(What’s Left of) Our Economy: A Valentine’s Day Bust for Tariff Alarmists

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aluminum, inflation, Labor Department, manufacturing, metals, metals-using industries, PPI, Producer Price Index, producer prices, steel, tariffs, Trade, wholesale prices, {What's Left of) Our Economy

If trade alarmists and tariff fear-mongers were hoping for a Valentine’s Day gift from Thursday’s producer price inflation report, they’re now nursing broken hearts. For the new numbers from the Labor Department continue the string of official data releases showing that President Trump’s trade curbs on imports of metals and various goods from China have generated no significant inflationary pressure in the economy overall. Indeed, there’s only the scantest evidence that they’ve created upward price pressure even in the products most directly affected.

As has been the case for months for this Producer Price Index (PPI) data – along with the statistics on consumer prices – the most reliable figures are the Trump tariffs on steel and aluminum imports, because they’ve been in place since March. But when it comes to the producer price results – which look at the economy from the wholesale sector’s standpoint – it’s worth examining the China-related data as well, since the first tariffs on producer goods from China were imposed in July. (P.S.: Keep in mind that the new statistics, which bring the story up to January, incorporate an annual set of revisions that in this case impact the seasonally adjusted numbers going back to 2014).

Prices for steel remain elevated through, January, but increases have lost noteworthy momentum. True, they rose sequentially in January by 0.50 percent and their initially reported monthly decline of 0.63 percent in December was revised to a 0.18 percent dip. Moreover, steel prices have risen by 11.02 percent since April – the first full month they were in effect. By contrast, the super-category in the PPI report in which they’re placed – processed goods minus foods and feeds – saw its prices decline by 0.55 percent during that period.

But most of the steel price increases took place over the summer. Since September, they’re down 1.20 percent. That’s not nearly as big a fall-off as for their super-category overall (where prices were off by 3.83 percent during this period). But it’s a decrease nonetheless.

Upon moving to aluminum prices, however, the notion that tariffs have been mainly behind these high and still rising prices breaks down completely – because aluminum pricing trends have been so completely different.

Whereas wholesale steel prices increased on-month in December, wholesale aluminum prices fell – by an unrevised 0.40 percent. Both metals registered a 0.50 percent sequential price rise in January.

But aluminum’s period of strong pricing power was considerably shorter than steel’s, and ended in June. And since that month, they’re down by 6.40 percent. That’s almost double the price slump experienced by its core processed goods super-category (the same as steel’s) – 3.37 percent. So something other than tariffs clearly has been driving the price movements of these metals on the wholesale level.

Important divergences also appear in the data for metals-using industries. Last month, for example, we found that prices for sectors like pumps, compressors, and related equipment; mining machinery and equipment; construction machinery and equipment; and metal-forming machine tools, rose faster on month than prices in their super-category – final demand goods minus food and energy.

In January, these trends continued for construction machinery and that machine tools sector. But the new monthly increases for other metals-using sectors, like agricultural machinery and equipment (0.21 percent), metal-cutting machine tools 0.30 percent), industrial materials handling equipment (0.17 percent), and machine tool parts and mold-making equipment (flat), were considerably weaker, and completely in line or softer than the latest monthly price increase for the core final demand goods category (0.26 percent). That’s significant given recent solid output growth for the entire manufacturing sector, and especially the durable goods industries that rely heavily on metals as inputs.

Nonetheless, increases pushed through earlier in the year helped most metals-using sectors produce price hikes on a January-to-January basis considerably stronger than that for the core final demand goods super-category (2.40 percent).

Switch over to “intermediate demand” goods and you find mixed results, too. Big annual price hikes have been seen in sectors like metal containers, fabricated wire products, and certain kinds of valves (for January, 5.58 percent, 15.56 percent, and 5.77 percent, respectively). These increases all exceeded that for their core intermediate demand super-category (0.97 percent). Yet they were all lower than the December figures (6.46 percent, 16.42 percent, and 6.03 percent). (The intermediates super-category figure was 3.29 percent for that month.) So some inflation momentum has been lost.

Since the metals tariffs were imposed, prices of metal containers have risen 2.01 percent, prices of fabricated wire products have risen 10.16 percent, and prices of those valves are 2.82 percent higher. All these inflation rates are much faster than that of the intermediate demand super-category (where prices overall fell 0.55 percent during that period). But as with the annual figures, they vary considerably, with the wire products sticking out like an especially sore thumb.

The first Trump China tariffs weren’t imposed until early July, so the sample size is smaller. But the case for tariff-led wholesale inflation on this front is just as weak as in the metals-related sectors.

The evidence for tariffs-led producer price inflation is much weaker for goods imported from China – perhaps because the levies haven’t been in place for nearly as long as the metals tariffs. The table below shows the PPI changes for some of the leading products found on the Trump administration’s initial China tariff list. They were imposed on July 6, so the numbers show the cumulative price changes since August. (Note: Because the administration’s Trump announcement used a different classification system than that used in the PPI reports, the below data don’t match up exactly with that tariff list. But the following goods are all at the least main parts of the items on the Trump list, or vice versa. The same holds for the super-category figures used, as with metals tariff-related products, for comparison’s sake.)

