(What’s Left of) Our Economy: Real Wages are Nearly in Recession and Manufacturing Pay Extends its Slump


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Here’s a question that reporters really should ask Janet Yellen this afternoon during her farewell press conference as Federal Reserve chair, and that journos and all Americans should be asking the Trump administration and Members of Congress at every opportunity: If the economy is so solid, and the job market is so historically tight, how come it’s now skirting a technical real wage recession, and why is the paycheck slump for manufacturing now nearly two years old?

My term “technical recession” doesn’t exactly match the standard version of an economic downturn – two straight quarters of contracting output. But it’s pretty darned close: at least two straight quarters over which some indicator (in this case, inflation-adjusted wages) has dropped cumulatively.

The real wage data released today by the Bureau of Labor Statistics (BLS) reveal that this is exactly the situation for the entire private sector. (These real wage data don’t include public sector workers since their paychecks are mainly determined by politicians’ decisions, not by market forces.) Since June – five data months ago – constant dollar hourly pay is down 0.56 percent. Indeed, this measure of compensation has now decreased for four straight months. One more and we’re in technical recession territory.

In manufacturing, where job-creation has perked up this year, the situation is even worse. Real wages in industry are down on net since March, 2016. They’re not down by much (0.09 percent). But it’s the longest such stretch since the January, 2012 to September, 2014 period.

On a monthly basis, after-inflation private sector wages dropped by 0.19 percent in November. Year-on-year, they’ve risen by the same meager amount. Between the previous Novembers, real private sector wages increased by 0.94 percent.

Since the beginning of the current economic recovery, more than eight years ago, this pay has advanced by only 3.98 percent.

In manufacturing, after-inflation hourly pay tumbled by 0.55 percent on month in November, and is 0.37 percent lower on a year-on-year basis. From November, 2016 to November, 2017, constant dollar manufacturing wages increased by 1.21 percent.

And their total improvement since the mid-2009 beginning of the current recovery? 0.65 percent.

It’s true that wages aren’t the economy’s only measure of compensation. But they’re clearly a major measure. Their weakness – which is not only chronic, now, but accelerating – is a clear sign that, contrary to the Fed’s judgment, there’s still plenty of slack in U.S. labor markets and that, contrary to the President’s claims, the nation’s employment picture is anything but Great Again.


(What’s Left of) Our Economy: A Key Sign of Better U.S. Job Quality


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The U.S. government’s latest jobs report makes clear that the economy is well past the impact of the latest hurricane season, so it’s a great time to see if a new development in the makeup of American employment and hiring that began to appear this year. And last Friday’s non-farm payrolls figures (for November) confirm that it’s still in place: What I call the subsidized private sector is losing some noteworthy steam as a prime engine of the economy’s job creation during the current economic recovery, while the remaining “real private sector” is gaining momentum.

Not that the subsidized private sector – which consists of industries like healthcare, whose levels of output and therefore employment depend heavily on government subsidies – is a spent job-creation force. In fact, its share of total U.S. jobs on a standstill basis remains much higher than either at the start of the ongoing recovery and than at the onset of the last recession. But the growth curve has taken a significant bend down over the past year. And that’s good news if you believe – as you should – that the most sustainable type of job creation is that spawned by the part of the economy that’s shaped overwhelmingly by market forces.

First let’s look at the numbers over the last few years. For the first eleven months of 2017 (the new November figures are of course preliminary), the subsidized private sector accounted for 21.97 percent of all the economy’s net new hiring. That’s still considerably more than its share of employment last month (15.82 percent). But it’s significantly lower than the eleven-month share from last year – 24.12 percent.

In fact, this 2016-2017 decrease is the first such annual decline in several years. From 2013 to 2015, the number grew from 12.28 percent to 15.82 percent to 23.93 percent.

The converse has also been true: The real private sector’s share of total net new job creation has rebounded this year after falling since 2013: Here are those January-November numbers:

2013: 89.58 percent

2014: 80.09 percent

2015: 70.81 percent

2016: 66.47 percent

2017: 75.84 percent

Nonetheless, the subsidized private sector has built up such powerful employment momentum that its share of total non-farm payrolls (NFP) and of real private sector (RPS) jobs keeps growing. Here’s where it’s stood on some key recent dates.

December, 2007 (recession onset): 13.22 percent of NFP, 18.72 percent of RPS

June, 2009 (recovery start): 14.97 percent of NFP, 22.08 percent of RPS

November, 2017 (latest): 15.82 percent of NFP, 22.92 percent of RPS

Yet the momentum has waned a bit more recently, as the data from the last few Novembers shows:

November, 2014: 15.44 percent of NFP, 22.40 percent of RPS

November, 2015: 15.59 percent of NFP, 22.60 percent of RPS

November, 2016: 15.72 percent of NFP, 22.80 percent of RPS

November, 2017: 15.82 percent of NFP, 22.92 percent of RPS

In other words, between November, 2014 and November, 2015, the subsidized private sector’s share of NFP increased by 0.97 percent and of RPS by 0.89 percent.

Between the following Novembers, these growth rates had slowed to 0.83 percent and 0.88 percent, respectively. But they slowed much more significantly over the subsequent year (through last month) – to 0.64 percent and 0.53 percent, respectively.

This slowdown, moreover, could speed up if major changes are made in the nation’s healthcare system, as still seems distinctly possible. In turn, these developments look like a big economic wild card going forward. For now, though, better quality job creation has joined slightly better quality economic growth as two hallmarks of President Trump’s first year in office. Whether he’s had anything to do with them or not, they’re pieces of good economic news that shouldn’t be overlooked.

