(What’s Left of) Our Economy: Manufacturing’s Productivity Leaders Continue to Surprise

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aerospace, aluminum, appliances, Bureau of Labor Statistics, durable goods, labor productivity, manufacturing, non-durable goods, pharmaceuticals, productivity, semiconductors, steel, {What's Left of) Our Economy

One of my favorite sets of U.S. government statistics came out this morning – “Productivity and costs by industry: manufacturing and mining industries.” However boring it sounds, it’s useful because it sheds lots of light on which specific sectors within domestic American manufacturing should be seen as winners and losers or “industries of the future” (presumably the productivity stars) versus smokestack and other allegedly outmoded types of activity (the productivity laggards).

In addition (and this will be covered in an upcoming post), these detailed figures on manufacturing labor productivity (the narrowest of the two types of productivity tracked by the feds, but the measure that comes out on the timeliest basis) go far toward showing whether job loss in manufacturing lately has mainly been due to trade and globalization, or to industry’s improved efficiency. This debate of course has long been near or at the heart of the broader, decades-long debate about the effectiveness of American trade policies.

First let’s look at the overall numbers – which are anything but flattering to manufacturing. According to the Bureau of Labor Statistics (which compiles these data), in 2018, when manufacturing’s labor productivity as a whole rose by 0.80 percent, it fell in absolute terms in 67 out of the 86 sectors examined. That was a worse performance than in 2017. Even though that year, overall manufacturing labor productivity improved by slightly less (0.70 percent), it decreased in 54 of those 86 industries.

Broken down by super-categories, in 2018, in the 51 durable goods industries followed by the Bureau, labor productivity declined in 41. In the non-durables super-sector, labor productivity dropped in 26 of 35 sectors studied. For 2017, the comparable numbers were 34 of 51 and 20 of 35, respectively.

Even more interesting, in my view, are the results for these 86 individual industries. First, the ten best labor productivity performers in 2018 and their annual percentage gains. As you’ll see, the list that isn’t exactly dominated by advanced technology, at least according to the most popular definitions and portrayals. (FYI, “magnetic media” are a fancy name for products like audio tapes and compact disks – which this aging baby boomer is constantly told are hopelessly outdated.)

magnetic media mfg & reproducing:               +9.1 percent

computer & peripherals mfg:                          +7.7 percent

leather/hide tanning & finishing:                    +6.5 percent

grain & oilseed milling:                                  +5.3 percent

miscellaneous textile product mills:               +5.2 percent

turbine & power transmission equip:             +4.6 percent

resin, rubber, & artificial fibers:                    +3.5 percent

cut and sew apparel:                                      +3.2 percent

agricultural chemicals:                                  +2.2 percent

miscellaneous transport equip:                      +2.1 percent

And here’s a list of the 2018’s ten worst labor productivity performers. Most appear to be “lower tech.” But look at aerospace at Number Five! That’s the economy’s biggest trade surplus winner! The huge automotive sector had a terrible labor productivity year, too.

lime & gypsum products:                             -11.8 percent

textile fabric & finishing mills:                    -11.3 percent

motor vehicle bodies & trailers:                  -10.1 percent

sawmills & wood preservation:                    -9.5 percent

aerospace products & parts:                         -8.1 percent

petroleum & coal products:                         -7.8 percent

motor vehicles:                                            -7.6 percent

sugar & confectionary products:                 -7.1 percent (tie)

apparel knitting mills:                                 -7.1 percent (tie)

audio & video equipment:                           -6.9 percent

beverages:                                                    -6.1 percent

Finally, here are some labor productivity numbers for some manufacturing sectors of special interest. Pharmaceuticals seems a logical choice to kick it off, given the role that healthcare and drug-pricing issues have been playing lately in national policy and political debates. Its 2018 labor productivity fall-off indicates that if the industry improved its efficiency, it wouldn’t need such sky-high prices for many of its products to achieve what it considers adequate profitability. 

pharmaceuticals & medicines:                    -3.4 percent

iron & steel mills & ferroalloys:                 -2.4 percent

alumina & aluminum production:               -2.3 percent

household appliances:                                +1.6 percent

The next three sectors have been prominent in trade policy controversies. The two metals sectors faltered on the labor productivity front last year. (In 2017, both produced considerably better results). But if you look at their labor compensation costs (also provided in today’s productivity release), you’ll see that they’ve at least shared many of the benefits of the protective tariffs they’ve received with their workforces.

