(What’s Left of) Our Economy: New U.S. Jobs Data Show a Continued Trade Punch for Manufacturing – & Industry Resilience

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aircraft, aluminum, automotive, Boeing, Bureau of Labor Statistics, China, General Motors, General Motors strike, GM, manufacturing, manufacturing jobs, metals tariffs, metals-using industries, steel, tariffs, Trade, Trump, {What's Left of) Our Economy

For observers of U.S. domestic manufacturing, this morning’s new jobs report (for November) could not have made clearer how the recent strike at General Motors (GM) have bollixed up the recent monthly totals for reasons having nothing to do with the underlying state of the economy or with President Trump’s trade wars. Nonetheless, even with the strike’s effects filtered out, industry’s job creation this year continues to lag behind last year’s strong pace, and damage from Mr. Trump’s metals tariffs in particular is still apparent – if anything but calamitous.

Moreover, in a continuing mystery, although Boeing’s safety woes are kneecapping domestic manufacturing’s trade performance, their impact on manufacturing employment is still nowhere to be seen.

Because of the GM strike’s impact, the overall manufacturing job figures for November (along with the revised October numbers) are pretty worthless. What does matter are the results with motor vehicles and parts stripped out (although even taking this step fails to account for the strike’s effects on all the industries making up the domestic automotive supply chain).

Ex-automotive, the previously reported October U.S. manufacturing monthly jobs change would have come to a 5,600 net monthly gain, rather than a 36,000 net loss. The revised October manufacturing jobs change reported today was somewhat better – without the GM strike, a net sequential employment loss pegged at a higher 43,000 would have been a net gain of 6,800. (And another revised October figure will come out next month, along with a new November number.)

For its first read on November’s performance, the Bureau of Labor Statistics reports that domestic industry’s payrolls rose by 54,000 on net. Removing from that total the 41,300 jump in automotive employment stemming from the return to work of GM workers and of employees at parts companies who may have been laid off, and you get a 12,700 monthly increase in manufacturing jobs.

Encouragingly, that’s the best such performance since January’s 17,000 payroll advance. But the year-on-year improvements remain humdrum even taking out the automotive distortions.

For example, without the automotive distortions, October’s stand-still manufacturing jobs total would only have been 56,000 higher than that of October, 2018. Between the previous Octobers, manufacturing employment surged by 275,000. The comparable November numbers? A 32,000 improvement between 2018 and 2019, as opposed to 228.000 between 2017 and 2018.

The November jobs report’s news for so-called trade hawks wasn’t good, either. As usual the impact of the Trump administration’s steel and aluminum tariffs are relatively easy to gauge, and it remains the case that the metals-using sectors’ employment performance has lost notable momentum versus the rest of manufacturing and the rest of the private sector overall.

Below are the latest figures for employment changes at major metals-using industries starting with the 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 Oct       New thru          Thru Nov

entire private sector:                    +2.58 percent   +2.62 percent    +2.82 percent

overall manufacturing:                +1.40 percent   +1.40 percent    +1.83 percent

durable goods:                            +1.48 percent    +1.43 percent    +1.99 percent

fabricated metals products:        +1.57 percent    +1.49 percent    +1.51 percent

non-electrical machinery:          +1.74 percent    +1.65 percent    +1.26 percent

automotive vehicles & parts:      -4.89 percent    -4.60 percent      -0.45 percent

household appliances*:               not available    -6.31 percent      not available

aerospace products & parts*:     not available   +8.98 percent       not available

*data are one month behind

The end of the GM effect is clear from the big differences between the October and November overall manufacturing and durable goods jobs changes. But by the same token, November was a lousy employment month for the big machinery and fabricated metals sectors. Look at that aerospace products and parts increase, though – job creation in this Boeing-heavy sector continues to excel.

Now it’s possible that much of the damage being done to the company, and manufacturing more generally, is being done in its own vast domestic supply chain. But the employment numbers for narrower sectors like aircraft and their parts show nothing of the kind, and the effects on companies in other supplier sectors (e.g., machinery, metals, and fabricated metals products) simply can’t be teased out.