(What’s Left of) Our Economy: A Stunning Downgrade for U.S. Manufacturing Labor Productivity Growth


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Wow! There were so many important results flowing from last week’s final (for now) government data on third quarter U.S. labor productivity, I hardly know where to begin. (I’m also feeling a little sheepish about waiting so long to report on these data, but it’s just another sign that we’re living in a target-rich commentary environment, as RealityChek‘s motto suggests.) But after finishing this post, I feel confident you’ll agree that the big downward historical revisions to manufacturing labor productivity growth deserve the most attention.

Not that the new figures on overall labor productivity (for the so-called non-farm business sector) were anything to sneeze at. These new numbers cover the narrowest measure of productivity (gauging only output per hour worked by an individual American employee) but as known by RealityChek regulars, they’re issued on a much more timely basis than the multi-factor or total factor data – which measure the output generated by a wide range of inputs.

And this update on third quarter labor productivity confirmed that it grew at its highest sequential annualized rate (2.95 percent) since the third quarter of 2014 (4.34 percent). The revised labor productivity gain was actually a touch smaller than the originally reported 2.97 percent rise, but not nearly enough to change the overall story. If this rate of improvement continues, that would be excellent news, since strong productivity growth is an economy’s best bet for a sustainable increase in economic growth and living standards.

At the same time, analyst David P. Goldman has noted that the new data add to compelling evidence that recent years have seen a reversal in the relationship most economists have long assumed (and that was borne out by by these same statistics) between unit labor costs (a main labor component of the productivity statistics) and the broadest measures of unemployment. As Goldman just observed, normally, they move in opposite directions – i.e., when joblessness is rising, the price of labor generally (and logically) falls, and vice versa. But since 2014, unemployment has kept tumbling, but labor costs have fallen as well. If this trend continues, that would be much worse news, since it would undermine the portrayal of productivity growth as a boon to the nation’s workers. (And a richly deserved hat-tip to a Twitter follower of mine, who goes by “Field Roamer” for calling my attention to this post.)

It’s been clear throughout this current U.S. economic recovery that wage growth has been unusually weak, but Goldman’s post paints the paycheck picture in a much grimmer light, and that’s definitely worth exploring further.

But to me, the manufacturing revisions deserve center stage, both because of their magnitude and the long time frame they cover – all the way back to 1987, when manufacturing labor productivity began to be tracked. I’ll let the Bureau of Labor Statistics (BLS), which calculates productivity for the U.S. government, summarize its dreary conclusions:

A large upward revision to the change in the annual manufacturing productivity index from 2008 to 2009 was more than offset by downward revisions in adjacent years, and the average annual rate of growth from 2007 to 2012 was revised down from 2.9 percent to 1.2 percent. The average annual rate of manufacturing productivity growth during the current business cycle from 2007 to 2016 was revised down from 1.6 percent to 0.9 percent, and the long-term rate for the entire series from 1987 to 2016 is now 2.8 percent, compared to the previous estimate of 3.2 percent.”

In other words, over roughly the last thirty years, labor productivity in industry has risen 12.50 percent more slowly than previously reported. And manufacturing’s performance on this crucial front wasn’t great to start with.

Another way to look at the new numbers is to see how they affect what we know of America’s manufacturing labor productivity performance during the most recent economic expansions – a method that gives us the best apples-to-apples data. If your jaw doesn’t drop, it should.

The 1990s expansion still comes across as a period of robust manufacturing labor productivity growth. The cumulative increase was downgraded only from 46.81 percent to 45.94 percent.

But check out the new results for the previous decade’s recovery. Viewed through the lens of the old productivity data, its performance was excellent, and surprisingly so. After all, this expansion was fueled by the inflation of the credit and housing bubbles whose bursting led to the global financial crisis and the Great Recession. Yet the BLS had been saying that its cumulative productivity gain was 41.23 percent – just about as good as the 1990s advance factoring in this recovery’s shorter duration.

The new numbers – only 30.08 percent manufacturing labor productivity growth – are much more consistent with the idea that the previous economic recovery was marked largely by phony, unsustainable growth.

And as for the present recovery? The old data already made clear what a productivity disaster it’s been. Though it’s lasted nearly as long as the 1990s expansion, the previous BLS data pegged its total manufacturing labor productivity growth at only 20.93 percent – just about half the rate generated during the 2000s expansion.

The new rate? Only 9.41 percent, meaning its been cut nearly in half. Moreover, according to the new figures, the current recovery’s manufacturing labor productivity growth rate represents a much greater deterioration from the performance of the bubble recovery than had been reported. At least by this measure, American economic growth was already appearing even less healthy these days than it was leading up to the last meltdown produced by fake prosperity. Now this problem looks much worse. 

In addition, don’t forget:  Even these dreadful numbers probably overstate manufacturing labor productivity’s advances. Why? Because as the BLS acknowledges, its methodology for calculating this indicator include the effects of offshoring: simply substituting foreign workers for American workers. Since the total number of workers doesn’t change, the productivity figures for U.S. factories and related facilities are artificially inflated – and for reasons having nothing to do with greater efficiency. 

And these results raise all sorts of perplexing questions. For example, I’ve been arguing for quite some time that the overall slowdown in American labor productivity growth must surely stem from the trade- and offshoring-related losses of so much domestic industry – which has generally been the economy’s productivity growth leader. But the new BLS statistics indicates that there could be a bigger labor productivity growth problem within manufacturing itself. Alternatively, these losses could have been concentrated in especially high-productivity sectors of manufacturing – or trade and offshoring have had little or nothing to do with the problem to begin with.

More light could be shed on these questions by comparing America’s manufacturing labor productivity performance with that of other countries. Has it been better? Worse? Some short-range data I’ve seen indicate that the slowdown has been widespread across the globe, at least between 2015 and 2016. But I need to dive much deeper into these statistics to draw firmer conclusions.