                                                                                  Aug.-Dec.            Aug.-Jan.

core processed goods for intermediate demand:   -0.88 percent       -2.50 percent

aircraft engines and engine parts:                         +0.04 percent      +0.44 percent

ball bearings:                                                         +1.01 percent     +1.24 percent

electric generators:                                                +1.61 percent     +1.66 percent

medical, surgical & personal aid devices:            +0.34 percent      +0.93 percent

core commodity final demand                              +0.64 percent      +1.13 percent

industrial heating equipment:                               +1.79 percent      +2.41 percent

oil and gas drilling platform parts:                              0 percent              0 percent

farm machinery and equipment:                           +2.26 percent      +2.55 percent

paper-making machinery:                                     +0.31 percent      +0.52 percent

electricity transformers:                                        +0.12 percent      +0.68 percent

medical, surgical, and personal aid devices:         +0.33 percent      +0.93 percent

X-ray and electro-medical equipment:                  +0.12 percent     +0.37 percent

In a phrase, these results are all over the place – strongly indicating that the tariffs have not been the leading cause of their price changes. The only consistent pattern suggesting a notable tariff effect emerges after comparing the August-December and August-January results. In the core intermediate demand grouping, prices dropped at a faster pace between the two periods. But for the China-related goods, they rose, albeit at different rates.

In the core final demand grouping, prices rose at a faster pace for the super-category, and for all the specific goods within it except for oil and gas drilling platform parts. Interestingly, though, the acceleration for two other sectors – farm machinery and equipment and paper-making machinery – was slower than for the super-category as a whole. In addition, during the latest, August-to-January, period, prices for no less than five of the seven sectors rose more slowly than for the super-category for a whole – again signaling the strong influence of non-tariff factors.

America’s globalist elites haven’t lost credibility solely or even mainly because of trade policy. But that’s surely been part of the mix. And if they want to start regaining some, they might think about admitting that facts really do matter, and that scarcely any of them support their tariff fear-mongering.

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(What’s Left of) Our Economy: The New Manufacturing Output Data Belie Tariff Fear-Mongering Yet Again

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aluminum, China, Federal Reserve, imports, industrial production, inflation-adjusted growth, manufacturing, metals, metals-using industries, tariffs, Trade, Trump, {What's Left of) Our Economy

Tariff fear-mongers must have felt a shiver of excitement when today’s new industrial production report came out from the Federal Reserve. For the results showed the inflation-adjusted manufacturing output shrank in January by 0.90 percent – the third sequential decline since the first Trump administration metals tariffs went into effect, and the second since the first round of its China tariffs went into effect. Surely these figures made clear that their claims of the levies hurting American manufacturing were finally coming true! Even better, from their standpoint, revisions were slightly negative.

What a shame to report then that an examination of those always crucial internals demonstrates beyond a reasonable doubt that the trade curbs have had nothing to do with any trouble industry may (or may not) be running into. The evidence? The continuing excellent results registered by metals-using industries, and mixed figures for the much smaller number of sectors where the impact of the first China tariffs (whose first full month was only last August) can reliably be measured.

Here are the changes in real production for the major metals-using industries starting with April – the first full month during which these sectors had to deal with the levies. The table shows the previously reported data for December, the new December data, and the January figures. (All these statistics, it should be noted, are still preliminary.) And they would challenge even the cleverest D.C.-based spin-meister to construct a narrative supporting the popular Twitter hashtag #TariffsHurt:

                                                         old thru Dec.      new thru Dec.       thru Jan.

overall manufacturing:                   +2.02 percent      +2.11 percent   +1.20 percent

durables manufacturing:                +3.31 percent      +3.45 percent   +1.65 percent

fabricated metals products:            +2.05 percent      +2.82 percent   +3.19 percent

machinery:                                     +4.93 percent      +4.38 percent   +3.87 percent

automotive:                                    +3.36 percent      +3.93 percent    -5.18 percent

major appliances:                           +0.08 percent      +3.13 percent    -2.87 percent

aircraft and parts:                           +6.80 percent      +6.14 percent   +6.35 percent

As has been the case almost consistently since the trade curbs on steel and aluminum went into effect, most of the industries relying especially heavily on these metals have actually out-performed the rest of manufacturing. And the struggles indicated here of sectors like automotive and major appliances sure spring from developments distinctive to those sectors – in automotive, major recent volatility (which has also led to major recent revisions) and in appliances, a separate set of levies on large household laundry machines that went into effect in February. The above figures, moreover, even point to volatility in appliance production.

It’s more difficult to gauge the impact of the China tariffs because the first (relatively minor) tranche has been in effect for a much shorter period, and because the levies were based on a system for classifying manufacturing that’s different from the system used in the Fed’s industrial production reports (as well as most major federal government data). So matching up industries is a daunting task, and the more I think about it, the more I’m convinced that even the short list of sectors I presented last month for the December industrial production report contained too many industries where the match-up simply wasn’t close enough to be useful.

Below, therefore, are the only the sectors for which I think it’s possible to draw any firm conclusions, along with the total manufacturing results as a control figure. This highly limited sample shows the latest after-inflation growth rates from August (again, the first full months the first China tariffs were in effect) through December, and through January. And the only consistent trend visible here is volatility.