But even worse for the metals-using industries generally, whereas most were job creation leaders last year, they’ve turned into job creation laggards this year. This deterioration is made clear from comparing the previous table with the following table, which shows their employment performance from the metals tariffs advent through the end of last year and the beginning of this year:

                                                          Thru December               Thru January

entire private sector:                         +1.36 percent                +1.60 percent

overall manufacturing:                     +1.39 percent                +1.49 percent

durable goods:                                  +1.72 percent                +1.97 percent

fabricated metals products:              +1.57 percent                +1.78 percent

non-electrical machinery:                +2.33 percent               +2.57 percent

automotive vehicles & parts:          +1.07 percent               +1.15 percent

household appliances:                     -2.05 percent                -2.52 percent

aerospace products & parts:           +5.47 percent               +5.87 percent

Of course, President Trump’s tariffs on several hundred billion dollars worth of imports heading America’s way from China are affecting domestic manufacturing as well. But because of these products ubiquity throughout domestic industry, the greatly varying levels of their U.S. market share, and the duties’ on-again-off-again nature (prominently on display in recent days), I continue to despair of quantifying the impact usefully.

And speaking of Mr. Trump, there’s no doubt that, contrary to his confidence, trade wars are not “easy to win” – and can be highly disruptive even for countries like the United States with ample leverage to prevail. That’s inevitable when you’re trying to reverse several decades of policy. All the same, U.S. domestic manufacturing’s employment performance, even in leading victim industries, has held up pretty well since the President began responding to foreign predation in earnest. Whether the manufacturing interests he’s counting on to win reelection will agree is another question entirely.

(What’s Left of) Our Economy: New Data Show Continued U.S.-China Decoupling & Broad Trade Performance Improvement

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aircraft, Boeing, China, decoupling, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, merchandise trade, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

With all the China trade war headlines in the news lately, the release this morning of the latest (for October) monthly U.S. trade data couldn’t be timelier. Indeed, one of the biggest takeaways from the results is that, as has been the case since the conflict began, the decoupling of the American and Chinese economies continues apace.

A second big takeaway: Boeing aircraft’s safety woes remain a major drag on domestic U.S. manufacturing’s trade performance and hence overall production (currently in mild recession) – and one having nothing to do with President Trump’s tariffs or foreign retaliation. 

And a third important conclusion:  Aside from the China trade account, the new report shows considerable improvement in some of the most important trade deficits run by the economy for decades.

One measure if decoupling is the humongous merchandise trade deficit the United States has run with China for so long. As of October, it’s down 14.60 percent year-to-date – even though the U.S. economy keeps growing. And in that vein, America’s overall non-oil goods trade deficit (the best global proxy for U.S.-China trade) rose by 4.04 percent during the same period.

The same trends are visible on the individual export and import sides, too. From January through October of this year, U.S. goods exports to China accounted for 7.13 percent of America’s worldwide total. For the comparable period last year, that figure was 8.22 percent. The analogous merchandise import figures were 19.78 percent and 23.28 percent.

Other highlights of the new monthly trade report:

>The combined goods and services trade deficit fell 7.63 percent sequentially in October, from a downwardly adjusted $51.10 billion to $47.20 billion. The October total is the lowest since May, 2018’s $44.35 billion. And the monthly drop was the biggest since January’s 12.61 percent.

>The downgrade of the September overall trade deficit was an unusually large 2.57 percent.

>The combined goods and services trade deficit is now running just 1.35 percent ahead of last year’s level. That’s a much slower rate of increase than the 13.89 percent rise between the two previous January-through-October periods.

>The overall trade deficit’s slower year-to-date increase was mainly the result of a dramatic decrease in the U.S. petroleum trade deficit – from $46.97 billion in the first ten months of 2018 to $13.93 billion between January and October of this year. That 70.34 percent nosedive contrasts with the aforementioned 4.04 percent increase in America’s non-oil goods trade deficit.