Further, how significantly will these new labor productivity results affect the broader multi-factor productivity results? BLS hasn’t scheduled its next report on this indicator, so my oft-used advice to “stay tuned” applies to me, too, in this case.

Our So-Called Foreign Policy: Never-Trumpism Goes Off the Deep End on Korea


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Since I’ve made my living through writing of various kinds, and have been blogging furiously here for the last few years, I’m not often at a loss for words. This morning was (briefly) one of those exceptions, when I began reading a Washington Post Outlook article titled “This is how nuclear war with North Korea would unfold.” My verbal paralysis came not from the military details of the scenario presented by prominent arms control specialist Jeffrey Lewis. It came from the author’s disgraceful effort to pin much of the blame for the nightmare scenario he lays out on President Trump. The only word I literally could come up with was “unspeakable.”

At least Lewis didn’t portray Mr. Trump as an unhinged leader who, out of a simple fit of pique, decided needlessly to trigger a disastrous nuclear exchange that winds up killing millions on both sides of the Pacific. But for being subtler and (arguably) more sophisticated, this example of Trump Derangement Syndrome was all the more insidious.

Specifically, according to the author, it’s completely legitimate to suppose that, at a key point in the escalation of hostilities on the Korean peninsula, the president will turn a fraught situation into an unprecedented and nearly irretrievable disaster. How? With “an idle Twitter threat” that convinces North Korean dictator Kim Jong Un that both the United States and South Korea will use the unfolding conflict “as a pretext for the invasion he had wanted all along.” His response? He fires some of his own nuclear weapons “against U.S. forces in South Korea and Japan” and “slaughters” them “as they slept in their barracks or as they arrived at ports and airfields.”

Shortly afterwards, Lewis’ scenario continues, in the penultimate blunder of this tragedy, the Trump administration ignores the intercontinental North Korean nuclear-armed missiles still at Kim’s disposal, and tries to decapitate his regime and defang these forces with a conventional attack that, however massive, was too weak to accomplish its mission. In retaliation, Kim launches these missiles at the United States, and enough of them hit their targets to kill nearly 1.5 million Americans.

Whether you’re a Never Trump-er or not, you have to acknowledge two related flaws that are not only fatal, but completely irresponsible to overlook. The first is that even Lewis recognizes that, in order to look credible, the speculative exercise he describes needs to start with actions and miscalculations by the North and South Koreans, for which Mr. Trump couldn’t possibly be held responsible. The only way he can figure out how to blame the president for a dramatic worsening of the situation is to hide behind a charge from his own creations – fictional “surviving members of the [South Korean] Moon administration [who] insist that things would have been fine had President Trump not picked up his smartphone” and tweeted.

Second, Lewis seems to think, a la these South Korean officials, that following South Korean retaliatory missile strikes on North Korean air defense systems and “select leadership targets throughout North Korea,” there was any significant chance that nuclear weapons would remain sheathed.

Ordinarily, I wouldn’t recommend that anyone take the time to read this kind of intellectually dishonest claptrap. But Lewis’ exercise in slander does usefully reinforce one point about the Korean crisis that I’ve been making for years – and in fact the most important point for any American: The only reason that the United States could become sucked into a war with nuclear potential on the Korean peninsula – and thus expose its own cities to the unprecedented disaster of nuclear attack – is that tens of thousands of American troops and their families are still sitting directly in harm’s way.

During the decades when the United States could destroy North Korea with nuclear weapons and the North could not place millions of Americans at risk with its own nukes, this strategy could be defended as a reasonable gamble capable of deterring an attack by the North on South Korea – by making North Korea’s nuclear destruction inevitable. Now that the North can pose such a threat to the American homeland, this strategy unconscionably places American cities in North Korea’s nuclear cross-hairs. Worse, it achieves this result not to defend the United States itself, but to defend a South Korea amply wealthy enough to mount its own successful conventional defense.

The policy conclusion that must be drawn couldn’t be more obvious: Whatever you think of President Trump, the only way to remove this North Korean threat is to get U.S. forces out of this tinderbox immediately, if not sooner. The longer they remain the longer Kim has any reason to even threaten, much less attack, the United States if events, as is all too likely, start spinning out of control.

(What’s Left of) Our Economy: A Major China-Related Conflict of Interest Ignored by the Media


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EETimes is a great source of information about the technology world that I’ve long found invaluable for following and understanding the development of the microelectronics industry in particular and its implications. So it genuinely pains me to report that this news site did a major disservice to its readers yesterday by posting a column on Chinese investment in the U.S. economy written by an author whose close ties to the Chinese government went completely unmentioned.

The column, by venture capitalist Ray Bingham, failed badly on substantive grounds, too – so badly, in fact, that it represents a significant failure of the site’s editorial process. After all, it’s one thing – and an entirely legitimate thing – to argue, as per the author, that the federal government’s process for screening prospective foreign acquisitions of American companies for national security reasons (known by the acronym CFIUS) might be making some serious mistakes. Its mandate is to balance the national security threats with the economic benefits that such investments might create, and it’s always possible when such judgment calls are involved to overemphasize one consideration and underemphasize the other.

But EETimes should by no means have had Bingham to get away with simply describing China as a “perceived threat” and a country that is thought “to have motivations beyond the standard economic drivers.” The site should have at least required to the author to acknowledge that Beijing is mounting a serious challenge to American security interests throughout East Asia, and especially in the South China Sea, and that China’s state-dominated system as a whole operates in ways having absolutely nothing to do with “the standard economic drivers.” By letting Bingham off the hook, EETimes wound up publishing not an opinion article, but a piece of propaganda.

At the same time, even this serious failing pales against EETimes‘ blunder on the transparency front. Readers of all opinion pieces must always be told by media organizations when the author or authors of these articles have self-interested stakes in propagating certain viewpoints. (Think tanks and individual researchers should be held to the same standards.) Bingham qualifies in spades.

