(What’s Left of) Our Economy: The Real Message Behind the New U.S. Inflation Figures

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bubbles, consumer price index, core PCE, CPI, energy, Federal Reserve, inflation, Jerome Powell, monetary policy, PCE, personal consumption, personal consumption expenditures index, productivity, recession, {What's Left of) Our Economy

There – that wasn’t so hard, was it? Meaning that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge. Elected officials (or dictators) can cut public spending, monetary authorities like America’s Federal Reserve can tighten monetary policy, and voila. Receiving less financial juice, consumers stop consuming so much, businesses stop investing and hiring so robustly, and the lower level of economic activity begins depriving sellers of pricing power – at least if they want to keep their sales up. 

Moreover, these governments can enjoy the benefits of a venerable economic adage: an effective cure for high prices is high prices. That is, at some point, regardless of government policies, goods and services begin getting unaffordable. So businesses and consumers alike don’t buy so much of them, and the reduced demand also forces sellers that want to keep sales up to start marking them down.

At least that’s a message that’s easy to take away from the today’s new official report on U.S. “Personal Income and Outlays,” which, as usual, contains data on price increases and consumer spending, and which shows a softening in both.

Before delving into the specifics, however, it’s important to point out that (1) less economic activity means less prosperity – and in many instanaces can mean much worse – for most of the population; and (2), the higher inflation has become, the more belt tightening is needed, and the more economic suffering must be imposed, in order to bring it to levels considered acceptable. And since the new, better numbers from Washington still reveal price increases near multi-decade highs, it figures that returning to satisfactory inflation will require many Americans to experience significantly more economic pain.

In other words, the “soft landing” that Fed officials in particular describe as the goal of their anti-inflation policy – that is, taming inflation while still fostering some growth – still looks like much less than a sure bet. Even Fed Chair Jerome Powell acknowledges this.

Powell and many others insist that even if the landing is hard, the anti-inflation medicine will be necessary, since, in his words, “Economies don’t work without price stability.” Often they add that the steps necessary to defeat inflation will also help cure the economy of its long-time addiction to bubble-ized growth – that is, prosperity based on credit conditions that are kept way too loose, that deprive producers of the market-based disciplines needed to keep prosperity sustained, and that in fact spur so many bad and even reckless choices by all economic actors that they inevitably end in torrents of tears.

I’m sympathetic to these arguments, but the main point here is that killing off inflation per se has always been first and foremost a matter of will – which has clearly been lacking for too long. Avoiding recession, conversely, is no great accomplishment, either: Just keep inflating bubbles with easy money. It’s fostering soundly based, sustainable growth that’s been the challenge that American leaders have long failed to meet.

As for the specifics, let’s start with the inflation figures contained in today’s report from the Commerce Department. They’re somewhat different from the more widely covered Consumer Price Index (CPI) tracked by the Labor Department, but this Personal Consumption Expenditures (PCE) price index matters a lot because it’s the inflation measure favored by the Fed, which has major inflation-fighting responsibilities.

On a monthly basis, “headline” PCE inflation (the broadest measure) bounced up from April’s 0.2 percent (the weakest such figure since the flatlline of November, 2020) to 0.6 percent (the worst such figure since March’s 0.9 percent). The “core” figure (which strips out food and energy prices supposedly because they’re volatile for reason largely unrelated to the economy’s fundamental vulnerability to inflation), increased sequentially in May by 0.3 percent for the fourth straight month. Those are the smallest such increases since September, 2020’s 0.2 percent.

These results are one sign that spending has fallen off enough to prevent still strong energy inflation from bleeding over into the rest of the economy – just about all of which uses energy as a key input. And indeed, the new Commerce release reports that adjusting for inflation, personal consumption fell on month (by 0.4 percent) for the first time since last December (1.4 percent).

As known by RealityChek regulars, the annual rates of change are usually more important than the monthly, because they gauge developments over longer time periods and are therefore less likely to be thrown off by short-term developments or sheer statistical randomness. And encouragingly, they tell a similar story. The headline annual PCE inflation rate of 6.3 percent was the same as April’s, and lower than March’s 6.6 percent. Annual core PCE inflation dropped to 4.7 percent from April’s 4.9 percent and hit its lowest level since last November’s 4.7 percent – another sign that because consumers have pulled back, hot inflation in energy isn’t stoking ever stronger price rises elsewhere.

No one could reasonably call today’s inflation report “good” – especially since the baseline effect (which RealityChek readers know throughout 2021 produced annual inflation rates that were unusually high because of a catch-up effect from the unusually low inflation results of 2020) is gone. In other words, price increases much higher than the Fed’s two percent target rate are persisting.

But to this point, anyway, these increases aren’t coming faster – which is crucial because one reason inflation is so feared is its tendency to feed upon itself.

As pointed out above, though, weakening inflation by tanking the economy is no great triumph of economic policy. Worse, it’s all too easy to conclude from recent history that, even though a recession hasn’t officially arrived, once it does, most politicians will rev up the spending engines again, and (successfully) pressure the Fed to at least stop the tightening. And inflation will take off again. 

There’s a much better inflation-fighting alternative that’s available, at least in principle:  Increase the nation’s sagging productivity growth.  Boosting business’ efficiency enables companies to deal with cost increases — including wage hikes — without passing them on to consumers.  But a productivity rebound seems nowhere in sight, seemingly leaving the nation stuck in a pattern of blowing up bubbles to achieve periods of acceptable growth and employment, popping them at least occasionally to keep prices in check, and hoping the whole Ponzi scheme can somehow continue indefinitely.  

(What’s Left of) Our Economy: Continued Worsening Both for America’s Growth and its Trade Deficit

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exports, GDP, goods trade, gross domestic product, imports, inflation, real GDP, real trade deficit, recession, services trade, Trade, trade deficit, {What's Left of) Our Economy

The final (for now) official U.S. report on the change in the economy’s output (gross domestic product, or GDP) during the first quarter of this year came in this morning, and just as the estimates of sequential shrinkage have gotten slightly worse since the initial read two months ago, so did the estimates of the nation’s trade deficit. As known by RealityChek regulars, that’s one of the worst combinations of economic data possible.   

And although the growth-cutting impact of these swelling trade shortfalls remained unrevised from the 3.23 percentage points recorded in the previous GDP read, it’s still bigger than the 3.20 percentage points estimated in the initial release, and sizable by any measure. Indeed, it was big enough to represent the difference between quarterly growth and quarterly contraction.

First, the overall GDP results. The Commerce Department now judges the economy to have shriveled by 1.58 percent at annual rates after adjusting for inflation. (The measure most widely followed.) That’s worse than both the second estimate (a 1.52 percent decline) and the first read (1.42 percent). This confirmation of first quarter contraction, moreover, means that the economy has now officially proceeded halfway toward a recession according to the most common definition: two straight quarters of real GDP decreases.

The trade gap has widened similarly – from the initially reported inflation adjusted and annualized $1.5417 trillion to $1.5435 trillion to today’s $1.5447 trillion.

This total amounts to a new all-time quarterly high, and the seventh straight such record registered. The real growth bite of this deficit wasn’t a record in absolute terms. That distinction belongs to the third quarter of 2020. But that period’s 3.25 percentage point hit to inflation-adjusted GDP came in the context of that quarter’s roaring comeback from the short but deep CCP Virus-induced downturn from earlier that spring. So the trade deficit’s impact was barely noticed.

Without such a big (14.41 percent) sequential jump in the trade deficit, the economy would have expanded by 1.65 percent at real annual rates in the first quarter – no great shakes by any means, but certainly better than a slump.