Such compensation rose by 7.2 percent for iron and steel-makers, and five percent for the aluminum industry. Both increases handily beat the 1.70 percent average for all manufacturing, and the 1.40 percent for durable goods production.

Household appliances – which include tariff-ed large household laundry machines) – turned in the opposite performance. Labor productivity was up at a relatively strong pace. But labor compensation was off by 2.20 percent. (Even more unusual, its labor productivity fell in 2017, while labor compensation surged.)

Finally, let’s examine the semiconductor sector, since it’s commonly described as a main “building block” of the entire high tech portion of the American economy. In 2018, its labor productivity fell (by 1.20 percent) – and for the third straight year. But here, labor compensation was way up (by 5.60 percent).

Intellectually honest economists will admit that measuring productivity is one of their most challenging tasks. But it’s also inescapable.  And the new detailed manufacturing labor productivity data make clear that identifying the nation’s most and least valuable and promising manufacturing industries remains just as challenging. 

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(What’s Left of) Our Economy: The Real Deal with the U.S.-Canada Trade Balance

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aerospace, Canada, China, crude oil, dairy, energy, Justin Trudeau, lumber, natural gas, subsidies, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

Extra! Extra! Read all about it! The nation’s globalist political and media classes have gotten it right on a major U.S. trade policy issue!

I’m talking about the numerous complaints issuing from American politicians, journalists, talking heads, and purported academic and think tank experts about President Trump’s decision to make Canada the focus of so much of his trade-related ire.

Mr. Trump is right about Canada maintaining sky-high tariffs and lavish subsidies in certain sectors of its economy, like dairy and lumber. (I’d add aerospace to this list.) But the idea that Canada represents one of America’s biggest trade headaches, and has been taking advantage of the U.S. economy left and right due to poorly negotiated trade deals, is completely belied by the numbers. And P.S. – it’s not even necessary to point to America’s services trade surplus with its northern neighbor to debunk the numbers.

The keys are recognizing the immense role played by energy in bilateral goods trade. Commerce in crude oil and natural gas is almost never the subject of the U.S. trade deals and broader trade policy decisions that the President – for the most part – has correctly lambasted.

Energy’s predominance is most apparent when U.S.-Canada trade in goods is calculated according to the measures used most prominently by the American government – total exports, and general imports. In fact, these headline data show that the U.S. oil and gas shortfall has typically been twice the size of the overall American merchandise trade deficit with Canada – meaning that when it comes to other goods (like manufactures) the United States has been running a surplus.

For example, in 2009 (the year the current U.S. economic recovery began), according to these figures, the United States ran an overall $20.18 billion goods trade deficit with Canada, a $45.75 billion deficit in crude oil and natural gas, and a $30.02 billion surplus in manufacturing.

Last year, the overall U.S. merchandise deficit with Canada had fallen to $17.50 billion – largely because the energy deficit had sunk to $16.45 billion. And the American manufacturing surplus reached $41.07 billion.

As many trade policy critics have rightly pointed out, the total exports and general imports numbers aren’t the best data for measuring U.S. bilateral trade balances. (They’re fine for America’s global trade balances, though, as the discrepancies that emerge in the bilateral accounts cancel each other out on a worldwide scale.) Instead, the most accurate picture is provided by looking at domestic exports and imports for consumption – i.e., the trade flows that concentrate on exports that are actually made in America (as opposed to being transshipped through the United States from countries where they originated), and on imports that Americans actually purchase for their own use (as opposed to products being transported through the United States to their final destinations).

But although these statistics reveal a much larger U.S. merchandise gap, along with deficits in manufacturing, oil and gas predominate in these figures as well. In 2009, the domestic exports etc numbers show a total American goods trade deficit with Canada of $52.89 billion – nearly 87 percent of which was in oil and gas. The manufacturing shortfall, moreover, was tiny – only $200 million.