As EETimes told its readers:

Ray Bingham is co-founder and partner at Palo Alto-based Canyon Bridge Capital Partners, a global private equity investment fund focusing on the technology sector. He has considerable experience in identifying growth and mature technology firms for investment, giving them new life and helping them to reach their full long-term growth potential.”

As it should have added, Canyon Bridge (in the words of the Financial Times newspaper) “sits at the end of a long chain of Chinese funds and investors with ties to the government. “

“The parent company of its largest backer, Yitai Capital, is China Venture Capital Fund Corporation Limited, which Chinese state media reported last year has a mandate to ‘carry out our national strategies and to mainly invest in projects about technological innovation and industrial upgrading’.

One of CVC’s state-owned investors, China Reform Holdings Corporation, aims to help state ventures invest domestically and internationally. Benjamin Chow, Canyon Bridge’s [other] founder and managing partner, previously worked for a CRHC-controlled fund, China Reform Fund Management. The website for China Reform Fund Management describes CRHC as a ‘state-owned assets management corporation under direct supervision from central government” that among other priorities makes strategic investments in “new emerging industries as well as other sectors related to national security and economic lifelines.'”

In other words, Bingham and his company work for the Chinese government. He contends that Canyon Bridge’s Chinese investors were merely “‘limited partners’, with no active role in how the fund is run. ‘They have no decision-making authority over what we invest in, how we manage it or the disposition of those assets ultimately,’ he said. But so what? Can anyone seriously doubt that when these ‘limited partners’ say ‘Jump!’, Bingham and colleagues respond, ‘How high?’”

Therefore, Bingham’s job, along with Canyon Bridge’s, is representing Chinese government interests. Whatever you think of the morality or wisdom of this choice, the information is absolutely essential to a reader’s ability to judge the accuracy of his claims, merits of his arguments, and the critical issue of what he might be concealing about the subjects he discusses.

And in this vein, something else EETimes should have forced Bingham to disclose:  He and his Chinese backers had just been rebuffed by that same U.S. government investment-screening system in their effort to take over the American-owned microchip semiconductor firm Lattice Semiconductor. So small wonder the author has problems with its operations. It’s crimped his own income stream.

Again, Bingham asd others like him have every right to work for the Chinese government, and EETimes has every right to publish them. But EETimes failure to reveal Bingham’s enormous personal stake in loosening Washington’s foreign direct investment policies is a flat-out breach of journalistic ethics. And the site should correct this mistake and tell its readers the whole story without delay.

(What’s Left of) Our Economy: Manufacturing Remained a Jobs Winner and a Wages Loser in November


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U.S. manufacturing in November continued its recent pattern of good employment gains but weak wage performance. November payrolls bested October’s by 31,000, and the year-on-year jobs gain of 189,000 was the best since April, 2015’s 194,000. September and October revisions boosted manufacturing employment by a net of 2,000. Manufacturing’s share of overall employment, moreover, grew to 8.50 percent. As recently as July, it had once again hit an all-time low of 8.47 percent. Yet in the automotive sector, which led domestic manufacturing’s bounce-back from a deep recessionary plunge, a jobs recession hit its first anniversary, with employment down 400 on net since last November.

On the wage front, manufacturing remained a laggard, as pre-inflation hourly pay in November fell sequentially by 0.15 percent versus a private sector gain of 0.19 percent. Manufacturing’s performance year-on-year was no better, as its current dollar wage gain of 1.87 percent trailed the private sector figure of 2.47 percent. As a result, the gap between pre-inflation private wage advances and manufacturing wage advances during the current recovery widened year-on-year from 22.52 percent to 24.27 percent.

Here’s my analysis of the latest monthly (November) manufacturing figures contained in this morning’s employment report from the Bureau of Labor Statistics:

>November was far from the cruelest month for U.S. domestic manufacturing employment, which rose sequentially by a healthy 31,000, and improved year-on-year by 189,000 – the best annual gain since April, 2015’s 194,000.

>From November, 2015 to November, 2016, manufacturing lost 21,000 jobs on net.

>Moreover, September’s manufacturing employment advance was revised up again, from 6,000 to 9,000 – offsetting by 2,000 the downgrade for the October increase from 24,000 to 23,000.

>These improvements brought manufacturing’s share of non-farm employment (the Bureau of Labor Statistics’ U.S. jobs universe) up from 8.49 percent to 8.50 percent.

>One conspicuous exception in November to the brightening manufacturing jobs picture was the automotive sector – whose powerful bounce-back led domestic industry’s rapid initial recovery from its deep recessionary downturn.

>Despite a 1,700 monthly rise in net new jobs, weak revisions left automotive’s payrolls 400 fewer than last November, a one-year stretch that technically qualifies as a recession (more than two quarters of cumulative negative growth).

>Manufacturing wages continued to disappoint in November, though. The 0.15 sequential decline in hourly pay before inflation contrasted with the 0.19 percent rise in the private sector overall.

>Year-on-year, pre-inflation manufacturing wages advanced by 1.87 percent – not only slower than the private sector’s 2.47 percent performance, but well behind industry’s 2.86 percent rise between the previous Novembers.

>The November wage results mean that, since the current economic recovery began in mid-2009, private sector wages before inflation have risen 24.27 percent faster than manufacturing wages. Last November, the gap was 22.52 percent.

>The solid November gains pushed the number of net new manufacturing jobs created since the sector’s February and March, 2010 lows to 1.061 million. This total represents 46.27 percent of the 2.293 million net job nosedive manufacturing suffered from the late-2007 start of the recession through that aforementioned employment bottom.