                                                                       Aug.-Dec.                    Aug.-Jan.

overall manufacturing:                              +1.26 percent              +0.36 percent

ball bearings:                                             +0.02 percent               -0.09 percent

industrial heating equipment:                    +5.19 percent              -3.86 percent

farm machinery and equipment:                +2.50 percent              +9.12 percent

As the next few months pass, it will be possible to examine usefully the China tariffs’ impact on more and more manufacturing sectors. To date, however, the grade is “incomplete” (at best). As for the effects of the steel tariffs, though, isn’t it time to consider putting that #TariffsHurt hashtag way out to pasture?

(What’s Left of) Our Economy: Tariffs-Led Inflation, Where are You?

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aluminum, China, consumer price index, CPI, inflation, Labor Department, metals, metals-using industries, producer prices, steel, tariffs, Trade, Trump, {What's Left of) Our Economy

If you’re a baby-boomer or a fan of old sitcoms, you know the show Car 54, Where Are You? It came to mind as I was examining the new consumer price inflation data that came out of the Labor Department this morning. Because these consumer price index (CPI) should make the country’s tariff-mageddon-mongers ask, in an equally plaintive tone, “Tariffs-led inflation where are you?” That is, the results at best offer scarcely any evidence that the Trump trade levies are eating away much at American shoppers’ buying power.

As usual, let’s first look over the statistics for metals-using industries, because they’ve been dealing with tariffs on steel and aluminum since late March, when they were first imposed. The table below compares price changes for their products with price changes for overall “core inflation” (which excludes food and energy prices, supposedly because they’re volatile for reasons that have little to do with whatever overall upward or downward general pricing pressures are shaping the economy). For good measure, I’ve included related products in an effort to distinguish between price changes due to fluctuating metals costs, and price changes due to costs of other materials or substances in the product in question – e.g., fresh produce and canned produce.

And as RealityChek regulars will notice, I’ve not only included autos and parts here, but added appliances and some other metals-using goods.

As for the dates, they cover the latest monthly price changes (through January), the changes from April (the metals tariffs’ first full month) through January, the year-on-year changes for April, and the year-on-year changes for January. The last two are probably the best measures of whether the impact of the trade curbs has been intensifying – for better or worse.

                                      Dec.-Jan.       Since April         y/y April           y/y Jan.

core CPI:                  +0.24 percent   +1.67 percent   +2.12 percent   +2.15 percent

fresh fruits                 -0.19 percent   +0.07 percent   -0.43 percent   +1.25 percent

& vegs:

fresh fruits:                +1.14 percent   -0.28 percent   +1.38 percent   -0.74 percent

fresh vegetables:         -1.66 percent  +3.01 percent    -2.50 percent  +3.64 percent

processed fruits           -0.88 percent   -0.64 percent   -1.29 percent    -0.46 percent

& vegs:

canned fruits:              -0.05 percent   +0.94 percent   -0.14 percent   +0.70 percent

& vegs:

canned fruits:              -1.59 percent    -0.56 percent    -1.60 percent   +0.35 percent

canned vegs:              +0.45 percent    +1.44 percent  +1.00 percent   +1.11 percent

soups:                         +0.34 percent    +0.80 percent   -0.38 percent   -0.81 percent

malt beverages           +0.07 percent    +1.66 percent  +0.84 percent  +2.23 percent

at home:

alcoholic                      -0.04 percent    +1.34 percent  +2.17 percent  +2.25 percent

beverages away:

non-frozen, non-         +1.32 percent    +2.45 percent   -0.52 percent  +1.80 percent

-carbonated non-

alcoholic rinks:

carbonated drinks:       +2.08 percent   +4.92 percent  +0.04 percent  +5.53 percent

juices & non-               +1.84 percent   +3.39 percent   -0.26 percent  +3.31 percent

alcoholic drinks:

new cars & trucks:       +0.22 percent   +0.93 percent   -1.61 percent +0.06 percent

motor vehicle               +0.33 percent   +1.92 percent   -0.74 percent +2.12 percent

parts:

appliances:                   +1.36 percent   +4.56 percent   +0.27 percent +6.43 percent

major appliances:         +0.99 percent  +7.47 percent  +1.55 percent  +9.66 percent

non-electric                  +0.67 percent   -0.84 percent   -1.57 percent  +3.59 percent

cookware & tableware:

tools, hardware,            +0.98 percent  +0.77 percent  +0.19 percent  +1.57 percent

outdoor equipment:

The two sets of year-on-year figures do reveal some evidence of hotter inflation in metals-using products between April and January. Also apparent, however, is accelerating inflation in several of the non-canned versions of these products. As has been the case in previous months, prices change for all sorts of reasons; tariffs are only one and nothing indicates that, generally speaking, they stand out.

The evidence is more mixed for other food sectors that offer lots of canned products, like soups and beverages. The trouble is, they also offer lots of products in other kinds of containers or packages. So tariff alarmists can point to the beverages as examples of prices rising at a faster annual pace since the metals levies were imposed. But when it comes to soup, prices have been falling at a faster pace.

Moreover, if the metals tariffs have been so important, why is January year-on-year inflation for all three of the canned products so much lower than January year-on-year overall core inflation?

