s positively goofy for globalists to claim that these countries would be strong and active supporters of security or economic goals compatible with U.S. and traditional free world interests if only President Trump showed more patience with them.

Of course, it’s possible – and perhaps likely – that these Asian and European moves are ultimately bluffs aimed at curbing Mr. Trump’s perceived worst excesses. But it’s at least as possible that these countries hope to create pressure on the President to accept their longstanding, “Heads we win, tail you lose,” strategy vis-a-vis the United States.

All of which reminds me of episodes when I was little, and blurted out remarks like, “I’m going to run away.” My parents often replied, “Is that a promise or a threat?” That sounds to me like a necessary and indeed long overdue U.S. response to its worrisomely feckless allies.

(What’s Left of) Our Economy: Back into Decline for U.S. Labor Productivity

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Well, that didn’t last long. After two straight quarters of encouraging growth, U.S. labor productivity is back in the doldrums, with this morning’s preliminary data from the Labor Department revealing a drop during the third quarter of this year.

At least, however, these latest figures on the narrowest measure of the economy’s efficiency, and ability to grow healthily and generate sustainably rising living standards contained a novel recent twist: U.S.-based manufacturing outperformed the Labor Department’s main definition of the broader economy – the “nonfarm business sector.”

Moreover, the results pointed to a trend I hadn’t recognized till now: Manufacturing’s transformation from a national productivity leader into a laggard, which began during the current economy-wide recovery (and probably began during the Great Recession preceding it) is heavily concentrated in nondurable goods manufacturing. Labor productivity in the larger durable goods super-sector is still growing faster than that of nonfarm businesses, though the gap between the two has shrunk decidedly.

As known by RealityChek regulars, labor productivity measures how much output an American worker turns out for each hour he or she is on the job. It’s not as broad a gauge as “total factor productivity” (AKA “multifactor productivity), which measures output per hour resulting from a wide array of inputs, including not only human beings but capital, energy, materials, and others. But the labor productivity numbers come out on a timelier basis.

The news for the second quarter’s final (for now) data was pretty good. The increase in nonfarm business labor productivity was upgraded from a 2.3 percent annualized rate to 2.5 percent. Manufacturing’s 2.2 percent annualized drop, however, was revised down to a 2.4 percent decrease – its worse such performance since the four percent plunge in the third quarter of 2017.

This morning’s first initial read on third quarter labor productivity reversed this pattern. Nonfarm business labor productivity was down 0.3 percent on an annualized basis – worse than the 0.1 percent dip for manufacturing, and its first shrinkage since the fourth quarter of 2015 (when it fell by 3.5 percent annualized).

But it was the more detailed figures on manufacturing’s third quarter that really caught my eye. Durable goods sectors’ labor productivity performance was in the black, growing at a 1.2 percent annual pace. But the nondurables result was deep in the red – down 1.5 percent.

Nor are these results aberrations, as the table below shows. It presents the total labor productivity growth rates during the previous two economic recoveries and the current upturn (to ensure the best, apples-to-apples findings). The main takeaway: Both super-sectors have suffered major labor productivity growth rates declines since the 1990s expansion. But during the current recovery (the longest on record in the United States), labor productivity growth in nondurables plummeted much faster than in durables (which wasn’t killing it on this front, either).

                                                                                  Durable mfg    Nondurable mfg

1990s expansion (2Q 1991-1Q 2001):                   +66.11 percent  +23.81 percent

bubble expansion (4Q 2001-4Q 2007):                 +34.59 percent  +24.01 percent

current expansion (2Q 2009 thru final 2Q 19):     +15.37 percent    +5.83 percent

current expansion (2Q 2009 thru prelim 3Q 19):  +15.71 percent    +5.44 percent

Moreover, as made clear from the table below, and its comparison of labor productivity growth in nonfarm businesses and in manufacturing as a whole during the same periods, however poor the durables’ performance, it’s still better than that of nonfarm businesses in an absolute sense. Nonetheless, its lead is down considerably.

                                                                         Non-farm business    manufacturing

1990s expansion (2Q 1991-1Q 2001):               +23.74 percent       +45.86 percent

bubble expansion (4Q 2001-4Q 2007):             +16.59 percent       +30.23 percent

current expansion (2Q 09 thru final 2Q 19):     +12.85 percent         +9.00 percent

current expansion (2Q 09 thru prelim 3Q 19):  +12.77 percent         +8.97 percent

Today’s productivity read was the first of three to be released for the third quarter (additional revisions will be made down the road), so it’s possible that the overall labor productivity result will wind up being an upturn rather than a downturn.  But for now, any talk of a new U.S. productivity growth revival looks premature. 

(What’s Left of) Our Economy: Boeing’s Safety Woes are Hammering U.S. Manufacturing & Overall Trade Flows Under Trump

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When last month’s U.S. trade figures (for August) came out, I wrote about how the economic narratives about the woes of domestic manufacturing and America’s trade accounts during the Trump Tariffs Era have been turning into a story about the safety related troubles of Boeing. This morning, the September data were issued, and the Boeing drag on the trade performances of industry and the entire economy look bigger than ever. Especially interesting, the Boeing effect worsened during a data month when total U.S. trade, manufacturing trade, and civilian aircraft trade all took modest turns for the better.