>At the same time, this “Made in Washington trade deficit” (so called because oil and services trade have little to do with the terms of U.S. trade agreements and other trade policy decisions) has been rising at a considerably slower pace this year (the aforementioned 4.04 percent rate) compared with last – when the January-through-October increase was 12.74 percent.

>Total U.S. exports dipped by 0.21 percent in October, from $207.55 billion to 207.12 billion – their lowest level since April’s $206.87 billion.

>Total U.S. exports are down 0.04 percent year-to-date – compared with a 7.45 percent rise between the preceding January-through-October period.

>”Made in Washington” exports are down 1.35 percent year-to-date, with October’s monthly $119.96 billion total the lowest since October, 2017’s $118.19 billion. Between the first ten months of 2017 and the first ten months of 2018, they grew by 5.98 percent.

>”Made in Washington” imports are up 0.55 percent year-to-date, with October’s monthly $187.54 billion total the lowest since November, 2017’s $186.99 billion. Between the first ten months of 2017 and the first ten months of 2018, they climbed by a much faster 8.26 percent.

>The also chronic and huge U.S. manufacturing trade deficit rose by 5.45 percent between September and October – from $87.91 billion to $92.70 billion. The increase followed two straight sequential declines.

>Manufactures exports in October improved by 5.03 percent, from $91.84 billion to $96.45 billion. But the much larger amount of manufactures imports increased by a faster 5.23 percent, from $179.75 billion to $189.15 billion.

>Year-to-date, the manufacturing trade deficit is up 2.76 percent, from $847.21 billion to $870.62 billion. That’s a much slower rate of increase than the 11.26 percent rise between January-through-October, 2017 and the same 2018 period.

>Interestingly, the safety woes of longtime manufacturing export superstar didn’t weigh heavily on the industry’s latest trade figures. Exports of civilian aircraft actually edged up sequentially in October – from $3.29 billion to $3.33 billion. Imports rose more, from $1.35 to $1.60 billion, but the result contributed only $210 million to the $4.79 billion monthly rise in the total manufacturing trade deficit.

>Longer term, though, it’s a much different story. For the first ten months of this year, civilian aircraft exports have decreased from $46.03 billion to $37.21 billion. Import, however, are up from $10.06 billion to 12.16 billion.

>As a result, the civilian aircraft trade surplus is down on a year-to-date basis from $35.97 billion to $27.15 billion. And this $8.82 billion drop-off represents 37.68 percent of the $23.41 billion worsening of the overall manufacturing trade balance so far from 2018 to 2019. Moreover, it’s a far cry from the days when the civilian aircraft sector was strengthening the U.S. manufacturing trade balance.

It’s true that when examining the improvement of trade performance on an absolute or relative basis, the economy’s growth rate has to be taken into account. In this vein, though, the rates of improvement are all significantly faster than the slowdown being experienced by the wider economy. That development doesn’t lend itself to pithy headlines (or catchy campaign slogans). But by any reasonable standard, it’s solid progress.

(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

(What’s Left of) Our Economy: U.S. Growth Takes a Bubbly Turn

Tags

Barack Obama, bubble decade, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, Trump, {What's Left of) Our Economy

As encouraging as last week’s official report on U.S. economic growth was – with the rate picking up even more than expected in the second quarter despite numerous forecasts of continued and even worsening slowdown – one big fly was visible in this ointment. The quality of the nation’s expansion has been weakening considerably this year, and as known by RealityChek regulars, growth overly dependent on the wrong engines can inflate the kinds of bubbles that burst so disastrously a decade ago, and triggered a frightful global financial crisis and a deep, punishing recession.