Moving away from foods, faster inflation can also be seen in automotive products, appliances, cookware and tableware, and tools and hardware. But as with some of the food categories, the January-January inflation rate for the tools section is below that for the economy’s “core” overall, and appliance prices also have been affected by a separate set of tariffs slapped on large household laundry machines last February. So consumer prices are still rising strongly for these goods, although it’s hard to see why year-old washing machine tariffs or ten-month old metals tariffs would be major factors behind the big December-January increases shown above.

In recent previous posts on consumer price data and the Trump tariffs, I’ve been providing information on products that will be affected by levies on imports from China. But the more I think about it, the less confident I am that the effects can be accurately gauged at this point. For one, the first full month of tariffs on goods from China came in August. The amount was relatively small ($34 billion). The first full tariff month for another $16 billion worth of Chinese import categories came in September, but none of the products in either tranche belonged in the consumer categories. (Because they were producer goods – the kinds of parts, components, and materials that go into consumer and other products –  confident about measuring their effect on U.S. producer prices – the next set of which come out tomorrow.)

A major set of tariffs containing many consumer goods levies was announced in mid-September, but they only went into effect late that month, so only four months worth of data for those products is available. And plaguing analysis of any of these price statistics, they’re issued using a classification system that’s different from that used in the list of tariff-ed Chinese goods. In a fair number of cases they line up; in most cases, they don’t, and finding satisfactory matches is challenging.

So as I see it, more patience is needed before a useful verdict on the China tariffs can be delivered. But metals tariff-led inflation clearly remains mythical – which of course only strengthens the case for President Trump’s determination to overhaul American trade policy.

(What’s Left of) Our Economy: Private Sector U.S. Jobs Increasingly Really Deserve the Name

Tags

Barack Obama, Employment, healthcare, Jobs, private sector jobs, recession, recovery, subsidized private sector, Trump, {What's Left of) Our Economy

Although unemployment in America has hovered near multi-decade lows for most of the last year, concerns about job quality rightly persist – largely because wage gains have only recently showed signs of recovering to historically normal levels for a recovery. But the latest official data from the Labor Department demonstrate that the makeup of the country’s employment picture and how it’s changed make clear continued improvement in one key measure: Growing private sector employment increasingly reflects gains in what I’ve called the real private sector, as opposed to the subsidized private sector.

Also apparent from the employment figures: The resurgence of the real private sector in relative terms as well as in absolute terms has been a Trump era phenomenon.

As known by RealityChek regulars, this trend is encouraging because the subsidized private sector consists of parts of the economy that are often (and even officially) viewed as parts of the private sector, but whose health depends largely on government largesse. That is, its total employment and its employment gains would be much smaller without huge government payouts – i.e., politicians’ decisions. The healthcare services industry is the main example.

By contrast, the real private sector consists of parts of the economy whose health flows largely from free market forces. So without getting involved in the debate over whether the United States supports too many subsidized private sector jobs or not, it should be clear that they have little to do with the state and health of the economy as a whole – unlike real private sector jobs.

According to the Labor Department’s Bureau of Labor Statistics, from 2013 through 2016, the subsidized private sector’s share of total annual employment increases more than doubled: from 11.34 percent to 25.99 percent. And its share of annual total private sector jobs gains (that is, employment increases by the private sector as conventionally defined), soared from 11.02 percent to 28.59 percent.

During 2017 and 2018 (and the data for late 2018 is still preliminary), the subsidized private sector’s share of total annual U.S. jobs gains dropped to 21.04 percent and then to 19.90 percent. And its share of the growth of total private sector jobs fell to 21.91 percent and then to 20.74 percent.

Another way to look at the Obama-era growth of subsidized private sector employment is to examine its growth as a share of the growth of real private sector jobs. In 2013, this figure stood at 12.38 percent. In 2016? Just over 40 percent. In other words, in the last year of Barack Obama’s presidency, some four in ten of the net new jobs created in the private sector came in the subsidized private sector – meaning that they were heavily dependent on government largesse.

In 2017 and 2018, subsidized private sector jobs growth as a share of total private sector jobs growth sank all the way to 28.05 percent, and then to 26.16 percent.

Looking at the economy from a static standpoint – i.e., through snapshots taken at crucial dates – illustrates these trends, too, although less dramatically. After all, even major relative changes can take many years to show up as major absolute changes in a supertanker as big as the U.S. economy.

At the outset of the last recession the subsidized private sector represented 13.67 percent of all U.S. jobs and the real private sector’s share was 70.16 percent. And the subsidized private sector’s share of the total (conventionally defined) private sector was 19.49 percent.

By the time the recovery began, in mid-2009, these figures stood at 14.97 percent and 67.80 percent – showing that during an economic downturn that decimated the overall American jobs market, subsidized private sector employment rose not only in relative terms but in absolute terms (from 18.92 million to 19.61 million. Meanwhile, the subsidized private sector’s share of the total private sector employment had risen to 22.07 percent.

By January, 2017 – the final month of the Obama administration and eight and a half years into the recovery – the subsidized private sector comprised 15.75 percent of all American jobs, and the real private sector was back up to 68.94 percent. Subsidized private sector employment had grown to 22.84 percent of total private sector jobs.

By December, 2018 (results that are still preliminary) the subsidized private sector’s share of all American employment had kept increasing – to 15.91 percent. And the real private sector’s share grew modestly, too – to 69.11 percent, as did the subsidized private sector’s share of the total private sector (to 23.02 percent).