By 2017, according to this measure, the annual U.S. goods deficit had risen to $64.84 billion. But the oil and gas deficit – which had shrunk dramatically in absolute terms due to the U.S. energy production revolution – still comprised a little over 73 percent of this total. And the manufacturing deficit was only $4.28 billion (out of a U.S. global total of more than $937 billion).

I can understand why President Trump views Canadian Prime Minister Justin Trudeau as a pro-globalist showboat. I agree. But when it comes to trade, and turning it into an engine of growth and domestic job creation, Mr. Trump has much bigger fish to fry – starting with the thoroughly and increasingly predatory trade policies pursued by his “good friend,” Chinese leader Xi Jinping.

Making News: National Radio Interview Now On-Line – & More!

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aerospace, China, Gordon G. Chang, Making News, ShareAmerica, State Department, The John Batchelor Show, Trade, Trump

I’m pleased to announce that if you missed my interview last night on John Batchelor’s nationally syndicated radio show, you’re in luck!  The podcast is now on-line.

So click here to listen to a stimulating and timely conservation among John, co-host Gordon G. Chang, and me about President Trump’s recent seemingly confusing moves on the China trade issue.

In addition, a May 8 article on the State Department-sponsored website ShareAmerica, featured my views on China’s efforts – many of them illegal according to world trade law – to develop its civilian aerospace industry. Here’s the link.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Newsmax TV Interview on China’s Threat to Boeing…& More!

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aerospace, BBC, Boeing, China, Lifezette.com, Making News, Newsmax TV, Ozy.com, ports

I’m pleased to announce that an interview I did this afternoon on Newsmax TV has just gone on-line. The subject: my Lifezette.com article Tuesday on how China’s new domestically produced commercial jet could become a major threat to America’s Boeing and to the nation’s longstanding aerospace predominance.  Click on this link to watch.

Also, it was great to be quoted yesterday in this Ozy.com article on how President Trump’s trade policies could affect the ports in the southeast part of the country.

Finally, I’ve got an interview coming up Sunday with the BBC on China’s “One Belt One Road” initiative, which many observers fear (or hope?) will make the People’s Republic the globe’s economic leader in the twenty first century. Check in with RealityChek for the details on broadcast time, and for news of other upcoming media appearances and other developments.

Making News: Talking China Tonight on John Batchelor’s Nationally Syndicated Radio Show…& More!

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aerospace, Boeing, China, Dominic Gates, Gordon Chang, Making News, manufacturing, The John Batchelor Show, The Seattle Times, Xi JInPing

I’m pleased to announce that I’m scheduled to appear on John Batchelor’s nationally syndicated radio show tonight to discuss U.S.-China relations in light of Chinese President Xi Jinping’s visit to the United States.  Click on this link to listen live at 10 PM EST to what I’m sure will be a timely discussion with John, co-host Gordon Chang, and me.  And if you can’t tune in, I’ll post a link to the podcast as soon as one is available.

Also, it was great to be quoted today in Dominic Gates’ Seattle Times article on Boeing’s decision to build its first overseas factory in China.  In fact, it was my conversation with Dominic about U.S. policy options to fight China’s investment and technology blackmail that inspired today’s post on new American approaches to the China economic challenge.

(What’s Left of) Our Economy: If Washington Was Serious About the China Economic Challenge….

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aerospace, allies, Boeing, China, Cisco, cyber-security, Edward Snowden, forced technology transfer, imports, investment, lobbying, manufacturing, multinational companies, national security, offsets, offshoring, South China Sea, subsidies, telecommunications, Trade, Xi JInPing, {What's Left of) Our Economy

However understandable, the intense administration and media focus during Chinese leader Xi Jinping’s U.S. visit on Beijing’s cyber-hacking has overshadowed several other major Chinese threats to American national security and economic well-being – and the need to fix U.S. strategies that are failing badly to cope with them. High on the list is China’s widespread practice of extorting corporate investment and technology transfer by threatening to shut uncooperative companies out of its large and potentially bigger market. And this blackmail deserves special attention this week because two big examples of it have made it into the news recently.