>At the same time, manufacturing remains a significant employment laggard, too. Since its February, 2010 jobs bottom, the private sector overall has boosted its payrolls by a net 17.643 million. That’s more than twice the 8.78 million net positions lost during the recession and its aftermath.

>Further, manufacturing employment is still 8.96 percent (or 1.232 million jobs) lower than when that recession began at the end of 2007.

>During the same period, private sector employment has grown by 7.64 percent (or 8.863 million jobs).

>The latest inflation-adjusted wage data for manufacturing and overall private sector wages go through October, and also reveal special, chronic problems with manufacturing pay.

>Real manufacturing wages increased by 0.09 percent on month in October – a slight upgrade from the originally reported flat-line. The latest year-on-year figure remained at a 0.46 percent decline and the latest October, 2015-October, 2016 figure remained at a 1.87 percent gain.

>For the private sector as a whole, the October monthly real wage performance has been downgraded, from a 0.09 percent dip to a 0.29 percent decrease. The year-on-year results have worsened, too – wages are now judged to have risen only by 0.19 percent, rather than 0.73 percent, and the improvement between the previous Octobers has been downgraded from 1.13 percent to 0.75 percent.

>Yet these data are still better on the whole than those for manufacturing.

>In addition, during the current recovery – which is now more than eight years old – real private sector wages are up by 4.17 percent. Their manufacturing counterparts have risen by only 1.21 percent.

(What’s Left of) Our Economy: More Offshoring Lobby Snake-Oil on NAFTA


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If Tom Linebarger conducts business the way he talks about trade policy, I’d watch out for my wallet if I dealt with his company. Because recent remarks made by the Cummins Inc. Chairman and CEO about President Trump’s efforts to rewrite the North American Free Trade Agreement (NAFTA) represent an unusually brazen example of snake-oil peddling.

In an interview with Politico‘s “Morning Trade,” Linebarger, whose firm is a leading manufacturer of diesel and natural gas engines and engine components, contended (in the reporter’s words) that “Although Trump believes differently, the United States is a much less attractive place for companies to invest if NAFTA no longer exists.”

In Linebarger’s view (and his own words), even if they’re only bargaining tactics, Mr. Trump’s threats to terminate the deal are “a terrible idea” because “Investors make decisions based on what they project is going to happen and one of the challenges in posturing with something of this nature is that people will begin to change their plans.”

Continued Linebarger:

Not only would terminating NAFTA worsen the position of the U.S., but it causes multinational companies like mine to figure what’s the best way to position yourself for a world without NAFTA, which might mean changing manufacturing locations. Mexico has 44 free trade agreements. The U.S. has free trade agreements with 20 countries. So the very best way to sell to everybody else is to be in Mexico.”

But here’s what Linebarger didn’t tell Politico. First of all, according to Cummins’ latest annual report, more than half (54 percent) of all of the company’s net sales last year went to customers in the United States. The year before, it was 56 percent. Second, one of Cummins’ senior executives for Latin America stated publicly last month that all of Cummins’ Mexico engine production is exported, and that 80 percent goes to the United States. (The rest goes to the United Kingdom.)

So if Trump terminated NAFTA, and (as he has pledged) raised tariffs on Mexico-produced goods and services high enough to make the country unprofitable as an export platform, Cummins could lose nearly all of the customers for its four Mexico factories if it failed to return that production to the United States. It would also lose a big chunk of its total worldwide customers. 

Of course, Linebarger, Cummins, and other footloose multinationals could always try to skirt those tariffs by producing for the American market in other countries.  But that strategy could only succeed if the Trump administration simply sat back and did nothing about U.S. trade with any of these countries.  And just this week, Washington served notice that it would respond to such production-shifting ploys by announcing stiff new tariffs on Chinese-made steel entering the American market from Vietnam.        

In addition, the Latin America executive made clear that, despite Linebarger’s touting of Mexico’s non-U.S. trade deals, the company has made scarcely any use of them. And continuing U.S. domination of Cummins’ Mexico exports is all the more striking given that Mexico has been able to benefit from a free trade deal with the European Union (which the United Kingdom of course will be leaving) since late 2000, and from such an agreement with Japan since mid-2005. (Incidentally, counting all the EU countries separately is the only way the number of Mexico’s free trade agreements gets anywhere close to Linebarger’s 44.)

The only conclusions that can be drawn from the numbers: Either Linebarger is a complete incompetent and has failed to use Mexico as a supply base for dozens of promising non-U.S. markets, or he recognizes that Europe, Japan, and much of the rest of the world have little interest in importing advanced manufactured goods like those made by Cummins — or at least little interest in importing them from Mexico.

But let’s not ignore an equally important conclusion made clear by this piece: If journalists don’t stop simply taking at face value the claims of Offshoring Lobby mainstays like Linebarger, Americans will never have the kind of informed debate they need on trade and their place in the global economy.

(What’s Left of) Our Economy: The Republican Tax Plans’ Biggest Flaw


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The tax bills passed by the Republican-controlled House and Senate and strongly supported by President Trump (despite some important differences between them) can be fairly criticized for any number of big reasons: the mess of a drafting process in the Senate, the impact on already bloated federal budget deficits and the national debt, the cavalier treatment of healthcare reform, the seemingly cruel hits to graduate students and to teachers who buy some of their students’ school supplies.

My main concern is different, though. I could see an argument for the main thrust of the bills – even taking into account most of the above flaws – if they boasted the potential to achieve its most important stated aim. In Mr. Trump’s words, “We’re going to lower our tax rate to the very competitive number of 20 percent, as I said. And we’re going to create jobs and factories will be pouring into this country….” Put less Trump-ishly and more precisely, the idea is that by slashing tax rates for corporations and so-called pass-though entities, along with full-expensing of various types of capital investment, American businesses will build more factories, labs, and other productive facilities; buy more equipment, materials and software; hire more workers and increase their pay (since the demand for labor will soar).