Nevertheless, this examination of the changing dimensions of subsidized private sector employment also reveals that the national jobs market still hasn’t returned to pre-recession normality. In particular, even though the current recovery is nearing it’s tenth anniversary, that real private sector share of total employment (69.11 percent) is still below where it stood at the downturn’s onset (70.16 percent).

(What’s Left of) Our Economy: A Laughable Indictment of Trump’s World Bank Choice

Tags

David Malpass, economic development, Financial Times, globalism, multilateralism, third world, Trump, World Bank, {What's Left of) Our Economy

I was going to post this morning on more implications of yesterday’s new monthly U.S. trade figures, but as so often happens, the Mainstream Media has just come out with an article whose mind-boggling cluelessness reveals such deep-seated biases that I had to switch gears. Special bonus – it didn’t even come from a mainstay of the establishmentarian U.S. foreign policy and globalization Blob. Instead, we have the Financial Times editorial board to thank.

What other conclusion can be reasonably drawn from the FT editorial slamming President Trump’s appointment of David Malpass to head the World Bank?

Not that Malpass has been God’s Gift to Economics or to the cause of third world economic development. But according to the FT, a big problem with Malpass is that he lacks the leadership experience as well as intellectual and often political heft of previous U.S. choices like – wait for it – Robert S. McNamara.

That’s right – the same Robert McNamara who deserves such blame for the American disaster in Vietnam. What’s next for the FT? Criticizing Mr. Trump for appointing a senior military adviser lacking the battlefield genius of George Armstrong Custer?

Almost as bad: What’s given the FT editorialists the idea that McNamara, or any of his pre-Malpass successors, was such a whiz at the Bank? Here’s an appraisal of McNamara’s tenure arguing that he unintentionally created “incentives for Bank staff and management to push money out the door, sometimes with relatively little regard for how it would be used—a practice that still bedevils the Bank’s work today.” And this was from an admirer.

A second major FT argument against Malpass looks more reasonable at first glance:

“His judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under.”

What the FT conveniently forgets, though, is that using this standard would rule out virtually every economist in the world as World Bank president.  

Considerably stronger is the FT‘s observation that “As early as 2011 [Malpass] suggested tightening monetary policy and driving up the dollar, a hard-money philosophy entirely at odds with the reality that the Fed had averted economic disaster.”

The problem with this school of thought is that, although the Federal Reserve’s flooding of the American economy with easy money may have been necessary to keep the nation (and world) afloat, it’s also arguably created a global addiction to super-cheap credit that’s kneecapped chances of restoring genuine long-run economic health.

As contended by no less an economic authority than Lawrence Summers (a former World Bank research chief), the result has been “secular stagnation” – the inability of the United States or other major countries to grow acceptably without inflating lending and spending bubbles that are doomed to burst disastrously.

As the editorial makes clear, the FT mainly objects to Malpass because he’s “deeply sceptical of multilateral institutions.” Which would be funny even if the FT itself didn’t describe the Bank as already “dysfunctional” – despite being led by McNamara and all his supposedly genius successors.

More fundamentally, all else equal, why should anyone lack skepticism about any means to an end? Worshiping multilateralism is like worshiping a hammer. Sometimes is the best tool to use; sometimes it’s not.

The FT reasonably argues that “With an increasing number of rival sources of development finance — not to mention private capital — the bank needs to think hard about where it can best add value.” The paper just as reasonably concludes that effecting change requires its president “to be a critical friend of multilateralism who recognises that its institutions need to be adapted to a changing world, not an instinctive ideological enemy.”

But given that these – and other – problems with the Bank have persisted for so long, it’s hard to imagine that a leader accepted by multilateral fetishists like the FT would generate the necessary push.

As a result, the Malpass nomination can just as reasonably be viewed as a Trump administration attempt to change the kind of losing game coddled for so long by diehard multilateralists like the FT editorial board. Such critics should exhibit a little more humility before writing him off as a sure failure. Not to mention minimal historical memory. 

(What’s Left of) Our Economy: New U.S. Trade Figures Start Creating a Trump China Scorecard

Tags

China, exports, goods trade, imports, manufacturing, merchandise trade, tariffs, Trade, Trade Deficits, {What's Left of) Our Economy

After a roughly month-long shutdown-related delay, the latest U.S. monthly trade figures were finally released this morning – bringing the story up only through November. But although they’re clearly somewhat dated (especially considering how fast China trade-related events are moving), they reveal some noteworthy China-related developments and point to some equally noteworthy potential China-related trends.

The new trade report makes clear that, at least through November, President Trump’s tariffs, and possibly the threat of more, are influencing trade flows. And there’s even some evidence that, although the U.S. bilateral goods deficit that so bothers Mr. Trump is moving in the wrong direction, the underlying trends are much more favorable. Here’s what I mean.

It’s true that, on a year-to-date basis, the American goods deficit with China is up considerably. In fact, the 10.90 percent widening of this gap during this period is the biggest since the same period between 2010 and 2011 – when the U.S. economy was conclusively moving out of recession, and the deficit jumped by 22.38 percent.

But the November monthly figures point to a more complicated picture, especially keeping in mind that two big sets of U.S. tariffs have been imposed on goods imports from China since last July.

