A total stunner – that’s the best way to describe the manufacturing and trade results of this morning’s Commerce Department report on economic growth during the first quarter broken down by industry. Unfortunately, they provide causes for both optimism and pessimism about whether President Trump’s tariff-centric trade policies will strengthen or weaken U.S. domestic industry over any analytically respectable period of time. And one big reason may be that manufacturers are still in the process of adjusting their business models to cope with the new policy environment.
The case for optimism rests on the quarterly growth (albeit a measly 0.03 percent) registered by American-located manufacturing despite a steep (20.25 percent) plunge in the sector’s huge and longstanding trade deficit. That kind of nosedive in the shortfall hasn’t been seen since the depths of the Great Recession – when manufacturing production was plummeting, too. (In this case, growth is measured by current-dollar “value-added,” which eliminates much of the double-counting that can result when economists calculate the production increases of final products without stripping out the previous output of the parts, components, and materials comprising them.)
The new data also contrasts with the last time of comparably meager quarterly manufacturing growth – 2016. During that final year of the Obama administration, industry grew sequentially by 0.63 percent in the second quarter, flat-lined in the third quarter, and 0.02 percent in the fourth quarter. The manufacturing trade deficit changes back then? In the second quarter, it grew by 8.96 percent, in the third quarter it increased by 7.52 percent, and in the fourth quarter is shrank – but by a bare 0.52 percent.
In fact, the last time a double-digit sequential decline in the manufacturing trade deficit took place (during the first quarter of 2016, when it sank by 10.17 percent), manufacturing production actually dropped – by 1.42 percent.
Manufacturing’s performance looks better when examined on an annual basis. Between the first quarter of 2018 and the first quarter of 2019, manufacturing value-added grew by 4.99 percent, while the manufacturing trade gap widened by only 1.55 percent. That’s greatly improved over last year’s yearly statistics by quarter.
Between the second quarter of 2017 (the first full data quarter under President Trump), and the second quarter of 2018, manufacturing production rose by 8.08 percent, while the trade deficit widened by 7.83 percent. The third quarter numbers: 7.23 percent and 12.45 percent. The fourth quarter numbers: 6.21 percent and 17.80 percent.
The second and third quarter results were clearly distorted by “tariff front-running” – businesses’ decisions to procure as much in the way of imports from China before major duties were imposed. That’s evident from the dramatic slowdown in the manufacturing trade gap’s first quarter annualized increase.
But for both sets of data, there’s a rub that should be obvious: Both between the fourth quarter of 2018 and the first quarter of 2019, and over the past year, the drop-off in the manufacturing trade deficit was accompanied by a drop-off in manufacturing’s growth rate itself. And that first quarter sequential 0.03 percent production increase was the worst such result since the fourth quarter, 2016’s 0.02 percent.
Optimists can take heart from industry’s ability to eak out growth despite continuing and even greater supply chain disruptions, and despite unusual inventory buildups triggered by tariffs and especially by their anticipation. Also arguably encouraging manufacturing growth that’s ever less reliant on foreign inputs. Pessimists can observe out that the minimal growth indicates that adequate rates of manufacturing expansion still depend on robust net imports.
Both vantage points should recognize that domestic manufacturing remains in a state of uncertainty (as the current narrative holds) and sometimes outright confusion and turmoil – and that the threat of much more widespread China tariffs and increases on current China tariffs will greatly limit clarity going forward. Which means that both should agree that a valid verdict on the President’s trade policies won’t be possible for many months into the future.