Specifically, the overall U.S. trade deficit in September dropped by 4.70 percent, from an upwardly revised $55.04 billion to $52.45 billion. The total was the lowest since April’s $51.98 billion, and the sequential decrease the biggest since January’s 12.61 percent nosedive.

Partly as a result, the year-to-date trade deficit is up by 5.47 percent – a rate of increase less than half that of the previous year’s 12.68 percent.

Combined goods and services exports rose by 0.88 percent from $207.83 billion to $205.99 billion – their worst monthly performance since April’s $205.76 billion. Total imports, however, sank by nearly twice as much proportionately – 1.68 percent. And September’s $258.44 billion figure was also the lowest since April ($257.74 billion).

Services trade, however, provided an oddly glum counterpoint. It’s long been a trade surplus generator, and remained so in September. But the new monthly surplus of $19.27 billion was the lowest since December, 2012’s $18.55 billion. The main culprit? The fourth straight high for monthly services imports ($49.89 billion).

At the same time, the huge and chronic manufacturing trade deficit fell sequentially in September for the second straight month, from $92.08 billion by 4.53 percent, to $87.91 billion. That total was the best since June’s $83.63 billion. And this progress was mirrored in civilian aircraft. Their exports jumped month-to-month in September by 25 percent. Imports rose even faster – by 41.58 percent. But their amount is much smaller ($1.35 billion vs $3.29 billion). Therefore, the civilian aircraft trade surplus improved from $1.69 billion to $1.95 billion.

What, then, is the problem? It becomes glaringly visible upon examining trade in civilian aircraft during the entire stretch of Boeing’s current woes (which essentially began this past March with many national aviation authorities grounding the plane in their own countries’ airlines, and/or barring it from their national air spaces), and comparing it with the aircraft trade figures for the same periods of previous years, and with the performance of overall manufacturing exports and imports.

Last month, I described how civilian aircraft’s trade performance between this past April (the first full month in which the Boeing effect could be expected to begin showing up) and August had deteriorated markedly from the same period last year. Today’s trade data show that the deterioration has grown far worse.

As made clear in last month’s post, despite its reputation as a major American trade winner, the civilian aircraft sector has experienced ever poorer results since 2017, and the new trade figures confirm this trend.

Between April and September of 2017 and April and September of 2018, civilian aircraft exports fell by 10.32 percent, even though overall U.S. manufacturing exports increased by 6.84 percent. The industry’s record on the import side was better – they dropped during this time by 13.98 percent, while manufacturing imports in total climbed by 11.64 percent.

But the comparison between the following April-to-September periods looks considerably drearier for aircraft. Between April and September of last year and the same period this year, although manufacturing exports were down by 3.82 percent, civilian aircraft foreign sales sank by 26.80 percent. And although manufacturing imports edged up only 0.27 percent between these periods, American purchases of civilian aircraft surged by just over 26 percent.

Further, the impact of aircraft’s slump on manufacturing and overall U.S. trade has been substantial and growing. As of last month’s trade report, the fall in these products’ exports between the April-August 2018 and April-August 2019 periods accounted for 30.72 percent of the decrease in total manufacturing exports during that time, and 16.81 percent of the increase in total manufacturing imports.

As of today’s figures, the civilian aircraft share of manufacturing’s total export decline is up to 31.35 percent of the total, while their share of industry’s total import increase has shot up to more than half manufacturing’s total.

Expanding the focus to all U.S. goods trade except for energy products (which to date haven’t received significant attention in free trade negotiations or any other aspects of American trade diplomacy) also reveals a sizable Boeing effect. Between the April-September 2018 and 2019 periods, civilian aircraft’s export decline accounted for fully 42.39 percent of the total U.S. non-oil goods export decrease recorded then, and 20.61 percent of the non-oil goods import increase.

In addition, to repeat a crucial point, this major Boeing effect on manufacturing and overall trade has absolutely nothing to do with the Trump trade wars, since civilian aircraft so far have not been subjected to foreign tariffs on American exports imposed in retaliation for Mr. Trump’s levies. This situation will change due to recent and upcoming rulings in the long-running World Trade Organization case between Boeing and the European Union’s Airbus. But as of now, any evaluation of the Trump effect on U.S. trade flows ignoring the powerful drag created by Boeing’s troubles deserves a grade of “incomplete” – at best.

(What’s Left of) Our Economy: Despite Jobs Report Stunners, the Trade Wars’ Manufacturing Impact Became No Clearer

Although travel kept me from reporting promptly on Friday’s monthly U.S. jobs report (for October), this indicator of the American economy’s health is so closely watched that it’s essential to point out what it said about the manufacturing sector and in particular the impact of President Trump’s tariff-centric trade policies. And that’s true even though the six-week strike at General Motors, which began in mid-September and lasted through nearly the end of last month, surely threw the October figures for industry even further off than what the actual findings revealed.