In addition, on a relative basis, the 3.23 percentage point drag on first quarter growth stayed the biggest ever – slightl eclipsing the 3.22 percent drag on the 1.53 percent total real GDP contraction way back in the second quarter of 1982.

Moreover, the quarter-to-quarter swing in the trade gap’s growth impact – from a 0.23 percentage point hit during the fourth quarter – was the biggest since mid-2020, when the 1.53 percentage point boost to growth in the second quarter became a 3.25 percentage point subtraction in the third quarter.

And for good measure, the sequential swing in the trade gap’s absolute growth impact between the fourth quarter of 2020 – when a small worsening of the inflation-adjusted trade deficit subtracted just 0.23 percentage points from growth – to the first quarter remained the biggest since mid-2020. Then, a percentage point boost to growth in the second quarter became a 3.25 percentage point subtraction in the third quarter. But again, that latter figure came during a quarter of 30.19 percent annualized constant dollar growth!

The newest increase in the price-adjusted quarterly trade deficit also generated a new record in terms of its share of the overall economy. As of today, the real trade gap represents 7.83 percent of inflation-adjusted GDP – compared with the 7.82 percent calculable last month.

One bottom line: The after-inflation trade deficit is now 82.24 percent higher than in the fourth quarter of 2019 – the last quarter before the CCP Virus’ arrival began seriously affecting and especially distorting the economy. That’s not so far from a doubling.

Today’s GDP report showed that total inflation-adjusted exports fared a little better in the first quarter than first estimated. The new $2.3613 trillion inflation-adjusted annualized figure is 0.15 percent higher than the second read’s and 0.29 percent above the first’s.

Yet these overseas sales are still down 1.23 percent from last year’s fourth quarter and fell sequentially for the fourth time in the nine quarters that have passed since the first pandemic-affected quarter (the first quarter of 2020). Further, these exports are still 7.52 percent lower than immediately before the virus’ arrival in force, in the last quarter of 2019.

The total first quarter real imports numbers, however, have continued to rise, too. This morning’s constant dollar annualized figure of $3.9060 trillion was up 0.12 percent from the second read and 0.25 percent from the first.

As a result, the first quarter remains the new record-holder for quarterly total after-inflation imports, and the all-time high is still the fifth in a row. The sequential increase of 4.42 percent, moreover, is still the biggest since the 17.29 percent explosion between those second and third quarters of 2020, and total price-adjusted imports are now up 14.85 percent since that last pre-pandemic fourth quarter of 2019.

Interestingly, the new GDP report also confirmed that the nation’s trade in goods has been improving modestly while trade in services – not only the economy’s biggest sector, but the one hit hardest by the pandemic – has been deteriorating.

In this vein, the final estimate of the real goods trade deficit came in at $1.6572 trillion at annual rates. That figure is 0.65 percent smaller than that in the second GDP report, and 0.68 percent less than the initial result.

At the same time, the new total is still a seventh straight record, and the increase of 12.88 percent over the $1.4681 trillion gap reported for the fourth quarter of last year remained the biggest sequential increase since the 20.40 percent surge between the second and third quarters of pandemic-ridden 2020. Moreover, the new first quarter total is 54.68 percent higher than the $1.0714 trillion during the fourth quarter of 2019 – the last data quarter before the CCP Virus began playing havoc with the economy and economic data.

By contrast, the new estimate shows that the chronic U.S. services trade surplus keeps decreasing. The latest figure for the first quarter – $109.3 billion in real terms at annual rates – was fully 8.15 percent lower than the second estimate and 9.59 percent smaller than the first. Due to this third estimate, the services surplus fell by 9.88 percent from the fourth quarter’s $120.1 billion real annualized total, and has been cut by more than half (51.79 percent) from its $226.7 billion level in the immediate pre-pandemic fourth quarter of 2019.

The goods and services trade divergence has marked both the export and import performances comprising the above trade balance figures. For goods exports, the final estimate for the first quarter ($1.7577 trillion annualized and adjusted for inflation) was up 0.33 percent from the second estimate and 0.54 percent from the first.

But real goods exports still dropped by 1.97 percent between the last quarter of 2019 and the first of 2022, this sequential fall-off (like that for total real exports) remains the fourth in the nine pandemic-affected quarters, and it’s still the biggest such decrease since that registered between the first and second quarters of pandemic-y 2020 (23.08 percent). And since the fourth quarter of 2019, goods exports are still off by 1.39 percent.

By contrast, constant dollar goods imports results have come down during the first quarter – though not in a straight line. The new total of $3.4149 trillion on a real, annualized basis is 0.15 percent below the second read but just 0.05 percent below the first.

Today’s real goods imports figure, though, was also the second straight all-time high and a 4.72 percent increase over the fourth quarter figure – the greatest sequential increase since the 6.80 percent rise in the fourth quarter of 2020. These imports, moreover, are now 19.66 percent above their fourth quarter, 2019 level.

The after-inflation services exports estimates, however, kept weakening in the first quarter GDP reports. The $631.5 billion real annualized total reported today was a 0.61 percent improvement over the fourth quarter’s $627.7 billion, the second straight quarterly gain, and the best quarterly result since the $695.3 billion recorded in he first quarter of 2020.

But it was down 0.28 percent from the second read and 0.33 percent from the first. and since the final pre-pandemic fourth quarter of 2019, these exports have plunged by 18.38 percent.

As for the price-adjusted services imports estimate, it grew quickly in the first quarter. The third read of $522.2 billion at price-adjusted annual rates is 1.54 percent higher than the second and 1.85 percent above the first. And these purchases were 2.88 percent higher than the fourth quarter total.

This final (for now!) first quarter after-inflation services imports figure is the highest since the $547 billion figure for the fourth quarter of 2019. But since then, these purchases have sagged by 4.53 percent.

A glass-half-full type might point out that this final first quarter GDP report — and the last few official monthly trade releases, might represent peak trade deficit for the United States.  But a glass-half-empty type tight counter that the main reason could be an economic slowdown and possibly imminent recession that would primarily — and finally — depress Americans’ importing and other spending. That’s hardly the ideal formula for narrowing the trade gap and indebtedness it fuels.  But it’s one that seems unavoidable for now.         

(What’s Left of) Our Economy: Revisions Take U.S. Manufacturing’s Solid Pandemic-Era Performance Down a Notch

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aerospace, aircraft, aircraft parts, apparel, appliances, CCP Virus, chemicals, computer and electronics products, coronavirus, COVID 19, durable goods, electrical components, electrical equipment, fabricated metal products, Federal Reserve, furniture, inflation-adjusted output, machinery, manufacturing, medical devices, miscellaneous durable goods, miscellaneous nondurable goods, nondurable goods, nonmetallic mineral products, paper, petroleum and coal products, pharmaceuticals, plastics and rubber products, printing, real growth, recession, semiconductors, textiles, wood products, Wuhan virus, {What's Left of) Our Economy

Sharp-eyed RealityChek readers have no doubt noticed my habit of noting that “final” versions of official U.S. economic data are typically final only “for now.” That’s because Washington’s statistics gathering agencies, to their credit, look back regularly on several years’ worth of figures to see where updates are needed because new information has come in, and this morning, the Federal Reserve released its own such “benchmark” revision of its manufacturing production data.

The results don’t contain any earthshaking changes, but they do alter the picture of domestic industry’s inflation-adjusted growth during the pandemic period, as well as of the performance of specific sectors, in non-trivial ways.