The specific internals of these reports on the gross domestic product (GDP) to track for signs of bubble-ization are personal consumption and housing. For their bloat provided most of the hot air during the 2000s (along with most of the actual growth). And the GDP report for the third quarter of this year (the most recent data available), as was the case since the second quarter, showed that these two GDP elements have driven growth much more powerfully than during that deceptively prosperous era. Further, during the last two quarters overall, growth has looked far bubblier by this measure than at any time during former President Barack Obama’s administration, with one exception. In fact, the second quarter of this year was the bubbliest ever. (More specifically, since 2002, when government figures enabled these calculations to be made.)

The table below shows the actual annual figures from 2002 through 2018 (leaving out only the recession years 2007-2008, and 2008-2009). The left-hand column shows how much total inflation-adjusted growth (the growth rate most closely followed by students of the economy) in each year was fueled by growth in personal consumption plus growth in housing. The center column shows the annual after-inflation growth rate for that year. And the right-hand column shows the difference between that toxic combination’s growth rate, and growth itself.

That ratio is important because it helps makes clear the relationship between growth’s health on the one hand and its rate on the other. Put differently, it makes possible answering the question of whether and when the U.S. economy has been growing acceptably without excessive contributions from the toxic combination.

                      percent of growth       actual growth rate          difference

02-03:                     91.11%                     2.86%             31.86 times greater

03-04:                     74.65%                    3.80%              19.64 times greater

04-05:                     79.25%                    3.51%              22.58 times greater

05-06:                    58.86%                     2.86%              20.58 times greater

06-07:                    27.01%                     1.88%              14.37 times greater

09-10:                    43.77%                     2.56%              17.10 times greater

10-11:                    82.80%                    1.55%               53.42 times greater

11-12:                   59.64%                     2.25%               26.51 times greater

12-13:                   71.58%                    1.84%               38.90 times greater

13-14:                   83.80%                    2.54%               32.99 times greater

14-15:                   96.58%                    2.91%                33.19 times greater

15-16:                127.04%                    1.64%               77.46 times greater

16-17:                  81.13%                    2.37%               34.23 times greater

17-18:                 69.55%                     2.93%                23.74 times greater

One conclusion that leaps out from these results: They bounce around considerably. But they show that growth during the Obama years was somewhat bubblier than during the previous and notorious bubble decade (even leaving out the huge jump in 2015-16), and that its health from that anomalous year steadily improved during the first two years of the Trump administration.

Especially noteworthy: The best Trump growth year (2017-18) was significantly less bubbly than the best Obama year (2014-15) even though that Trump year saw somewhat faster growth.

But what a turnaround since then! As the table below shows, major growth quality improvement continued into the first quarter of this year. Was the economy finally demonstrating the ability to grow strongly by using much safer engines? Unfortunately not, as growth’s quality simply collapsed in the second quarter, and even the third quarter improvement registered so far has kept it in the danger zone. 

                       percent of growth           actual growth rate           difference 

1Q 19:                   24.62%                            3.06%              8.05 times greater

2Q 19:                 150.42%                            2.00%            75.21 times greater

3Q 19*                102.70%                            2.11%            48.67 times greater

*still preliminary

On a standstill basis, the economy lately has looked bubblier than at any time during the Obama years, and in fact is approaching its bubble decade condition. During that period, personal consumption and housing combined regularly stayed above 73 percent of real GDP. Its annual peak came in 2005 – 73.50 percent.

The toxic combination’s share of the economy fell fairly steadily thereafter until 2012 – as did the growth rate itself – and then began rising again (while growth itself continued to slump) from 70.62 percent to 72.58 percent in 2016.

The trend continued into 2017 (72.96 percent) before the percentage dropped the following year to 72.69 – as growth itself picked up.

After falling further in the first quarter of this year (to 72.35) as growth itself rose further, the toxic combination’s role swelled to 72.90 percent in the third quarter – not far off the bubble decade levels. Unfortunately, growth itself has tailed off dramatically to 2.11 percent annualized.

Overall, the Trump economy still remains less bubbly

than the Obama economy. For the 32 months during which the former President was in charge of economic performance, the toxic combination generated 80.74 percent of total growth. During the nine months of Mr. Trump’s economic stewardship, that figure stands at 72.64 percent. But the gap has been closing this year, and as long as it keeps narrowing, President Trump’s economic legacy will remain very much up in the air.