Actually, since automation will surely keep steadily reducing the direct hiring generated by all this promised productive investment, let’s focus less on the jobs promise (keeping in mind that manufacturing in particular generates lots of indirect jobs per each direct hire), and more on the business spending that will boost output – since faster growth is the ultimate key to robust employment and wage levels going forward.

Unfortunately, after spending the last few days crunching some relevant numbers, I can’t see the GOP tax plans living up to their billing – which makes their flaws all the more damning.

What I’ve done, essentially, is look at inflation-adjusted business spending during American economic recoveries (to ensure apples-to-apples data by comparing similar stages of the business cycle) going back to the Reagan years of the 1980s, and examine whether or not individual and especially business tax cuts have set off a factory etc building spree. And I didn’t see anything of the kind, except possibly over the very short term. Moreover, even these increases may have had less to do with the tax cuts than with other influences on such investments – like the overall state of the economy and the monetary policies carried out by the Federal Reserve (which help determine the cost of credit).

Let’s start with the expansion that dominated former President Ronald Reagan’s two terms in office – lasting officially from the fourth quarter of 1982 through the second quarter of 1990 (by which time he had been succeeded by George H.W. Bush). The signature Reagan tax cuts, which focused on individuals, went into effect in August, 1981 – when a deep recession was still underway.

Interestingly, business investment kept falling dramatically through the middle of 1983 – when an even stronger rebound kicked in through the end of 1984. Indeed, that year, corporate spending (known officially as private non-residential fixed investment surged by 16.66 percent. But this growth rate then began slowing dramatically – and through 1987 actually dropped in absolute terms.

A major tax reform act was signed into law by the president in October, 1986, and individuals were its focus as well. Two provisions did affect business, but appeared to be at least somewhat offsetting in their effects, in line with the law’s overall aim of eliminating incentives and disincentives for specific kinds of economic activity. They were a reduction in the corporate rate and a repeal of the investment tax credit – whose objective was precisely to foster capital spending. Other provisions had major effects on business but principally by encouraging more companies to change over to so-called pass-through entities, not (at least directly) on investment levels. Business spending recovered, but its peak for the rest of the decade (5.67 percent of real GDP in 1989) never approached the earlier highs.

Arguably, fiscal and monetary policy were much more influential determinants of business spending, along with the recovery’s dynamics. The depth of the early 1980s recession practically ensured that the rebound would be strong, as did the massive swelling of federal budget deficits, which strengthened the economy’s overall demand levels, and their subsequent reduction.

Perhaps most important of all, the Federal Reserve under Chairman Paul Volcker cut interest rates dramatically from the stratospheric levels to which he drove them in order to tame double-digit inflation. And yet for most of 1984, when business spending soared, the federal funds rate (FFR) was rising steeply. Capex also strengthened between 1987 and mid-1989, which also witnessed a scary stock market crash (in October, 1987).

The story of the long 1990s expansion, which mainly unfolded during Bill Clinton’s presidency, was simultaneously simpler and more mysterious from the standpoint of business taxes – and macroeconomic policy. Following a shallow recession, Clinton raised both personal and corporate tax rates while government spending was so restrained that the big budget deficits he inherited actually turned into surpluses by the late-1990s. For good measure, the FFR began rising in late 1993, from 2.86 percent, and between early 1995 and mid-2000, stayed between just under six percent and just under 6.5 percent.

And what happened to capital spending? In late 1993, right after the tax-hiking, spending- cutting, deficit-shrinking Omnibus Budget Reconciliation Act was passed, and the Fed was tightening, businesses went on a capex spending spree began that saw such investment reach annual double-digit growth rates in 1997 and stay in that elevated neighborhood for the next three years.

It’s true that Clinton and the Republican-controlled Congress passed tax cut legislation in August, 1997, that among other measures lowered the capital gains rate. But the acceleration of business spending began years before that. And although we now know that much of this capital spending went to internet-centered technology hardware for which hardly any demand existed then at all, from a tax policy perspective, the key point is that this category of spending rose strongly – not whether the funds were spent wisely or not.

The expansion of the previous decade casts major doubt on whether any policy moves can significantly juice business spending. Just look at all the stimulative measures put into effect, tax-related and otherwise. The recovery lasted from the end of 2001 to the end of 2007, and during this period, on the tax front, former President George W. Bush in June, 2001 signed a bill featuring big cuts for individuals, and in May, 2003 legislation that sped up the phase-in of those personal cuts and added reductions in capital gains and dividends levies. For good measure, in October, 2004, the “Homeland Investment Act” became law. It aimed to use a tax “holiday” (i.e., a one-time dramatically slashed corporate rate) to bring back (i.e., “repatriate“) to the U.S. economy for productive investment hundreds of billions of dollars in profits earned by American companies from their overseas operations.

In addition, under Bush, the federal budget balance experienced its biggest peacetime deterioration on record, and starting in the fall of 2000, the Federal Reserve under Alan Greenspan cut the FFR to multi-decade peacetime lows, and didn’t begin raising until mid-2004.

The business investment results underwhelmed, to put it mildly. Such expenditures fell significantly throughout 2001 and 2002, and grew in real terms by only 1.88 percent the following year. Thereafter, their growth rate did quicken – to 5.20 percent rate in 2004, 6.98 percent in 2005, and 7.12 percent in 2006. But they never achieved the increases of the 1990s and by 2007, that expansion’s final year, business investment growth had slowed to 5.91 percent.