The main bottom lines: First, the Fed previously estimated that U.S.-based manufacturers had increased their constant dollar production from February, 2020 (the month before the CCP Virus’ arrival in force began roiling the entire American economy) through last month, by 4.94 percent. Today, the Fed told us that the advance was just 4.12 percent.

Second, as a result, domestic industry has further to go in real terms to recover its all-time high than the central bank had judged. As of the last regular monthly industrial production increase, U.S.-based manufacturing was 2.41 percent smaller after inflation than in December, 2007 – still its peak. But the new figures show that these manufacturers are still three percent behind the after-inflation output eight-ball.

Third, and especially interesting given the recent, significant U.S. growth slowdown and distinct possibility of a recession before too long, the revisions add (though just slightly) to the evidence that the overall economy’s woes this year are indeed beginning to affect manufacturing. Before the revision, the Fed judged that real manufacturing output had expanded by 2.68 percent between last December and this May, and slipped by 0.07 percent between April and May. The new figures: 2.46 percent and -0.22 percent, respectively.

The virus-era downward revisions affected durable goods and nondurable goods industries alike. The previous price-adjusted growth figure for the former during the pandemic period was 6.31 percent. Now it’s pegged at 5.18 percent. For the latter, the downgrade was from 3.42 percent to 2.99 percent.

Before the revisions, of the twenty broadest sub-sectors of manufacturing tracked by the Fed, only five suffered inflation-adjusted production declines from immediate pre-pandemic-y February, 2020 through this May, and all were found in the nondurables super-category. They were miscellaneous non-durable goods (down 11.43 percent), textiles (down 3.80 percent), paper (2.33 percent), printing and related activities (1.89 percent), and petroleum and coal products (1.21 percent).

The new data show that the number of growth losers has expanded to eight;. Four sectors were added: fabricated metals products (down 1.30 percent), nonmetallic mineral products (1.06 percent), apparel and leather goods (off by 0.59 percent), and furniture and related products (0.17 percent). And petroleum and coal products’ contant dollar production was upgraded from a 1.21 percent decrease during the pandemic period to a 2.96 percent gain.

The names on the list of top five pandemic period growers remained the same, with after-inflation production actually improving in aerospace and miscellaneous transportation (from 18.99 percent to 19.69 percent), miscellaneous durable goods (from 11.41 percent to 12.43 percent), and machinery (from 6.29 percent to 6.52 percent). But real production gains were revised down in computer and electronics products (from 10.42 percent to 7.38 percent), and chemicals (from 8.48 percent to 7.55 percent).

In absolute tems, the biggest price-adjusted output upgrades were registered in miscellaneous nondurable goods (from an 11.43 pecent nosedive to a smaller drop of 7.56 percent), electrical equipment, appliances and components (from a 2.19 percent rise to one of 4.95 percent), the aforementioned petroleum and coal products sector, wood products (from a 5.24 percent increase to 6.45 percent), and plastics and rubber products (from 1.78 percent growth to 2.76 percent).

The biggest real production downgrades came in the printing sector (all the way from a 1.89 percent inflation-adjusted output shrinkage to one of 9.52 percent), apparel and leather goods (from a 4.59 percent real production rise to a 0.59 percent dip), nonmetallic mineral products (from 2.58 percent price-adjusted growth to a 1.06 percent decline), and the aforementioned computer and electronics product sector.

RealityChek has been following with special interest narrower sectors that have attracted unusual attention since the CCP Virus arrived, and the new industrial production revision shows that constant dollar output climbed by more than previously estimated in aircraft and parts (24.89 percent versus 19.08 percent) and medical equipment and supplies (14.48 percent versus 11.51 percent), and by less in semiconductors and other electronic components (22.48 percent versus 23.82 percent) and in pharmaceuticals and medicine (12.79 percent versus 14.78 percent).

These Fed revisions are hardly a reason to push the panic button about U.S. manufacturing. But because domestic industry’s fortunes during the pandemic era have been so closely tied to blazing hot demand for its products, it’s hardly great news to learn that with signs abounding of a slumping American economy, manufacturing is approaching this apparent downturn in less robust shape than thought as late as yesterday.   

(What’s Left of) Our Economy: You Bet that Mass Immigration Makes America Less Productive

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amnesty, Bureau of Labor Statistics, construction, demand, Donald Trump, economics, Forward.us, hotels, illegal aliens, immigrants, Immigration, labor productivity, productivity, restaurants, supply, total factor productivity, wages, {What's Left of) Our Economy

An archetypical Washington, D.C. swamp denizen thought he caught me with my accuracy pants down the other day. Last Sunday’s post restated a point I’ve made repeatedly – that when countries let in too many immigrants, their economies tend to suffer lasting damage because businesses lose their incentives to improve their productivity – the best recipe for raising living standards on a sustainable, and not bubble-ized basis, as well as for boosting employment on net by fostering more business for most existing industries and enabling the creation of entirely new industries.

The reason mass immigration kneecaps productivity growth? Employers never need to respond to rising wages caused by labor shortages by buying labor-saving machinery and technology or otherwise boost their efficiency. Instead, they continue the much easier and cheaper approach of hiring workers whose pay remains meager because immigrants keep swelling the workforce.

It’s a point, as I’ve noted, strongly supported by economic theory and, more important, by evidence. But Todd Schulte, who heads a Washington, D.C.-based lobby group called Forward.us, wasn’t buying it. According to Schulte, whose organization was founded by tech companies like Facebook with strong vested interests in keeping U.S. wages low, “the decade of actual [U.S.] productivity increases came directly after the 1986 legalization AND 1990 legal immigration expansion!”

He continued on Twitter, “giving people legal status and… expanding legal immigration absolutely has not harmed productivity in the last few decades in the US.”

So I decided to dive deeper into the official U.S. data, and what I found was that although there are bigger gaps in the productivity numbers than I’d like to see, there’s (1) no evidence that high immigration levels following the 1986 amnesty granted by Washington to illegal immigrants and the resulting immigration increase mentioned by Schulte improved the national productivity picture over the pre-amnesty period; and (2) there’s lots of evidence that subsequent strong inflows of illegal immigrants (who Schulte and his bosses would like to see amnestied) have dragged big-time on productivity growth.

First, let’s examine the productivity of the pre-1986 amnesty decades, which provides the crucial context that Schulte’s claim overlooks.

According to U.S. Bureau of Labor Statistics figures, during the 1950s, a very low immigration decade (as shown by the chart below), labor productivity grew by an average of 2.63 percent annually. Significantly, this timespan includes two recessions, when productivity normally falls or grows unusually slowly.

Figure 1. Size and Share of the Foreign-Born Population in the United States, 1850-2019

During the 1960s expansion (i.e., a period with no recessions), when immigration levels were also low, the rate of labor productivity growth sped up to an annual average of 3.26 percent.

The 1970s were another low immigration decade, and average labor productivity growth sank to 1.87 percent. But as I and many other readers are old enough to remember, the 1970s were a terrible economic decade, plagued overall by stagflation. So it’s tough to connect its poor productivity performance with its immigration levels.

Now we come to the 1980s. Its expansion (and as known by RealityChek regulars, comparing economic performance during like periods in a business cycle produces the most valid results), lasted from December, 1982 to July, 1990, and saw average annual labor productivity growth bounce back to 2.24 percent.

As noted by Schulte, immigration policy changed dramatically in 1986, and as the above chart makes clear, the actual immigant population took off.