(What’s Left of) Our Economy: Mainstream Media Never Trump-ism on Trade Gets Weirder and Weirder

Tags

China, consumers, inflation, Mainstream Media, retail, Reuters, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

It’s like they can’t help themselves. Even when Mainstream Media organizations and reporters conduct detailed research showing that President Trump’s tariffs-heavy China trade policies aren’t hurting U.S. consumers in the slightest, they feel compelled to issue dire warnings about the possibility. If you doubt me, check out this Reuters piece from the day before Thanksgiving on how the levies are affecting America’s major retailers.

Reuters, to its credit, actually took the trouble to look at prices to gauge the impact of the Trump levies by examining actual prices – as opposed to economists and to analysts from think tanks and other groups bought and paid for by the corporate offshoring lobby, who toss out apocalyptic numbers based on bogus-at-best methodologies.

The findings, “based on a pricing study conducted for Reuters by retail analytics firm Profitero, which examined online prices from seven large retailers for 21,000 products”?

From the October and November, 2018 to the same months this year, for goods “in key holiday categories including appliances, electronics, toys and video games,” leading big box and other retailers overall have held prices “lower than the average rate of inflation during the same period….”

More specifically, at “Walmart, Walmart-owned Jet.com, Amazon, Target Corp, Best Buy, GameStop, and Staples,” electronics prices rose somewhat more than prices in the U.S. economy across the board, but prices for the other products rose at much lower rates, and toys and video games actually became less expensive in absolute terms.

Nor did Reuters try to hide these results, as the headline reads “Top U.S. retailers absorb tariff pressure ahead of holiday shopping season,” and the same point was made in the lead paragraph.

Nonetheless, the report felt compelled to warn that “America’s trade war with China threatens to push up product prices, which could hurt consumer spending this holiday season, a period which makes up nearly 40% of annual revenue for many retailers.”

Sure that’s true in a technical sense. But this sentence is also about as responsible and accurate as one stating that “disciplining a child threatens to alienate him or her” when there’s no sign of that outcome developing, and when in fact all the evidence shows the discipline working. And as for hurting consumer sales, that currently seems far-fetched as well, based on what’s known about the current holiday shopping season. How do I know this? I read it in another Reuters article.

Moreover, it’s legitimate to ask why Reuters didn’t draw the opposite conclusion from its research: The Trump administration and tariff supporters so far have been right in insisting that consumers could be shielded from tariff-induced inflation, and in fact would be, because retailers know full well that they lack the leverage needed to force prices up, and would need to offset them themselves – by eating the extra costs, offsetting them by becoming more efficient, or some combination of the two.

Yes, this would have entailed writing something positive about the President and his trade policies.  But noxious as that might seem to the Mainstream Media, it would have gad the added virtue of being true. 

(What’s Left of) Our Economy: Globalization and Butter Cookies

Tags

China, consumers, country of origin labels, food, free trade, globalization, Indonesia, Netherlands, Trade, {What's Left of) Our Economy

So there I was sitting on the living room couch watching some TV after the big Thanksgiving meal with my some of my wife’s family, and of course I was eating again – this time some “premium butter cookies” from a big, brightly colored tin container. Why should that be remotely blog-worthy?

Here’s why. If you’re a cookie aficionado like me, when you read terms like “butter cookies” and “big, brightly colored tin container” chances are you think the product comes from Denmark. And in fact, you’d be even more likely to come to that conclusion upon seeing that the brand is “Danisa” and that the cookies come from an “original recipe of Danish Specialty Foods APS.” The cover is topped by a European-type monarch’s crown, too.