For example, despite widespread reports of tariff “front-running” late last year aiming at avoiding future levies, the U.S. merchandise trade deficit fell on a monthly basis by 12.16 percent – from $43.01 billion in October to $37.86 billion. Yes, the October trade gap represented the fourth straight monthly record high. But the November drop was the biggest overall since last February’s 18.61 percent. And the November total was the lowest since August’s $38.57 billion.

Moreover, because U.S.-China trade is so seasonal (think, in large measure, “Christmas”), it’s instructive to compare last November’s results with its most recent predecessors. And this exercise reveals that the sequential deficit decline was the biggest November monthly decrease since recessionary 2008’s 17.41 percent.

A similar pattern emerges for exports. America’s goods sales to China in November fell sequentially by 5.10 percent, from $9.13 billion to $8.66 billion. That’s the lowest such level since May, 2016 ($8.54 billion) and the lowest November level since recessionary, 2009 ($7.37 billion). And the monthly November merchandise deficit decrease was the biggest since recessionary 2008’s 14.83 percent. Interestingly, though, last November’s monthly export drop was smaller than October’s (6.73 percent).

Goods imports from China were off markedly as well – by 10.93 percent sequentially in November, from October’s all-time high of $52.23 billion. The $46.53 billion November total was the lowest since last July’s $47.10 billion.

In addition, the monthly decrease was the biggest since last February’s 14.68 percent, and the biggest November fall-off since 2008 (16.95 percent).

But U.S. policy’s effectiveness can’t accurately be evaluated unless the China trade flows are examined in the context of broader American economic trends and in particular manufacturing trends – since bilateral trade flows are so manufacturing-heavy. And what the key numbers suggest is that, even though the merchandise deficit with China has grown rapidly and indeed is heading for an all-time annual record, American industry is starting to reduce its dependence on Chinese parts, components, and other inputs.

The main evidence is the relationship between the growth of U.S. manufacturing production on the one hand, and the growth of U.S. goods imports from China on the other. If the resulting ratio is rising, then so is that U.S. dependence. If it’s falling, the reverse would seem to be true. So here are those figures for the first eleven months of each year going back to 2010-11, when the current U.S. economic recovery finally showed some real legs. (Incidentally, RealityChek regular may recall a similar exercise last November regarding American manufacturing’s growth and the global manufacturing trade deficit.)

2017-18: 4.64:1

2016-17: 3.41:1

2015-16: the deficit fell by 5.94 percent while manufacturing grew an inflation-adjusted 0.03 percent.

2014-15: the deficit fell by 7.21 percent while manufacturing shrank an inflation-adjusted 2.02 percent

2013-14: 4.18:1

2012-13: 4.66:1

2011-12: 3.18:1

2010-11: 7.80:1

According to the above table, U.S. manufacturing’s dependence on Chinese inputs has grown faster between the first eleven months of 2016-17 and the first eleven months of 2017-18. But the latest year-to-date results are much lower than those for 2010-11. And this year’s numbers are probably also inflated by that tariff front-running. We’ll know more as the figures for the next few months come in, but with the possibilities live both of tariffs going up and coming off, definitive conclusions still look pretty far off.

(What’s Left of) Our Economy: Inside that Big New Manufacturing Jobs Revision

Tags

inflation-adjusted wages, Jobs, manufacturing, non-farm payrolls, private sector, wages, {What's Left of) Our Economy

Last Friday’s U.S. jobs report (for January) contained a special bonus: On top of the usual monthly numbers, and the insights they yielded on the impact of Trump tariffs on domestic manufacturing (described in this post), the statistics incorporated an annual revision that goes back several years – and they change the picture of industry that’s been available to date.

The big takeaways: U.S.-based manufacturing’s job creation performance has been slightly weaker lately than initially reported. But its wage performance has been more mixed – better in absolute terms but worse compared with the private sector overall. (The focus in this post when discussing relative performance is mainly on the private sector, because its economic performance stems largely from market forces. For the overall non-farm employment figure – the definition of the American employment universe used by the Labor Department, which reports these data, includes government jobs. Their results are driven largely by politicians’ decisions.)

First, let’s examine those latest monthly jobs numbers. They show that manufacturing hiring kicked off the new year on a soft note. Only 13,000 net new jobs were added – the worst such figure since August’s 8,000. And revisions were negative – with December’s initially reported 32,000 growth in payrolls downgraded all the way to 20,000.

As a result, 2018 still stands as manufacturing’s best job-creation year since 1997 – when employment grew by 304,000 on net. But the annual increase of 284,000 now stands at 264,000. Also noteworthy: The 2018 jobs gain far exceeded 2017’s 190,000 (which itself was first reported as 209,000.)

The downward revisions also decreased the improvement manufacturing had shown as a share of total non-farm employment. According to the previous employment release, manufacturing’s share of this U.S. jobs total came in just short of 8.56 percent – the best such figure since July, 2016’s 8.56 percent.

Today’s report lowered that December number to 8.52 percent – and kept July, 2016 at 8.56 percent. January’s share is 8.52 percent as well. The revised data show that manufacturing payrolls during the Trump administration have still been rising faster than total non-farm payrolls, since the figure for the first full Trump month stayed at 8.49 percent. But the out-performance has been more modest than previously judged.