But did labor productivity growth take off, too? As that used car commercial would put it, “Not exactly.” From the expansion’s start in the first quarter of 1982 to the fourth quarter of 1986 (the amnesty bill became law in November), labor productivity growth totalled 10.96 percent. But from the first quarter of 1987 to the third quarter of 1990 (the expansion’s end), the total labor productivity increase had slowed – to 5.76 percent.

The 1980s are important for two other reasons as well. Nineteen eighty-seven is when the Bureau of Labor Statistics began collecting labor productivity data for many U.S. industries, and when it began tracking productivity according to a broader measure – total factor productivity, which tries to measure efficiency gains resulting from a wide range of inputs other than hours put in by workers.

There’s no labor productivity data kept for construction (an illegal immigrant-heavy sector whose poor productivity performance is admitted by the sector itself). But these figures do exist for another broad sector heavily reliant on illegals: accommodation and food services. And from 1987 to 1990 (only annual results are available), labor productivity in these businesses increased by a total of 3.45 percent – worse than the increase for the economy as a whole.

On the total factor productivity front, between 1987 and 1990 (again, quarterly numbers aren’t available), it rose by 1.23 percent for the entire economy, for the construction industry it fell by 1.37 percent, for the accommodation sector, it fell by 2.30 percent, and for food and drinking places, it increased by 2.26 percent. So only limited evidence here that amnesty and a bigger immigrant labor pool did much for U.S. productivity.

As Schulte pointed out, the 1990s, dominated by a long expansion, were a good productivity decade for the United States, with labor productivity reaching 2.58 percent average annual growth and total factor productivity rising by 10.87 percent overall. But when it comes to labor productivity, the nineties still fell short of the 1950s (even with its two recessions) and by a wider margin of the 1960s.

But did robust immigration help? Certainly not in terms of labor productivity. In accommodation and food services, it advanced by just 0.84 percent per year on average.

Nor as measured by total factor productivity. For construction, it actually dropped overall by 4.94 percent. And although it climbed in two other big illegal immigrant-using industries, the growth was slower than for the economy as a whole (7.17 percent for accommodation and 5.17 percent for restaurants and bars).

Following an eight month recession, the economy engineered another recovery at the end of 2001 that lasted until the end of 2007. This period was marked by such high legal and illegal immigration levels that the latter felt confident enough to stage large protests (which included their supporters in the legal immigrant and immigration activist communities) demanding a series of new rights and a reduction in U.S. immigration deportation and other control policies.

Average annual labor productivity during this expansion grew somewhat faster than during its 1990s predecessor – 2.69 percent. But annual average labor productivity growth for the accommodation and food services sectors slowed to 1.19 percent, overall total factor productivity growth fell to 1.19 percent, and average annual total factor productivity changes in accommodations, restaurants, and construcion dropped as well – to 6.36 percent, 2.67 percent, and -9.08 percent, respectively.

Needless to say, productivity grows or shrinks for many different reasons. But nothing in the data show that immigration has bolstered either form of productivity, especially when.pre- and post-amnesty results are compared. In fact, since the 1990s, the greater the total immigrant population, the more both kinds of productivity growth deteriorated for industries relying heavily on illegals. And all the available figures make clear that these sectors have been serious productivity laggards to begin with.

And don’t forget the abundant indirect evidence linking productivity trends to automation – specifically, all the examples I’ve cited in last Sunday’s post and elsewhere of illegal immigrant-reliant industries automating operations ever faster — and precisely to offset the pace-setting wage increases enjoyed by the lowest income workers at least partly because former President Trump’s restrictive policies curbed immigration inflows so effectively. 

In other words, in the real world, changes in supply and demand profoundly affect prices and productivity levels – whatever hokum on the subject is concocted by special interest mouthpieces who work the Swamp World like Todd Schulte.

(What’s Left of) Our Economy: Will Inflation and a Hawkish Fed Finally Undermine U.S. Manufacturing?

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aerospace, aircraft, aircraft parts, appliances, automotive, capital spending, CCP Virus, coronavirus, COVID 19, electrical components, electrical equipment, Federal Reserve, furniture, inflation, inflation-adjusted output, machinery, manufacturing, medical devices, medicines, non-metallic mineral products, petroleum and coal products, pharmaceuticals, real growth, semiconductor shortage, semiconductors, wood products, {What's Left of) Our Economy

The new (May) U.S. manufacturing production report from the Federal Reserve doesn’t mainly indicate that industry may be facing a crossroads because the sector’s inflation-adjusted output dropped on month for the first time since January.

Instead, it signals that a significant slowdown may lie ahead for U.S.-based manufacturers because its downbeat results dovetail with the latest humdrum manufacturing jobs report (also for May), with results of some of the latest sentiment surveys conducted by regional branches of the Fed (e.g., here), and with evidence of a rollover in spending on machinery and equipment by the entire economy (which fuels much manufacturing output and typically reflects optimism about future business prospects).

Domestic industry shrank slightly (by 0.07 percent) in real output terms month-to-month in May. On the bright side, the strong results of recent months stayed basically unrevised, and April’s very good advance was upgraded from 0.75 percent to 0.77 percent.

Still, the May results mean that real U.S. manufacturing production is now up 4.94 percent since just before the CCP Virus began roiling and distorting the American economy (February, 2020), rather than the 5.07 percent calculable from last month’s report.

May’s biggest manufacturing growth winners were:

>Petroleum and coal products, where after-inflation jumped by 2.53 percent sequentially in May. The improvement was the fourth straight, and the increase the best since February’s 2.68 percent. As a result, constant dollar production in these sectors is now 1.21 percent higher than in immediately pre-pandemic-y February, 2020;

>Non-metallic mineral products, whose 1.78 percent sequential growth in May followed an April fall-off that was revised way down from -0.67 percent to -1.72 percent. March’s 0.76 percent decrease was downgraded to a 1.29 percent retreat, but February’s sequential pop was revised down just slightly to a still outstanding 4.37 percent surge. All told, the sector has grown by 2.58 percent after inflation since February, 2020 – exactly the same result calculable from last month’s Fed release; and

>Furniture and related products, whose 1.23 percent May inflation-adjusted output rise was its first such increase since February’s, and its best since that month’s 4.96 percent surge. Moreover, the May advance comes off an April performance that was revised up from a -0.60 percent sequential dip to one of -0.12. In all, these results were enough to move real furniture production above its Februay, 2020 level – by 0.08 percent.

May’s biggest manufacturing production losers were:

>wood products, whose 2.56 percent real monthly output decline was its first decrease since January and its worst since February. 2021’s 3.65 percent. Moreover, April’s previously reported 1.13 percent advance is now estimated to have been just 0.97 percent – all of which means that constant dollar production by these companies is now 5.24 percent higher than just before the pandemic arrived, not the 7.85 percent calculable last month;

>machinery, whose May inflation-adjusted output sank by 2.14 percent – the biggest such setback since February, 2021’s 2.59 percent. As known by RealityChek readers, machinery production is one of those aforementioned indicators of capital spending because it’s sold to customers not just in manufacturing but throughout the economy.

It’s true that machinery’s revisions were mixed. April’s after-inflation production increase was upgraded all the way fom 0.85 percent to 1.69 percent – its best such performance since last July’s 2.85 percent. But March’s performance was revised down from 0.36 percent to one percent shrinkage, and February’s increase was revised up again, but only from 1.17 percent to 1.22 percent. Consequently, whereas as of last month, machinery production was 8.31 percent higher in real terms than in February, 2020, this growth is now down to 6.29 percent.