There’s no doubt that something needs to be done to boost business spending nowadays, which has lagged for most of the current recovery and turned negative last year – even though the federal funds rate remained near zero for most of that time and the Federal Reserve’s resort to unconventional stimulus measures like quantitative easing as well, despite unprecedented budget deficits (though they began shrinking dramatically in 2013), and despite the continuation of all the Bush tax cuts (except the repatriation holiday, and the imposition of a small surcharge on all investment income to help pay for Obamacare). Business investment’s record during the current recovery has been even less impressive considering a Great Recession collapse that was the worst in U.S. history going back to the early 1940s, and that should have generated a robust bounceback.

But if history seems to teach that tax cuts and even other macroeconomic stimulus policies haven’t been the answer, what is? Two possibilities seem well worth exploring. First, place productive investment conditions on any tax cuts and repatriation (the 2004 tax holiday act did contain them) and then actually monitor and enforce them (an imperative the Bush administration neglected). And second, put into effect some measures that can boost incomes in some sustainable way – and thus convince business that new, financially healthy customers will emerge for the new output from their new facilities. To me, that means focusing less on ideas like raising the national minimum wage to $15 per hour (though the rate should, at long last, be linked to inflation), and more on ideas like trade policies that require business to make their products in the United States if they want to sell to Americans, and immigration policies that tighten labor markets and force companies to start competing more vigorously for available workers by offering higher pay.

In that latter vein, the 20 percent excise tax on multinational supply chains contained until recently in the House Republican tax plan could have made a big, positive difference. Sadly, it looks like it’s been watered down to the point of uselessness, and the original has little support in the Senate. The House Republican tax plan also had included a border adjustment tax that would have amounted to an across-the-board tariff on U.S. imports (and a comparable subsidy for American exports), but the provision was removed from the legislation partly due to (puzzling) Trump administration opposition.

Mr. Trump clearly has acted more forcefully to relieve immigration-related wage pressures on the U.S. workforce, but it’s unclear how quickly they’ll translate into faster growing pay.  If such results don’t appear soon, and barring Trump trade breakthroughs, expect opponents of the Republican tax plan to keep insisting that it’s simply a budget-busting giveaway to the rich, and expect these attacks to keep resonating as the off-year 2018 elections approach.   


(What’s Left of) Our Economy: New Record Shortfalls in Manufacturing & High Tech Goods Key U.S. Trade Deficit Surge


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The combined U.S. goods and services trade deficit jumped 8.56 percent on month in October, to $48.73 billion, on new record trade shortfalls in key sectors of the economy, and in trade flows heavily influenced by U.S. trade policy. The monthly manufacturing trade deficit soared 11.35 percent sequentially to $88.98 billion – an all-time high that topped the previous record by (set in August) by 8.35 percent. In high tech goods, the October trade gap rose on-month by 33.67 percent, to a record $13.82 billion, largely on unprecedented ($43.39 billion) monthly imports.

The real non-oil goods deficit – which can be considered “Made in Washington” because it entails commerce covered by free trade deals and other policy decisions, and which will weigh on the most closely followed GDP figures – hit $65.21 billion in October, 8.07 percent higher than September’s figure, and 3.85 percent greater than the previous (March, 2015) record of $62.80 billion. The non-oil goods gap also hit a record on a pre-inflation basis in October, as it rose 7.96 percent to $64.87 billion. That total topped the previous record ($61.74 billion, also set in March, 2015) by 5.07 percent.

October’s data also revealed new monthly all-time highs for services exports and imports – and each for the second straight months. The former rose 0.46 percent sequentially, from a downwardly adjusted $65.29 billion to $65.59 billion; and the latter rose by 0.69 percent, from an upwardly adjusted $44.93 billion to $45.24 billion.

Although the October China goods deficit was “only” the third highest monthly total on record ($35.23 billion), October U.S. goods imports from the PRC set new a monthly high of $48.20 billion. Ditto for merchandise imports from Mexico ($28.72 billion). The October trade report was also notable for revising the September total deficit sharply (3.20 percent) upward, from $43.50 billion to $44.89 billion. Most of this upgrade came in the services trade, where the September surplus estimate was pushed 7.03 percent higher.

Here are selected highlights of the latest monthly (October) trade balance figures released this morning by the Census Bureau:

>A series of new record trade gaps in key parts of the economy (notably manufacturing and high tech goods), and in trade flows strongly shaped by U.S. trade policy (notably, non-oil goods) helped widen the total U.S. goods and services trade deficit by 8.56 percent on month in October. The $48.73 billion figure was the highest such total since January’s $48.78 billion.

>The new manufacturing trade deficit set in October ($88.98 billion), eclipsed the previous record of $82.15 billion (set in August), by 8.31 percent. Sequentially, the manufacturing trade shortfall rose 11.35 percent.

>October manufacturing exports of $93.84 billion were 3.22 percent higher than September’s $90.92 billion total. But the much greater amount of imports rose more than twice as fast – 7.03 percent – and hit $182.83 billion.

>Year-to-date, the manufacturing trade deficit is running seven percent ahead of last year’s record total – which was an all-time high.

>On this basis, manufacturing exports have increased by 3.79 percent, and imports have risen by 5.24 percent.

>In high tech goods trade, the new October record deficit of $13.82 billion bested the old (November, 2016) mark of of $13.79 billion by just 0.21 percent.

>A 6.87 percent monthly rise in high tech goods exports, to a new record $43.39 billion, was largely responsible.

>This import jump also helped the trade deficit in this volatile category surge by 33.42 percent sequentially.

>High tech goods exports declined on month in October by 2.29 percent, to $29.57 billion.

>The high tech goods deficit is running 28.25 percent ahead of last year’s pace so far this year, and seems headed for a new annual record, too.

>America’s non-oil goods trade balances can be considered “Made in Washington,” because they exclude commerce in services and energy (where trade liberalization has made relatively few advances), and therefore include products whose trade performance is strongly affected by trade agreements and related policy decisions.