So has the total increase in the number of manufacturing jobs since this figure bottomed in early 2010 – shortly after the official mid-2009 beginning of the current economic recovery. Before the latest revisions, Labor Department data showed that, through December, domestic industry had regained 1.389 million (60.58 percent) of the 2.293 million net jobs it had lost during the recession and its aftermath. Now, this figure stands at 1.356 million (59.14 percent of the lost jobs), and in January, it rose slightly to 1.369 million (59.70 percent).

Worse, the revised results show that manufacturing has been just as much of an employment laggard during this recovery than previously thought. Pre-revision, the Labor Department reported that overall private sector employment fell by 8.785 million from the December, 2007 onset of the last recession through its own February, 2010 bottom. These figures also pegged private sector jobs gains as 20.608 million from that low point through last December.

The revised private sector figures are 8.794 million jobs lost during the recession and its immediate aftermath, and 20.533 million regained through December. The January results pushed the jobs rebound figure up to 20.829 million.

On the pay front, the revisions show that manufacturing wages during the current recovery have actually risen slightly faster than previously reported, but that the gap with overall private sector wages actually widened.

First, the new monthly numbers. Pre-inflation hourly pay in manufacturing sank by 0.44 percent sequentially in January – the worst such performance since May, 2012’s 0.62 percent monthly drop. This decline greatly overshadowed the upward revision in December’s current dollar manufacturing wage improvement from 0.26 percent to 0.33 percent.

The overall private sector didn’t enjoy a great wage month in January, either: Pre-inflation hourly pay increased sequentially by only 0.11 percent – its worst such performance since October, 2017’s 0.15 percent decline. In addition, December’s monthly gain was revised down from 0.40 percent to 0.36 percent. But these latest results still beat manufacturing’s.

The January drop-off depressed manufacturing’s year-on-year pre-inflation wage gains down to 1.38 percent – the weakest such advance since February, 2015’s 1.25 percent. But the upward December monthly revisions did push that month’s annual increase up from 1.98 percent to 2.02 percent.

By contrast, the revisions increased December’s yearly current dollar private sector wage gain from 3.15 percent to 3.34 percent – the best since April, 2009’s 3.42 percent. January’s annual increase was 3.18 percent – also much better than manufacturing’s.

The new revisions improve manufacturing’s wage performance throughout the recovery, but not by much. Previously, such hourly pay was reported to have risen only by 18.60 percent from the expansion’s June, 2009 onset through December. Now that increase is judged to have been 18.72 percent, but the January monthly drop dragged down the new cumulative figure to 18.20 percent.

But from mid-2009 through December, pre-inflation hourly wages for the overall private sector also rose faster than previously thought – by 24.35 percent rather than 24.21 percent. As a result, the gap between the two widened, with private sector wages having increased by 30.07 percent faster than manufacturing wages during this period, not the 29.68 percent originally reported.

And the January numbers broaden the gap still further – to 34.50 percent.

The January inflation-adjusted wage figures won’t be out till later this month, but they don’t favor manufacturing, either, especially over the longer run.

In real terms, December’s monthly manufacturing wage increase has been upgraded from 0.28 percent to 0.37 percent, but the November results are literally a mirror image. They’ve been revised down from a 0.37 percent improvement to 0.28 percent.

The overall private sector’s after-inflation December wage gains have been revised down, too – from 0.46 percent to 0.37 percent. It’s 0.19 percent November advance was left unchanged.

On an annual basis, the new revisions still leave manufacturing’s December real wage gains at zero. At least that represented an improvement over the previous annual decrease of 0.28 percent. The overall private sector’s performance was upgraded from 1.12 percent to 1.30 percent – its best such results since 2015’s 1.82 percent.

The story is scarcely better for manufacturing when extended to the entire recovery. As with current-dollar wages, constant-dollar wage growth during this period was revised up – from 0.75 percent to 0.84 percent. The real private sector wage increase was upgraded, too – from 5.43 percent to 5.63 percent. So the real wage performance gap widened actually decreased – from 7.24 to 1 to 6.70 to 1.

Nonetheless, manufacturing remains in a real wage recession.  After-inflation hourly pay is down 0.09 percent on net since February, 2017. 

 

(What’s Left of) Our Economy: It’s Still the Same Old Story – No Tariff Damage to U.S. Manufacturing’s in Sight

Tags

China tariffs, Jobs, Labor Department, Mainstream Media, manufacturing, metals tariffs, metals-using industries, tariffs, Trade, Trump, {What's Left of) Our Economy

At this stage, despite what you read in the Mainstream Media, it would be genuinely newsy to report that official U.S. government data were indeed showing any significant damage to domestic manufacturing from the President Trump’s tariffs. Figures showing no significant damage at all from either the levies on steel and aluminum, or on products from China? They’ve become old hat, and this morning’s Labor Department report on the job market for January was no exception.

As of this January data, we now have ten months’ worth of statistics shedding lots of light on whether the metals tariffs have harmed the country’s metals-using industries. As you’ll recall, a main argument against the metals tariffs held that because the metals-using sectors were much larger, even if the levies helped steel and aluminum makers, they’d become an exercise in cutting one’s nose off to spite one’s face. For the number of workers and factories hurt by higher costs for a key material would far outnumber those helped by more expensive steel and aluminum.