Imagine my wife’s surprise, then, when she found out (after she came home with them from the supermarket thinking that they’d be a terrific gift for the relatives of Danish descent we saw today) that they’re a “Product of Indonesia.” And despite my decades of work studying the globalization of production (including food manufacturing) and other economic activity, the cookies’ origins threw me for a loop, too – for two reasons. First, I wasn’t aware that Indonesia was such a center of cookie production excellence. And second, Indonesia (as opposed to other very low-cost countries) might have made some sense had this enormous Asian archipelago country ever been controlled by Denmark. But it wasn’t. Its former colonial masters were the Dutch – who are known for some pretty terrific cookies themselves (but unfortunately were notably cruel imperialists).

Upon further investigation, however, I discovered that Indonesia has formidable cookie-making capabilities. Indeed, although Danish Specialty Foods APS is indeed a Copenhagen-based business whose website says it “specializes in Danish butter cookies and owns the right to the brand, Danisa, worldwide,” it also operates an Indonesian facility owned by PT Mayora Indah Tbk.

That Indonesian food conglomerate says its founder “started baking its first biscuits out of a home kitchen in 1948” and has since “grown to become a recognized global company in the Fast Moving Consumer Goods Industry.” And it’s big into the “biscuit, candy, wafer, chocolate, coffee, instant food, beverage and cereal” spaces.

More surprising still: Indonesia has quite the reputation, at least in Asia, for butter cookies in particular. And I’ve got to tell you – these cookies taste just as good as any I’ve had (most of which I assume have come from Denmark, but now I can’t really be sure).

So maybe the doctrine of comparative advantage – the principal economic theory supposedly explaining the superiority of the freest possible global trade over all other trade alternatives – is at work here after all? I suppose. At the same time, the same discipline of mainstream economics that lauds free trade also holds that economies at all levels work best when consumers have the most information available about the products and services they’re examining.

To be clear, American law requires no country-of-origin labels for processed food products like cookies.  So the two above companies deserve some credit for offering any “Product of Indonesia” identification at all.  At the same time, this label is found on the bottom of the butter cookie tin in type tinier than I’ve ever seen aside from some jewelry inscriptions.

Would my wife have bought the cookies had the brand been “Mayora” rather than “Danisa”? Had the tin cover pictured, say, a Sumatran rhino? Had “Product of Indonesia” been displayed prominently on the lid? Probably not, since she was looking for a gift from Denmark. Might she have picked some up if she just had a hankering for butter cookies, or thought I might? Maybe.

I’m still left

>wondering whether and if so why Denmark itself has lost its butter cookie-making chops – or at least its ability to make the products competitively;

>and thinking that if a company is willing to make a product associated with a country in a country that’s not associated with that country, it shouldn’t make that product’s real origin as inconspicuous as the law allows.

And let’s not forget a final twist to the story: Danish Specialty Foods announced on its website that it was planning to open a factory in China. Of course, it turns out there’s a long butter cookie-making tradition there, too.

(What’s Left of) Our Economy: The Crucial Trade War Message of the New U.S. Economic Growth Report

Tags

Boeing, business investment, capex, exports, GDP, gross domestic product, imports, inflation-adjusted growth, non-residential fixed investment, real GDP, real trade deficit, services trade, Trade, trade deficit, {What's Left of) Our Economy

Everyone hoping for the U.S. economy to perform well had to be cheered by this morning’s look at economic growth in the third quarter – the second of three such reports on the time period for the near future. And special bonus: The results significantly strengthen the case that the United States can absorb hits from even a long China trade conflict with room to spare.       

On top of beating expectations on its headline figure (which showed 2.11 percent annualized inflation-adjusted growth for July through September), a key internal indicator showed unexpectedly showed improvement as well – business investment.

What companies spend on plant, equipment, computers, research and development and the like is always closely watched because increases on these scores are (rightly) deemed the healthiest source of growth and better living standards. More recently, it’s been (rightly) seen as a test of the Trump tax cuts (which were mainly aimed encouraging such expenditures) as well as (less clearly) of the Trump trade policies (because of how they’re supposedly paralyzing corporate executives with uncertainty). And the results so far this year on the “capex” (capital – or business – spending) front certainly have been worse than last year’s excellent performance.