>The real non-oil goods trade balance is especially important, since it’s a component of the most closely followed (inflation-adjusted) gross domestic product (GDP) figures, and since its changes reveal whether trade policies are contributing to or subtracting from growth.

>So it can’t be good news that this chronic deficit hit an all-time high in October of $65.21 billion – 3.85 percent greater than the previous (March, 2015) record of $62.80 billion, and 8.07 percent higher than September’s $60.34 billion.

>As a result, unless the November and/or December figures decrease enough, the trade drag on the current economic recovery will rebound in the final quarter of 2017 after falling to 16.32 percent ($459.2 billion in lost real growth) according to the latest third quarter figures.

>The pre-inflation non-oil goods deficit hit a new record as well in October. The $64.87 billion total represented a 7.96 percent rise over September’s total, and a 5.07 percent increase over the previous record ($61.74 billion, also set in March, 2015).

>Other October records were set in monthly services exports and imports – and each represented a second-straight all-time high.

>Services exports in October rose by 0.46 percent on month, from a downwardly adjusted $65.29 billion to $65.59 billion; while imports increased by 0.69 percent, from an upwardly adjusted $44.93 billion to $45.24 billion.

>The massive, longstanding U.S. merchandise trade deficit with China did not set a record in October – although the $35.23 billion total was the third highest on record, and represented a 1.71 percent increase over September’s 6.74 percent figure.

>Yet U.S. goods imports from China did reach an all-time highs in October, rising 6.06 percent sequentially, to $48.20 billion – 5.19 percent greater than the previous $45.82 billion mark set in August.

>In October, America’s merchandise exports to the PRC did stay well below their monthly records, but still shot up 20.03 percent sequentially, to $12.97 billion.

>Year-to-date, the China goods deficit is running seven percent ahead of last year’s total – and 0.30 percent ahead of the January-October, 2015 rate, which eventually set the current annual record.

>U.S. merchandise imports from Mexico rose to an all-time high in October, too, with the $28.72 billion figure coming in 11.37 percent higher than September’s and 2.38 percent higher than the previous $28.05 billion record set in March.

>The U.S.-Mexico goods deficit – a prime target of President Trump’s trade policies – rose by 15.91 percent sequentially in October, as America’s goods exports rose on month by 10.08 percent to reach $21.11 billion. That represented their second best total ever after October, 2014’s $21.35 billion.

>Another prominent feature of the October trade report was a major (3.20 percent) upward revision in the September deficit – which is now judged to have been $44.89 billion instead of $43.50 billion. The new estimates were largely fueled by a 7.03 percent downgrading of the September services trade surplus, from $21.89 billion to $20.35 billion.

>Overall, the combined U.S. goods and services trade deficit is running 11.86 percent ahead of last year’s total, with total exports 5.32 percent higher and a 6.52 percent greater imports level.

(What’s Left of) Our Economy: Welcome Signs of Healthier U.S. Growth


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With the Commerce Department having issued last week its second read on U.S. economic growth in the third quarter of this year, RealityChek can update its ongoing examination of a major but sorely neglected economic issue: Is the quality of America’s growth improving or worsening? That is, has the nation managed to generate more output in ways that will make a repeat of the last decade’s financial crisis and ensuing Great Recession likelier? Or is it still relying excessively on the same unsustainable growth engines that made the crisis inevitable?

Happily, the news here is pretty good. Not earthshaking, to be sure. But the new statistics confirm that, so far during 2017, the nation has made gradual (though by no means adequate) progress toward former President Obama’s essential goal of creating “an economy built to last,” rather than one dependent on spending and housing bubbles.

As suggested by that last sentence, RealityChek measures the health of growth by looking at the share of the inflation-adjusted gross domestic product (GDP) made up of consumer spending and housing – the toxic combination whose bloat let to the previous decade’s near meltdown.

These two sectors’ combined share of the after-inflation economy peaked in the third quarter of 2005, at 73.27 percent. Last week’s GDP statistics pegged it at 72.85 percent – the lowest since the 72.70 percent in the third quarter of 2016.

In the fourth quarter of 2016, this figure rose to 72.94 percent, and increased again to 73.14 percent in the first quarter of this year. But since then, it’s dipped for two straight quarters – the first such sequence since the first half of 2014.

The big change hasn’t come from personal consumption. In fact, it’s share of real GDP hit its all-time high in the second quarter of this year: 69.60 percent. And the latest third quarter figure is a still elevated 69.43 percent. What’s happened has been a dramatic shriveling of the housing sector. It peaked as a share of real GDP in the second quarter of 2005 at 6.17 percent. The new GDP report pegs it at just 3.42 percent

Business investment – another pillar of solid, healthy growth – may have picked up in the third quarter, too. The quarter’s first estimate of GDP judged that such spending accounted for 16.33 percent of its 2.96 percent annualized constant dollar growth. That would have continued a string of declining relative importance that began in the second quarter. But the newest data revises the business investment contribution upward to 18.10 percent of a (higher) 3.26 percent annualized price-adjusted growth rate.

This hardly a sterling performance. And it hasn’t lasted very long. But these results are considerably better than those for 2016 (when business spending actually subtracted 5.33 percent from the year’s 1.49 percent real growth) or for 2015 (when such investment’s role was positive, but it fueled only 10.34 percent of that year’s 2.86 percent real growth).

In addition, they could set the stage for an interesting test of the Republican party’s fundamental tax reform strategy: Use tax cuts to put more money into the pockets of businesses and wealthier Americans to encourage the building of more factories and labs and other kinds of productive facilities at home. If the Republican approach survives Congress intact, the GDP numbers will be a big help in seeing whether its promise of producing better and healthier growth is kept.