>electrical equipment, appliances and components, where real output sagged for the second consecutive month, and by a 1.83 percent that was its worst such monthly performance since February, 2021’s 2.34 percent decrease. Revisions were modest and mixed, with April’s previously reported 0.60 percent sequential drop upgraded to -0.42 percent, March’s downgraded 0.04 percent dip upgraded to a 0.19 percent gain, and February’s real output revised up again – from 2.03 percent to 2.08 percent. These moves put real growth in the sector post-February, 2020 at 2.19 percent, less than half the 5.55 percent calculable last month.

By contrast, industries that consistently have made headlines during the pandemic delivered solid May performances.

Aircraft- and aircraft parts-makers pushed their real production up 0.33 percent on month in May, achieving their fifth straight month of growth. Moreover, April’s excellent 1.67 percent sequential production increase was upgraded to 2.90 percent (the sector’s best such result since last July’s 3.44 percent), March’s estimate inched up from a hugely downgraded 0.47 percent to 0.50 percent, and the February results were upgraded again – from 1.34 percent to 1.49 percent. This good production news boosted these companies’ real output gain since immediately pre-pandemic-y 16.37 percent to 19.08 percent.

The big pharmaceuticals and medicines industry performed well in May, too, as after-inflation production increased by 0.42 percent. Revisions were overall negative but small. April’s initially reported 0.20 percent real output slip is now judged to be a0.15 percent gain, but March’s upwardly revised 1.23 percent increase is now pegged at only 0.32 percent, and February’s downwardly revised 0.96 percent constant dollar output drop revised up to -0.86 percent. All told, inflation-adjusted growth in the pharmaceuticals and medicines sector is now up 14.78 percent since February, 2020, as opposed to the 14.64 percent increase calculable last month.

Medical equipment and supplies firms fared even better, as their 1.44 percent monthly real output growth in May (their fifth straight advance) was their best such result since February, 2021’s 1.53 percent. Revisions were positive, too. April’s previously recorded 0.06 percent dip is now estimated as a 0.51 percent increase, March’s downgraded 1.28 percent figure was upgraded to 1.41 percent, and February’s 1.46 percent improvement now stands at 1.53 percent. These sectors are now 11.51 percent bigger in terms of constant dollar output than they were just before the CCP Virus arrived in force – a nice improvement from the 8.92 percent figure calculable last month.

May also saw a production bounceback in the shortage-plagued semiconductor industry. Its inflation-adjusted production climbed 0.52 percent on month, but April’s previously reported 1.85 percent drop – its worst such performance since last June’s 1.62 percent – is now judged to be a 2.25 percent decline. At least the March and February results received small upgrades – the former’s improving from a previously downgraded 1.83 percent rise to 1.92 percent, and February’s upgraded growth of 2.91 percent now estimated at 2.96 percent. The post-February, 2020 bottom line: After-inflation semiconductor production is now 23.82 percent higher, not the 23.38 pecent increase calculable last month.

And since the automotive industry’s ups and downs have been so crucial to domestic manufacturing’s ups and downs during the pandemic era, it’s worth noting its 0.70 percent monthly price-adjusted output growth in May.

Revisions overall were negative. April’s previously reported 3.92 percent constant dollar production growth was revised down to 3.34 percent, March’s 8.28 percent burst was upgraded to 8.99 percent (the best such result since last October’s 10.64 percent jump), and February’s previously upgraded 3.86 percent inflation-adjusted production decrease was downgraded to a 4.24 percent plunge.

But given that motor vehicle- and parts-makers are still dealing with the aforementioned semiconductor shortage, these numbers look impressive, and real automotive output is now 1.17 percent greater than in pre-pandemic-y February, 2020, as opposed to the 0.77 percent increase calculable last month.

Domestic manufacturing has overcome so many obstacles since the CCP Virus’ arrival that counting it out in growth terms could still be premature. But an obstacle that it hasn’t faced since the pandemic-induced downturn have s looming again — a major economy-wide slowdown and possible recession that could result from monetary tightening announced by the Federal Reserve to fight torrid inflation.  And with the world economy likely to stay sluggish as well and limit export opportunities (see, e.g., here), the possibility that industry’s winning streak finally ends can’t be dismissed out of hand.  

(What’s Left of) Our Economy: Will Americans Need “That Seventies Show” to Tame Inflation?

Tags

consumer price index, consumers, CPI, demand, economics, elasticity, energy, Federal Reserve, food, inflation, interest rates, Jerome Powell, monetary policy, Paul A. Volcker, recession, retail sales, supply, {What's Left of) Our Economy

I haven’t commented much in detail on dccisions by the Federal Reserve to fight inflation, mainly because they’re so thooughly covered in the press. But yesterday’s announcement by the central bank that it would raise the short-term interest rate it controls by an amount not matched in nearly thirty years could loom especially large over the nation’s economic future, and some of its ramifications deserve more attention than they’ve received.

First, as widely noted, the Fed could be tightening monetary policy – in an effort to slow and eventually reverse price increases by slowing economic activity – even though a recession sooner rather than later looks likely. In fact, the timing of yesterday’s interest rate hike and seemingly solid assurances that increases will continue for the foreseeable future may be even stranger, because the recession may already be here.

Some important signs:  Yesterday also saw the release of a Census Bureau report indicating that U.S. retail sales dipped on a monthly basis in May.  If this result holds (and we’ll find out on July 15), that would mark the first such decrease since December, and the news would be ominous given the dominant role played by personal spending in the American economy. 

In addition, on top of the economy’s shrinkage during the first quarter of this year, a well regarded source of forecasts on the path of the gross domestic product (GDP – economist’s main measure of the economy’s size and how it changes) is predicting no growth whatever in the second quarter. That result would enable the nation to skirt a recession according to one popular definition of the term holding that such slumps only occur when GDP adjusted for inflation falls for two consecutive quarters.

At the same time, a flat-line real GDP for the second quarter would mean that, on a cumulative basis, the economy has contracted over a two-quarter stretch. That sounds like a pretty good approximation of a recession to me. In fact, this cumulative shrinkage could still take place even if after-inflation GDP eaks out a small gain between April and June. (We’ll get the first official read on the subject on July 28.)

And maybe more important, when it comes to the lives of most Americans, what’s the difference between a recession (especially if it’s modest) and very slow growth? Indeed, for the record, the Fed itself yesterday lowered its own projection for real U.S. growth for this entire year from 2.8 percent to 1.7 percent.

Second, examining the Fed’s inflation-fighting record during the late-1970s – which it’s also been widely noted bears some strong resemblances to the present – raises immense questions regarding the central bank’s chances of making major inflation progress without triggering a recession that would be anything but modest.

In case you’re not old enough to remember that historical episode, inflation was actually higher during the late-1970s, and also stemmed partly a combination of oil price shocks generated by overseas events plus a development that’s too often ignored nowadays – a substantial deterioration in the nation’s international financial position. Though this current account deficit back then was tiny by today’s standards, it had just become a noteworthy shortfall as a share of GDP after years of small surplus or balance, and was broadly interpreted as a sign that Americans’s spending was spinning out of control (You’ll find a great account of this period here.)

As current Fed Chair Jerome Powell is fond of recalling, that towering late-1970s inflation was broken mainly by the steadfastness of that period’s Chair, Paul A. Volcker – who raised interest rates to levels that were as astronomical as they were wholly unprecedented. But although Volcker took the helm of the Fed when inflation (as measured by the headline Consumer Price Index, or CPI) wasn’t that much higher than today’s rates, it took a near-doubling of these rates from levels that also were much higher than today’s to bring price increases down to acceptable levels, and even this effort took three and a half years and dragged the economy into not just one, but two recessions – and severe ones at that. (My sources for the interest rate infomation is here. For the inflation and growth data, I’ve relied on the official government data tables I always use.)