According to the new GDP report, real “non-residential fixed investment” still declined sequentially for the second straight quarter. But the decline was less (0.67 percent) than first estimated (0.75 percent). At the same time, pessimists could point out that the second quarter’s dip was considerably smaller (0.26 percent), so it remains far from clear that this valued growth engine is out of the woods.

Superficially, the trade results as such of the new GDP read looked poor as well, as the after-inflation overall deficit hit a new record. At an annualized $988.3 billion, it bested the previous all-time high of 983.0 billion of last year’s fourth quarter, and the $986.4 billion figure from last month’s first estimate of third quarter growth.

Think a bit, though, and the impact of Boeing’s aircraft safety woes represent a big part of the explanation – and a big part that can’t be blamed on President Trump’s tariffs-heavy trade policies. And even given the near halt in orders of its popular but troubled 737 Max model, the new numbers for total after-inflation total U.S. exports were slightly higher than those of the third quarter’s first read ($2.5231 trillion annualized versus $2.5222 trillion) and those of the second quarter ($2.5175 trillion).

Moreover, the “Boeing effect” apparently will need to be kept in mind a good deal longer, as suggested by this new report of major problems with another popular model.

Nevertheless, even constant-dollar merchandise (goods) exports keep trending up. True, at $1.7842 trillion annualized as of this morning, they remain less than the quarterly record of $1.8141 trillion, set in the second quarter of last year. But the new results exceeded those both for the second quarter ($1.753 trillion) and for the third quarter’s initial estimate ($1.7823 trillion).

Further, some more of the recent weakness in U.S. trade accounts looks attributable to another sector of the economy that has little or nothing to do with the trade wars, either – at least not directly, in the sense of provoking retaliatory tariffs. That’s America’s services trade.

The new GDP report’s statistics on these trade flows were worse than those of the second quarter and of the first third quarter estimates both on the exports side and on the imports side. Indeed, price-adjusted services exports fell deeper into worst-since-the-second-quarter-of-2017 territory (coming in at $745.7 billion annualized versus the earlier number of $740.7 billion. And at $563.5 billion, real services imports rose higher into all-time record territory (with the second worst such total being the $558.1 billion during the first quarter of this year).

Since President Trump has blown so hot and cold on his China tariffs – and shows signs of doing the same on threatened separate automotive tariffs – Washington-related trade developments seem likely to keep distorting the GDP figures (including by inhibiting some business investment) and the trade figures for the foreseeable future no matter what happens with Boeing or U.S. services industries.

At the same time, the new GDP report underscores a point often lost in the understandable and volatile flood of headlines and forecasts: Even though changing the fundamental course of American trade policy is a thoroughly disruptive undertaking, with transition-related efficiency-reducing adjustments inevitable, the U.S. economy looks to be passing this test, including with China, pretty handily.  Better still:  Modest signs of further improvement are visible. In other words, and especially considering the failure of pre-Trump approaches, there’s here’s every reason for the President to stay his new course on trade.

And one more point:  If we don’t communicate before, Happy Thanksgiving to you and yours!

(What’s Left of) Our Economy: The New York Fed’s Unseemly Rush to Judgment on Trump’s China Tariffs

Tags

Breitbart.com, China, consumers, deadweight loss, importers, John Carney, multinational companies, New York Fed, supply chain, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

When a senior researcher from the New York branch of the Federal Reserve System and two academic colleagues came out in May with a blog post on the Bank’s website reporting on who really pays the cost of President Trump’s tariffs on huge amounts of U.S. imports from China, they were hardly short of confidence in their answer. And Mr. Trump’s critics eagerly jumped on the emphatic contention that the main victims of the China trade war would be American households, who would get hit with a triple whammy.

Higher consumer prices could result from (1) the levies themselves simply being on to American customers by importers, (2) businesses switching from selling Chinese products to selling more expensive but non-tariff-ed foreign counterparts, and (3) businesses substituting more expensive domestic counterparts for the tariff-ed Chinese goods.