The first involves Boeing, which apparently will build its first foreign factory in China – a move that not so coincidentally coincided with China’s announcement that it would buy 300 Boeing jets. The second was Cisco Systems’ decision to start cooperating with a Chinese server company on projects that reportedly could include developing new telecommunications hardware products. This deal has followed several years in which Cisco has encountered big trouble in China due to fall-out from Edward Snowden’s techno-spying revelations and charges, and to Beijing’s policy of punishing American companies after Congress in effect froze China’s version of Cisco out of the U.S. market due to espionage concerns.

Since aerospace and telecommunications are clearly central to military strength, these American corporate cave-ins could easily endanger national security – unless you believe that they’ll forever remain in their current limited form. So more effective responses are urgently needed – unless Washington wants to face ever more harmful Chinese cyber-hacking (see this article of mine on how American firms have undoubtedly shared advanced cyber-war-related technologies with China), or ever better armed Chinese forces in possible future military showdowns in the South China Sea and other disputed Asian waters.

The companies themselves explain their agreement to China’s trade and investment conditions with the “half-a-loaf” argument, and it’s not completely unreasonable. They’re obviously not thrilled to be helping create likely new competitors (whether they care about American security is another matter entirely), but they point out that any China business they preserve or gain via their cooperation is more than they’d have without the China market. In fact, Beijing has used its leverage to string them along effectively enough that they’re reluctant even to complain about their China troubles to Washington – for fear of becoming targets for Chinese retaliation, and of excessively rocking the boat of bilateral economic relations generally.

But although the companies’ behavior may be justifiable from their own individual standpoints, their unavoidably narrow, self-interested perspectives make clear why they can’t be relied to protect or advance broader U.S. interests. Washington needs to take the lead. But can it do so without imposing heavy costs on these firms? To me, the answer clearly is “Yes” – and not just because China’s economy is slowing down. The key to success is understanding that a case-by-case approach inevitably leaves China in the driver’s seat, and that the United States can and should capitalize on position as an export market desperately needed by China to ensure adequate growth.

Severely restricting China’s access to this American market would grab Beijing’s attention not only for economic reasons. Chinese leaders would begin worrying about their political futures – and their own personal well-being – since their hold on power depends so strongly on delivering jobs and rising incomes to the country’s increasingly restive population. Moreover, even keeping in mind that short-term costs for the U.S. economy are inevitable – because policy shifts of this magnitude are always disruptive, and because it may take Beijing a while to get the message – the most obvious objections are surprisingly easy to dismiss.

Where will affected companies find customers to replace those they may temporarily lose in China? In many cases, in the American market, because the smaller U.S. trade deficit with China that would result from import curbs would spur more American growth overall. Moreover, so much U.S.-China trade nowadays is “head-to-head,” (in which the same goods compete with each other), that many American firms could fill the gap left by missing Chinese imports. And when it comes to U.S. companies that can’t make up China losses this way, government compensation seems appropriate.

Given Washington’s willingness to bail out Wall Street and auto-makers for blunders largely of their own making, subsidies look defensible for firms in the line of fire of whatever trade conflict develops. (One possible caveat: Many larger, multinational companies rely on China business heavily because they lobbied so effectively for the U.S. China trade policies that have created their vulnerabilities – and other major damage to the American economy – in the first place. So there’s also a case for letting them take their lumps, at least to some extent.)

If such subsidies don’t pass muster politically in the United States, another alternative is available to Washington: using the power of the American market to dissuade non-Chinese competitors to U.S. firms from seizing the opportunities created by these new American policies to boost their own China sales. Although the American firms’ China sales would remain lost, they at least wouldn’t lose competitve ground to foreign rivals.

Further, giving these third-party companies and countries the choice of doing business with China, or with the far bigger – and more reliable – United States would have the added benefit of adding international support to American efforts to fight Chinese protectionism and economic predation.  Working with Washington would also aid foreign governments and companies by reducing China’s scope to play trade partners off against one another. 

Finally, it’s true that the kind of jobs and even technology extortion used by China are standard operating procedures – especially in aerospace and in military aerospace – for many foreign governments, including those of U.S. allies. So how could Washington justify singling out China for counter-measures? Yet when it comes to allies and their policies (called offsets), the answer couldn’t be more evident: They’re allies and China manifestly is not. It makes no sense whatever to treat all foreign governments and economies the same when their relationships with the United States are so dramatically different, and this kind of foolish consistency certainly shouldn’t hamstring America’s approach to China’s economic transgressions.