Nonetheless, the January jobs report shows once again that nothing of the kind is happening. Indeed, as the table below makes clear, most of the country’s main metals-using manufacturing industries keep outperforming the rest of manufacturing. And some are creating jobs at a faster pace than the private sector overall.

And the laggards? Automotive is unmistakably gaining momentum, and household appliances are still experiencing the effects not only of metals tariffs, but of narrower tariffs on household laundry machines, and of a slumping housing sector.

                                                         Old thru Dec.    New thru Dec.     Thru Jan.

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

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

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

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

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

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

household appliances:                     not available      -2.21 percent    not available

aerospace products & parts:            not available     +5.51 percent     not available

But maybe the story is different for the China tariffs? Here the picture is fuzzier, both because the first tranche has only been in place since early July, and because the jobs data doesn’t match up that well with the categories of products tariff-ed in that first group (except for farm machinery and equipment). In addition, most of these categories are too narrow to show up in the Labor Department interactive data bases without a one-month lag. But the numbers below, which represent major manufacturing sectors that contain the tariff-ed goods, don’t show much tariff-related damage on the employment front since (and including) July.

As has been the case during this period, some industries have outperformed; others have under-performed. The resulting takeaway? Lots of factors other than China tariffs are affecting payrolls in these manufacturing segments.

                                                             July-December                     July-January

overall manufacturing                         +0.80 percent                      +0.91 percent

aircraft engines and engine parts:       +0.58 percent                       not available

industrial heating equipment:             +1.12 percent                       not available

oil and gas drilling platform parts:     +2.71 percent                       not available

farm machinery and equipment:        +0.20 percent                       not available

ball bearings:                                     +1.05 percent                       not available

But although the coverage of the Trump tariffs has stubbornly remained an exercise in gloom-mongering in the face of increasingly overwhelming evidence (here’s just one recent leading example), one reason for hope can be identified. Maybe the gulf between the trade reporting and the trade facts simply results from inherent argumentativeness and contrarianism – the kind that’s often seen in teenagers. If I’m right, the minute the tariff data becomes bad, the Mainstream Media will start serving up anecdotes about plucky exceptions to the rule.

 

(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

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an economy built to last, business investment, capex, CBO, Congressional Budget Office, debt, Financial Crisis, GDP, growth, manufacturing, NABE, National Association of Business Economics, tariffs, Tax Cuts and Job Act, Trade, {What's Left of) Our Economy

For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

“encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

(What’s Left of) Our Economy: Why Economics and Business Reporting Needs More Context, Too

Tags

aluminum, automotive, Fiat Chrysler, Ford, General Motors, GM, journalism, metals tariffs, profits, steel, tariffs, Trade, {What's Left of) Our Economy

It’s my fervent hope that journalists and their audiences learned a valuable lesson about context from this past weekend’s firestorm about the confrontation on the National Mall between a group of mainly white Catholic high school kids on the one hand, and some Native American and African American protesters. One test of whether the need to avoid rushing to judgment based on limited information really has sunk in will be stories about the impact of President Trump’s metals tariffs on the U.S. auto industry.

So far, the coverage has stressed that the levies, which to some extent, for some period of time, raise the cost of the steel and aluminum for auto-makers, have been major headwinds for the sector. And that’s certainly been the message sent by the industry itself. But there’s also no doubt that other key data, representing that crucial context, have gone missing, and these omissions have significantly distorted the picture being presented.

The key statistic that’s been emphasized is the $1 billion in increased 2018 costs claimed by both General Motors (GM) and Ford due to higher metals prices. Which of course sounds like a lot of money. (Fiat Chrysler, the third of the “Detroit 3” auto-makers, has said that because of its use of fixed contracts, its metals prices were largely unaffected last year, but could cost it an extra $300-$350 million this year.)

But the $1 billion figure doesn’t exist in isolation. It needs to be compared with the total costs these companies pay to run their operations. And when that rudimentary calculation is performed, the $1 billion looks pretty unimpressive.

After all, GM’s total costs and expenses in the third quarter of 2018 (the latest data available) topped $34 billion. Its total costs for the year’s first two quarters exceeded $32 billion. (See here and here.) So if the fourth quarter winds up in that ballpark, GM’s 2018 costs will be nearly $130 billion. Which doesn’t make the $1 billion in extra metals costs look very big at all. Ford’s costs, incidentally, were running even higher than GM’s for the first nine months of 2018.  (See the quarterly earnings reports listed here.) 

The extra metals costs look much more important compared with the profits of these companies. Through the third quarter of last year, GM’s operating profits were $7.50 billion. Its guidance for the fourth quarter and for this year is even better. Nonetheless, a company with nearly $130 billion in total annual costs would seem to have plenty of opportunities to generate savings to offset higher steel prices.

Ford’s operating profits so far in 2018 have been lower than GM’s (just under $5.2 billion).  But its costs have been higher, so it’s hard to finger the metals tariffs as its strongest 2018 headwind.

If President Trump imposes tariffs on vehicles and auto parts from much of the rest of the world, the Detroit 3 could definitely have a tougher slog this year. But that point is irrelevant to the impact of the metals tariffs last year.

Will the business and economics press present a fuller picture going forward? General Motors is expected to announce fourth quarter and full-year 2018 earnings on February 6. Ford’s is coming up tomorrow. Stay tuned!