Specifically, on Volcker’s first day as Fed Chair (in August, 1979), the federal funds rate it controls stood at 11 percent – versus the 1.75 percent ceiling to which the Powell Fed just approved. The annual inflation rate was 11.84 percent – versus the 8.52 percent recorded last month. And the economy was growing by three percent annually – versus the current rate of probably one percent at best.

Volcker engineered rate hikes to the 20 percent neighborhood – three times! (as depicted in the chart below) – and recessions that produced real GDP nosedives of eight and 6.1 percent (in the second quarter of 1980 and the first quarter of 1982), but the CPI didn’t retreat back into the single digits until May, 1981, and it took until the end of 1982 for a read of 3.8 percent to be recorded.

 

That history doesn’t seem to warrant much optimism that the Powell Fed can cut headline inflation to 5.2 percent by year end while increasing rates only to 3.4 percent (as it’s now expecting).

Third, at his press conference following the rate hike announcement, Powell echoed the conventional wisdom: that although the Fed can cut excessive levels of economic demand enough to tame inflation, it can’t address inflation by affecting economy’s ability to create enough supply to meet that demand, and thereby restore a satisfactory inflationary balance between the two.

But supply and demand are actuallly very closely connected. As I’ve discussed when posting about possible tariff cuts on imports from China, when consumer demand is strong enough, companies can pass along increases in their prices because their customers literally are willing to pay. When consumers are cautious, however, such price hikes become much more difficult.

To be sure, these rules don’t always hold. The big exceptions are products on which consumers will cut spending only as a last resort – like food and energy. They’re (rightly) seen as so important that demand for them is called “inelastic” by economists.

Since food and energy prices have been so central to today’s inflation, it’s easy to see why the conventional wisdom on the Fed and the economy’s supply side is generally accepted. But it’s also true that if consumers become stressed enough (for example, by interest rate increases high enough to slash growth, employment, and income levels), they’ll cut their overall spending even if they keep paying higher prices for those staples. Further, they can in principle reduce their purchases on non-staples enough to bring demand down substantially, and with it, inflationary pressures.

No one could reasonably relish this kind of outcome. But if the 1970s experience teaches any lessons for today, it’s that serious hardship for much of the population can’t be avoided if the inflation war is to be won. In my view, Powell has rightly stated that this victory is essential for America’s long-term prosperity. And President Biden deserves credit for endorsing such priorities. But will the Fed Chair actually take the Volcker-like steps needed to beat down inflation? Will a U.S. President still declaring he wants to be reelected remain a fan if he does? Because I can’t yet bring myself to believe either proposition, I can’t yet bring myself to be optimistic that inflation will drop significantly any time soon.

(What’s Left of) Our Economy: More Consumer Price Pain Signalled by Hot New U.S. Wholesale Inflation Numbers

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baseline effect, consumer price index, core inflation, cost of living, CPI, inflation, PPI, Producer Price Index, {What's Left of) Our Economy

Today’s official government report on U.S. wholesale prices (for May) is a perfect example of why it’s impossible to understand inflation without taking into account the baseline effect – the distortions that can result especially in year-on-year figures from wildly different points of comparison.

Specifically, if one set of annual results for any data series is abnormal (either unusually high or unusually low) that deviation is bound to influence the rate of change for the following year, and produce readings that are easy to misinterpret.

That’s why it’s not particularly important that, on an annual basis, the rate of overall (“headine”) wholesale inflation (as measured by the Producer Price Index, or PPI) has actually slowed slightly since March, or that such slowing has been seen since last November in the core PPI rate. (As with the core Consumer Price Index, or CPI, the core PPI strips out food and energy prices – along with trade services – because they’re volatile for reasons supposedly unrelated to the economy’s underlying inflation “prone-ness”). 

In fact, given the baseline effect plus the fact that both PPIs are seen as strong indications of consumer inflation rates to come — because they measure how much businesses charge each other for the goods and services they turn into final products offered to households and individuals — today’s report almost certainly means that the cost of living will keep soaring for the foreseeable future. For the baseline effect, which for much of last year could be used as an excuse for the robust consumer and producer inflation already being seen then, has been gone for months.

After all, the latest months’ worth of annual wholesale price increases represent comparisons with their results for a stretch in 2021 when these PPIs were already growing worrisomely fast. The increases in preceding months were coming off a comparison period during which these prices were still rising unsually slowly. They were still experiencing the hangover from the brief but sharp 2020 recession induced by the CCP Virus and related lockdowns and voluntary behavior curbs. In other words, a catch-up effect had been at work.

The tables below should make these points clear, starting with the headline annual PPI results by month starting with January, 2021. The right-hand column represents the baseline figure for the left – in other words, the results that month for the previous year. So, for example, the baseline for January, 2021’s 1.60 percent headline annual PPI increase was the 1.97 percent wholesale inflation recorded between January, 2019 and January, 2020. And the baseline figures for the 2021-22 results are the corresponding figures for 2020-21.

Jan 2021: 1.59 percent                  1.97 percent

Feb 2021: 2.95 percent                 1.11 percent

March 2021: 4.06 percent             0.34 percent

April 2021: 6.43 percent              -1.44 percent

May 2021: 6.91 percent               -1.01 percent

June 2021: 7.56 percent               -0.59 percent

July 2021: 7.96 percent                -0.17 percent

Aug 2021: 8.65 percent               -0.17 percent

Sept 2021: 8.78 percent                0.34 percent

Oct 2021: 8.87 percent                 0.59 percent

Nov 2021: 9.88 percent                0.76 percent

Dec 2021: 10.18 percent              0.76 percent

Jan 2022: 10.18 percent               1.59 percent

Feb 2022: 10.52 percent              2.95 percent

March 2022: 11.55 percent          4.06 percent

April, 2022: 10.89 percent           6.43 percent

May, 2022 10.66 percent             6.91 percent

As should be clear, although the annual pace of last month’s PPI inflation (10.66 percent) was a little lower than either April’s 10.89 percent or March’s 11.55 percent, the baseline figure during that period has jumped from 4.06 percent (which historically speaking was already lofty) to 6.91 percent. So there’s obviously explaining the latest figures with the catch up effect. Indeed, using historical standards, the catch up effect ended in February.

The core PPI inflation figures shown in the table below are lower in absolute terms, but the story they tell is otherwise almost identical. As with the first table, the figure in the right-hand column represents the previous year’s comparison point for the figure in the left-hand column.

Jan 2021: 1.79 percent                  1.64 percent

Feb 2021: 2.33 percent                 1.36 percent

March 2021: 3.15 percent             1.00 percent

April 2021: 4.81 percent              -0.09 percent

May 2021: 5.25 percent               -0.18 percent

June 2021: 5.60 percent                0.09 percent

July 2021: 6.01 percent                 0.27 percent

Aug 2021: 6.19 percent                0.36 percent

Sept 2021: 6.14 percent                0.72 percent

Oct 2021: 6.26 percent                 0.90 percent

Nov 2021: 7.04 percent                0.99 percent

Dec 2021: 7.09 percent                1.17 percent

Jan 2022: 6.90 percent                 1.79 percent

Feb 2022: 6.76 percent                2.33 percent

March 2022: 7.14 percent           3.15 percent

April, 2022: 6.78 percent            4.81 percent

May, 2022: 6.74 percent             5.25 percent 

So sure, May’s 6.74 percent annual core wholesale price rises were the best such results since last October’s 6.26 percent. But that latter number came after a baseline year when there was practically no wholesale inflation (0.90 percent) at all. By contrast, the baseline number for May’s PPI increase was more than five times higher (5.25 percent).