But before delving into the manufacturing-specific data, it’s important to review the overall totals. Non-farm payrolls (the Bureau of Labor Statistics’ definition of the United States’ job universe), grew by 128,000 on net in October. That’s not a great number by recent standards, but given that the GM work stoppage reduced vehicles and parts employment by 41,600, it’s eminently respectable – especially given how long the current economic recovery has lasted, and how low overall unemployment has fallen.

Just as important, the October jobs report revealed upward revisions for August and September that were absolutely jaw-dropping. The former’s jobs growth was upgraded from 168,000 to 219,000, and the latter’s from 136,000 to 180,000. In fact, the August employment increase was the economy’s best since January’s 312,000. And the upgrade of 95,000 for the two months combined was bigger than job growth for the individual months of February (56,000) and May (62,000). In fact, the collective revisions weren’t much smaller than the combined total for those two weak months.

American domestic manufacturing, however, didn’t share in this good news. In fact, even had GM not experienced labor problems, its payrolls would have climbed by only 5,600, and September’s previously reported 2,000 job loss was actually downgraded to a 5,000 decrease.

The question remains, however, about the impact of Mr. Trump’s trade wars, and unfortunately, the answer remains muddled not only by GM’s production halt – which of course rippled throughout its vast U.S. supply chain in ways that the BLS figures don’t enable analysts to quantify – but by the safety woes at Boeing and the similarly unidentifiable effects on its own widespread supplier network.

All the same, here are the latest figures for employment changes at major metals-using industries, which have been widely described as prime and continuing victims of the Trump tariffs on the imports of aluminum and steel. They start with April, 2018 – the first full month in which these levies were in effect, and run through October. For comparison’s sake, the results for manufacturing overall are also included, along with those of the durable goods super-sector in which most of the big metals-users are grouped:

                                                      Old thru Sept      New thru Sept       Thru Oct

entire private sector:                    +2.40 percent       +2.48 percent    +2.58 percent

overall manufacturing:                +1.71 percent       +1.69 percent    +1.40 percent

durable goods:                             +2.05 percent       +2.00 percent    +1.48 percent

fabricated metals products:         +1.36 percent       +1.47 percent    +1.57 percent

non-electrical machinery:           +1.95 percent       +1.79 percent    +1.74 percent

automotive vehicles & parts:      -0.69 percent         -0.71 percent    -4.89 percent

household appliances*:               not available         -6.47 percent    not available

aerospace products & parts*:     not available        +8.62 percent     not available

*data are one month behind

There’s no doubt from these results that payrolls in the metals-using industries, have continued their recent trend of losing job growth momentum versus the rest of manufacturing. Until the start of this year, as shown below, most of these sectors were out-performing industry as a whole. Now the only metals-users that aren’t laggards are fabricated metals companies and – oddly – aerospace firms:

                                                 Old thru Dec      New thru Dec      Thru Jan.

entire private sector:              +1.37 percent      +1.36 percent   +1.60 percent

overall manufacturing:          +1.45 percent      +1.39 percent   +1.49 percent

durable goods:                      +1.67 percent       +1.72 percent   +1.97 percent

fabricated metals products:  +1.75 percent       +1.57 percent   +1.78 percent

non-electrical machinery:    +2.20 percent       +2.33 percent   +2.57 percent

automotive vehicles & pts:  +0.77 percent       +1.07 percent   +1.15 percent

household appliances:*         not available        -2.21 percent    not available

aerospace products & pts:*   not available       +5.51 percent    not available

* data are one month behind

Curious about the GM strike’s effect? Take out the 41,600 net employment nosedive in the automotive sector, and its jobs decrease since the metals’ tariffs advent is -0.71 percent, not 4.89 percent. For durable goods, the increase would be 2.01 percent, not 1.48 percent, and for manufacturing overall, the increase would be 1.73 percent, not 1.40 percent. In other words, but for the GM strike, which began months earlier), both durable goods, the metals users, and manufacturing as a whole would look considerably better compared with the entire private sector – though they’d still be lagging. Add in Boeing’s woes, which however unquantifiable can’t be trivial in effect and which started months ago, and the manufacturing employment picture would look better still.

But don’t forget a final tariff-related influence on the performance of all these sectors – the Trump China policies. As known by RealityChek regulars, even if the President’s duties had been imposed in a more orderly way, their impact would be impossible even to estimate roughly given how widely but unevenly U.S.-base manufacturers use inputs from China.

Moreover, although a wide variety of American domestic manufacturers have faced foreign retaliatory tariffs prompted by the Trump levies (on top of formidable trade barriers that had been in place for decades before), growth has slowed materially in the countries and regions (especially China and the European Union) that have tried going toe-to-toe trade war-wise. The resulting decline in overseas demand for U.S.-made manufactured products and therefore exports hasn’t been major, but it however also difficult to specify, is surely weighing on American industry’s employment for reasons having nothing to do with the Trump trade wars.

The good news for anyone trying to follow the U.S. economy and the impact of trade policy is that the GM strike effect proposition can start to be tested with next month’s employment and other manufacturing-related statistics. The bad news is that all the other complications will remain firmly in place.