John Carney of Breitbart.com has both done a terrific job of explaining the gaping holes and other flaws in that first New York Fed post (in this piece about the longer work on which it was based), and of reporting that yesterday, the Bank published a follow-on post (by a different team of authors but also bearing the imprimateur of the New York Fed’s Research and Statistics Group) implicitly admitting many of the initial effort’s weaknesses.

Rather than me reproducing or summarizing John’s work (which you can read at the above links), I’d like to try adding some value – by using it and the New York Fed’s own material to show what an unseemly rush to judgment the initial study represented in a clear effort to slime the Trump tariff policies.

Here’s the unequivocal conclusion of that first New York Fed post:

“Studies, including our own, have found that the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent. ”

On top of these come the losses of businesses switching to non-Chinese suppliers. This supply chain reorganization produces what economists call “deadweight losses” and these New York Fed authors insisted that they arise “regardless of whether consumers switch to more expensive foreign sources or to a more expensive domestic source.”

The total damage to American households, according to the study? An impressive $831 for each American household each year. So much for President Trump’s claim that his trade war is only hurting China, right?

Well, as a used-car company ad has famously said, “Not exactly.” And the evidence comes from the second New York Fed post – which makes clear just how many uncertainties the first team needed to ignore in order to generate its headline-grabbing claim. Among them:

>”Who pays the tariff tax depends on how it is split between lower profit margins (for wholesalers, retailers, and manufacturers) and higher prices for consumers. Estimating this split is difficult since the distribution of any tax increase on profit margins and prices depends on the details of market structure, such as the number and size of competing firms.”

>”Policy efforts since World War II have been focused on lowering trade barriers. As a result, economists don’t have much data from which to glean insights into how firms respond to tariff hikes.”

>”Affiliates of multinational corporations may be leaving reported import prices unchanged for accounting reasons. In doing so, the multinational would be letting higher tariffs reduce the reported profits of its U.S. operation (rather than those of its Chinese operation).”

These cautionary notes are all entirely valid, but they add up to confessing that economists – including at the New York Fed – don’t have much basis for drawing any firm conclusions about the China tariffs’ impact on American consumers at all. As a result, they raise questions about why the first team never mentioned them, and why no one else at the Bank seems to have brought them up before posting, either.

Just as important, the second New York Fed post mentions several major ways in which China’s economy is taking major body blows from the trade war:

>Chinese entities with narrow profit margins may not be able to lower them further in order to prevent the prices they charge from increasing due to U.S. tariffs, and therefore “may be dropping out of the U.S. market.”

>Many Chinese entities have taken advantage of the post-tariff devaluation of China’s currency and have been able to accept this “loss in competitiveness” in the U.S. market by padding profits on their sales – which should strike everyone as awfully gimmicky.  (The latter point is my own conclusion.)

>China has indeed lost market share in the United States, including in sectors that the Chinese government has sought at great expense to promote – like machinery and electronics.

Because the New York Fed is, well, the New York Fed, and its studies are supposed to represent the gold standard of economic research, Googling that first study with “‘New York Fed’ China tariffs consumers May” produces some 79,000 results. It’s true that some of these mention the second study, too – and even note the costs to China. But I can’t help but share Carney’s concern that the first report’s troubling shortcomings won’t attract remotely as much attention.

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

Tags

737 Max, aircraft, aluminum tariffs, automotive, Boeing, Fed, Federal Reserve, General Motors, General Motors strike, GM, household appliances, inflation-adjusted growth, inflation-adjusted output, manufacturing, metals-using industries, safety, steel tariffs, supply chain, tariffs, Trade, trade wars, {What's Left of) Our Economy

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!)

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

Tags

America First, Asia, China, Clyde V. Prestowitz, free trade, globalism, Japan, Long Tongyu, managed trade, protectionism, South China Morning Post, Trade, trade talks, trade war, Trump, {What's Left of) Our Economy

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.