At some point, the business cost pressures shown in the PPI will ease to acceptable rates, and consumer cost pressures will follow. But the longer elevated inflation of both kinds lasts, the likelier that beating back these price surges will require policy moves that depress consumer demand enough to produce a recession — possibly a deep one. And today’s PPI report is the latest sign that there’s still lots of momentum behind current U.S. inflation.   

(What’s Left of) Our Economy: Everything You Wanted to Know About Immigration & the Economy — & Less

Tags

economics, immigrants, Immigration, innovation, labor shortages, Open Borders, productivity, The Washington Post, wages, {What's Left of) Our Economy

Leave it to the zealously pro-Open Borders Washington Post. It chose as the reviewer of a book by two economic historians apparently unaware of the relationship in U.S. history between immigration levels and productivity improvement a business professor seemingly just slightly less clueless about this crucial link either historically and going forward.

Doubt that? Then take a look at this morning’s rave by Harvard business professor Michael Luca about a new study by Ran Abramitzky and Leah Boustan of Stanford and Princeton Universities, respectively, titled Streets of Gold: America’s Untold Story of Immigrant Success.

According to Luca, Streets of Gold “reflects an ongoing renaissance in the field of economic history fueled by technological advances — an increase in digitized records, new techniques to analyze them and the launch of platforms such as Ancestry — that are breathing new life into a range of long-standing questions about immigration. Abramitzky and Boustan are masters of this craft, and they creatively leverage the evolving data landscape to deepen our understanding of the past and present.”

And their overall conclusion (which rightly takes into account the non-economic contributions of immigrants to American life) is that (in Abamitzky’s and Boustan’s words): “Immigration contributes to a flourishing American society” – especially if you take “the long view.”

But there’s no indication in Luca’s review that the authors weigh in on a key (especially in the long view) impact of immigration on the U.S. economy – how it’s affected the progress made by the nation in boosting productivity: its best guarantee for raising living standards on a sustainable basis.

As I’ve written repeatedly, mainstream economic theory holds that one major spur to satisfactory productivity growth is the natural tendency of businesses to replace workers with various types of machinery and new technologies when those workers become too expensive. Most economists would add that although jobs may be lost on net in the short-term, they increase further down the road once these productivity advances create new companies, entire industries, and therefore employment opportunities.

By contrast, when businesses know that wages will stay low – for example, because large immigration inflows will keep pumping up the national labor supply much faster than the demand for workers rises – these companies will feel little need to buy new machinery or otherwise incorporate new technologies simply because they won’t have to.

And more important than what the theory says, abundant evidence indicates that businesses have behaved precisely this way in the past (when scarce and thus increasingly expensive labor prompted acquisitions of labor-saving devices that helped turn the United States into an economic and technology powerhouse), into the present (as industries heavily dependent on penny-wage and often illegal immigrant labor have tended to be major productivity laggards).  

Reviewer Luca demonstrates some awareness that this issue matters in the here and now and going forward, writing that “Compared with the rest of the country, businesses in high-immigration areas have access to more workers and hence less incentive to invest in further automation.”

He also points out that “This has implications for today’s immigration debates.”

But his treatment of the current situation is confused at best and perverse at worst (at least if you buy the economic conventional wisdom and evidence concerning the productivity-immigration relationship).

Principally, he claims that “the United States is expected to face a dramatic labor market shortage as baby boomers retire and lower birthrates over time result in fewer young people to replace them.” Let’s assume that’s true – despite all the evidence that more and more employers are filling all the job openings they’ve been claiming by automating. (See, e.g., here, here, and here.)

Why, though , does Luca simply conclude that “Increased immigration is one approach to avoiding the crunch. Notably, the other way to avert this crisis is through further automation, enabled by rapid advances in artificial intelligence. Immigration policy will help shape the extent to which the economy relies on people vs. machines in the decades to come.”

Is he really implying that a low-productivity — and therefore low-innovation — future would be a perfectly fine one for immigration (and other) policymakers to be seeking?

Just as important, although Luca clearly recognizes that these questions have at least some importance nowadays, he provides no indication of where the book’s authors stand.

So let the reader beware. Luca clearly believes, as Post headline writers claim, that Streets of Gold makes clear “What the research really says about American immigration.”  What his review makes clear is that this claim isn’t even close.

   

(What’s Left of) Our Economy: America’s Now Definitely Inflation-Nation

Tags

baseline effect, Biden administration, consumer price index, core inflation, CPI, energy, Federal Reserve, food, inflation, prices, recession, stimulus, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

Today’s official U.S. report on consumer inflation was so bad that even what ‘s being pitched (for example, to a limited extent by President Biden) as kind of goods news isn’t anything close. As has so often been the case in the last year, one big key is looking at the so-called baseline effect. But the new (May) results for the Consumer Price Index (CPI) also highlight a reality that I and many others have been noting – the less-than-meets-the-eye difference between the headline and “core” CPI numbers.

The bad news about inflation is clear enough from the rise in the headline number – which tracks price increases throughout the entire economy. The 0.97 percent monthly increase wasn’t as scary as the 1.24 percent jump between February and March t(he highest since July, 1980’s 1.33 percent), but it was still the biggest since June, 1982’s 1.15 percent price surge.

Similarly, on an annual basis, May’s 8.52 percent overall CPI increase was lower than March’s 8.56 percent. But for all intents and purposes, both months’ results were the worst since December, 1981’s 8.91 percent disaster.

The (modest) ray of light that supposedly shone from the new inflation report came in the core figure – which strips out food and energy prices because they’re supposedly volatile for reasons having nothing to do with the economy’s alleged fundamental vulnerability to inflation.

To be sure, the monthly numbers shouldn’t have been the source of any encouragement. The May 0.63 percent sequential increase in core inflation was the hottest number since last June’s 0.80 percent, and represented the third straight month of acceleration.

Instead, glass-half-full types were pointing to the latest annual core increase. At 6.01 percent, May’s was the lowest since December’s 5.48 percent, and represented the third straight month of deceleration.

But here’s where the glass-half-empty types gain the upper hand. First, as I and – again – many others have observed, although food and energy prices do often move (down as well as up) for reasons largely unrelated to how overheated or not the economy may be. But energy prices in particular profoundly affect the cost of everything Americans make, sell, and buy that needs to be transported. And that means pretty much everything, including services, which typically rely on goods to get to customers. So there’s often an incontrovertible link between headline and core inflation.

Second, both energy and food prices are also often closely related to the economy’s overall levels of demand. And nowadays, they’re bound to keep rising as long as producers can pass them on to their customers. This in turn is the case because the latter can afford to pay more thanks to the unprecedented stimulus funds they received even after the economy was recovering strongly from the 2020 CCP Virus-induced crash,.

Third, there’s that baseline effect. Especially if its monthly rate is slowing, annual core inflation in the six percent neighborhood could be reasonably applauded if the previous year’s rate (the baseline) had been unusually low, or even negative (as it was for most of 2020). But the baseline figure for the latest May annual core inflation rate was May, 2021’s 3.81 percent (according to the latest government figures). That’s nearly twice the rate considered desirable by the nation’s chief official designated inflation-fighter, the Federal Reserve.

None of the ways to reduce this inflation rate way down reasonably quickly is a mystery to anyone influencing U.S. economic policies. Raising interest rates can get rid of a lot of the bloated consumer demand that’s contributed so much to recent price rises. For those emphasizing the Ukraine war’s major role in boosting food and energy prices, there’s the option of pressing for an end to the war sooner rather than later – even if it produces a morally ugly compromise.

But dramatically reducing consumer and business spending power enough to matter inflation-wise could bring on a recession – which the Federal Reserve still apparently believes can be avoided, at least judging from the modest monetary tightening it’s approved so far. And the Biden administration seems wed to letting the shots on ending the conflict to be called by Ukraine — which is so far rejecting the idea of making territorial or any other kinds of significant concessions.

So unless these situations change, the most reasonable conclusion is that inflation will keep raging until soaring prices finally tap consumers out by themselves. As an old adage goes, the likeliest cure for high prices may simply be high prices.

(What’s Left of) Our Economy: Is the New (April) U.S. Trade Report a False Dawn?

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Advanced Technology Products, Biden, Census Bureau, China, Donald Trump, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, services trade, South Korea, stimulus, supply chains, Switzerland, tariffs, Trade, trade deficit, Zero Covid, {What's Left of) Our Economy

Although today’s new official figures showed a major dropoff in the U.S. trade deficit between March and April, and the results came from a normally encouraging combination of more exports and fewer imports, the Census data also show that big caveats and questions are hanging over these results and how enduring they might be.

First and foremost, the improvement in the combined goods and services deficits, and all virtually all the trade balances comprising it, could be resulting from a dramatic slowdown in U.S. economic growth. Second, the latest decline in the chronic and huge U.S. goods trade gap with China surely stems from Beijing’s recent over-the-top (but surely temporary) Zero Covid policies, which have further snagged already tangled up supply chains. And third, large revisions in some of the numbers (especially for services trade) inevitably cast some doubt as to their reliability lately.

In fact, these features of the report – along with the still-near historic levels of many of these trade deficits and other usually typical gap-widening developments like a strong U.S. dollar and still-astronomical levels of economic stimulus from Washington – are telling me that my prediction last month of higher deficits to come will age pretty well.

Not that the narrowing of the trade gap in April was bupkis. The combined goods and services deficit fell 19.11 percent from March’s all-time high of $107.65 billion (which itself was revised down a hefty 1.96 percent) to $87.08 billion. This level was the lowest since December’s $78.87 billion and the nosedive the biggest since December, 2012’s 19.85 percent.

And as just mentioned, the improvement came from the right combination of reasons. Total exports hit their third straight monthly record, rising 3.49 percent from an upwardly revised (by 0.99 percent) $244.11 billion to $252.62 billion

Overall imports, meanwhile, tumbled 3.43 percent from their record $351.79 billion to $339.70 billion. The total was the second biggest ever, but the decrease was the greatest since the 13.16 shrinkage during pandemic-y and recession-y April, 2020.

The trade shortfall in goods was down 15.04 percent from a downwardly revised (by 1.04 percent) $126.81 billion in March to $107.74 percent in April. This level, too, was the lowest since December’s $100.52 billion, and the 15.04 percent sequential tumble the biggest since April, 2015’s 15.09 percent.

Goods exports rose sequentially by 3.57 percent in April, from 170.04 billion to a third consecutive record of $176.11 billion. And U.S. purchases of foreign goods sank by 4.38 percent on month in April, from a downwardly revised (by 0.65 percent) record $296.85 billion to $283.84 billion (as with total imports, the second highest result of all time). The decrease was the biggest since the 12.79 percent drop in that pandemic-y April, 2020.

But even the above sizable revisions paled before those made for services trade. The March surplus was upgraded fully 4.48 percent, from $18.34 billion to $19.16 billion, and the April figure grew by another 7.83 percent to $20.66 billion – the highest level since December’s $21.66 billion.

Services exports (apparently) deserve much of the credit. They reached an all-time high of $76.52 billion. This total bested May, 2019’s previous record of $75.41 billion by only 1.46 percent, but the milestone is significant given the outsized hit suffered by the service sector worldwide during the pandemic period.

April services exports, moreover, rose 3.30 percent from March’s $74.07 billion – a total that itself was revised up by 4.23 percent.

Services imports set their third consecutive monthly record in April, rising 1.73 percent, to $55.86 billion, from March’s upwardly revised (by 4.19 percent) $54.19 billion.

A big April fall-off also came in the non-oil goods trade deficit – known to RealityChek regulars as the Made in Washington trade deficit, because by stripping out figures for oil (which trade diplomacy usually ignores) and services (where liberalization efforts have barely begun), it stems from those U.S. trade flows that have been heavily influenced by trade policy decisions.

This shortfall decreased by 14.72 percent in April, to $108.68 billion, from March’s downwardly revised record $127.42 billion. The drop was the biggest since March, 2013’s 16.74 percent.

The enormous and persistent manufacturing trade deficit retreated in April from record levels, too. But even though the month’s $124.41 billion shortfall was 12.71 percent lower than March’s all-time high $142.22 billion, and even though the monthly decline of 12.71 percent was the biggest since pandemic-y February, 2020’s 23.09 percent, this deficit was still the second biggest ever.

April’s manufactures exports of $109.36 billion were 4.03 percent lower than March’s record $113.96 billion, but were still the second best total on record. Ditto for the month’s manufactures imports, which tumbled 8.85 percent from their March record of $256.18 billion to $233.50 billion.

Another April fall-off from a record monthly deficit came in advanced technology products (ATP). After ballooning by 73.65 percent sequentially in March, to $23.31 billion, the recently volatile gap narrowed in April by 21.50 percent, to $18.30 billion.

Both the better manufactuing and ATP trade figures surely stemmed at least in part from the Zero Covid policies that interfered with so much industrial production from China. The U.S. goods deficit with the People’s Repubic, however, narrowed by just 10.02 percent on month in April, from $34 billion to $30.57 billion. Even so, the level was the lowest since last July’s $28.56 billion.

U.S. goods exports to China were down on month in April by 16.25 percent (their biggest drop since February, 2021’s 278.85 percent), from $13.38 billion to $11.20b. This total is the lowest since last September’s $11.03 billion.

The much greater amount of U.S. goods imports from China plummeted 11.82 percent n month in April, from $47.37 billion to $41.77 billion – the lowest level since last July’s $40.32 billion.

Also notable – breaking a pattern going back several years — the 10.02 percent April monthly drop in the U.S. goods deficit with China was smaller than the month’s sequential decline in the non-oil goods deficit (14.72 percent). And on a yar-to-date basis, the China deficit is up only slightly less (27.59 percent) than the non-oil deficit (28.95 percent). So the next few months’ worth of data may shed some light on whether the Trump (now Biden) tariffs on China are losing their effectiveness, or whether the last few months’ numbers are anomalies.

Other significant April results for individual U.S. trade partners: The goods deficit with South Korea set a new record of $4.09 billion – 23.79 percent higher than March’s total of $3.30 billion and 21.70 percent greater than the old record of $3.36 billion set last September.

And the goods deficit with Switzerland cratered in April by 67.63 percent, to $2.89 billion, from March’s $8.93 billion level. The percentage shrinkage of this bilateral trade gap was the biggest since September, 2018, when a $1.22 billion U.S. deficit turned into a $149 million surplus.