There is, however, one obstacle to this kind of revamp of U.S.-China economic relations that I don’t see being overcome anytime soon – the continued domination of China policy-making in Washington by those aforementioned multinational, offshoring-happy business interests. The China policy status quo has undermined the American economy’s productive core, and increasingly threatens national security. But the offshoring lobby believes it’s worked well enough for its members. So until a critical mass of national political leaders decides to reject their lavish campaign contributions, expect China to keep taking America to the cleaners. And when Chinese actions sting enough, expect a few grumbles from the multinationals – no doubt mainly for show.

(What’s Left of) Our Economy: Manufacturing Renaissance, RIP

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aerospace, Boston Consulting Group, defense manufacturing, durable goods, Federal Reserve, industrial production, inflation-adjusted growth, Jim Tankersley, manufacturing, manufacturing jobs, manufacturing renaissance, non-durable goods, Washington Post, {What's Left of) Our Economy

I’m pleased to announce that the Washington Post has just reported on a major recent finding of mine about America’s supposed manufacturing renaissance: In terms of the supremely important measure of inflation-adjusted output, it never happened.

As summarized in a new piece by correspondent Jim Tankersley, revisions last month to Federal Reserve data show that instead of surpassing the highs it reached on the eve of the last recession, more than seven years ago, manufacturing production in real terms still hasn’t recovered the ground it lost. By contrast, in the two previous economic recoveries, manufacturing took much less time to exceed its previous output peak

Shortly after discovering this change, I shared the information with Tankersley and, gratifyingly, he considered it newsworthy.

His write-up adds an angle I wasn’t aware of – much of the shortfall has taken place in defense and aerospace manufacturing. At the same time, the picture can be usefully fleshed out with these details:

>The timing of the revisions couldn’t have been stranger. They came out just a six days after the Federal Reserve released its report on June industrial production. How much easier these results would have been to report on had the Fed either included them in that release, or waited to issue them for incorporation into last week’s July figures!

>Although much of the manufacturing renaissance coverage and commentary has focused on the sector’s job levels (in fairness, the holders of jobs do things like vote), I’ve closely monitored production because it ultimately matters much more. After all, how can robust employment be generated and maintained over any period of time without robust output? This relationship is especially important to keep in mind given manufacturing’s historically strong productivity performance. Even though efficiency has been growing more slowly as of late, the sector has a proven knack for using technology and other innovations to turn out more stuff with fewer workers.

>The revisions were anything but trivial. The last pre-revision figures showed that the sector’s output was 2.68 percent greater after inflation than the level it reached at the last recession’s December, 2007 onset. According to the new data, from December, 2007 through June, 2015, real manufacturing production had actually shrunk — by 2.28 percent.

The subsequent July industrial production figures actually reported a December, 2007-June, 2015 manufacturing output decline that was even greater — 2.50 percent. That’s because the June, 2015 real output level was less than originally reported. Happily, the initial July reading showed a monthly increase big enough to bring domestic industry to within 1.67 percent of its pre-recession high.

>Consistent with Tankersley’s finding of outsized downward revisions in defense-related industries, the worst newly revealed manufacturing losses came in durable goods industries. Previously, their inflation-adjusted output was judged to be up 9.52 percent since its December, 2007 pre-recession peak. Now the improvement is pegged at only 2.27 percent.

>Since its own pre-recession peak (July, 2007), non-durable goods output has been even worse than originally thought, but by only 7.88 percent versus 5.20 percent.

>These revisions themselves will be revised further down the road (as will the latest June and July data).  It’s possible, in fact, that these changes will soon incorporate research strongly indicating that manufacturing output has been considerably over-counted in recent years. Why? Because there’s abundant evidence that government statisticians haven’t done well at assessing the rapidly falling prices – and therefore the prevalence in manufactured goods – of parts, components, and other inputs that are imported. If these price changes indeed haven’t been fully captured, then many final manufactures – especially in information technology hardware – contain higher levels of foreign content, and thus lower levels of U.S.-made content, than we currently think.

>What we know for sure now, though, is that by the most meaningful measure, there never was a U.S. manufacturing renaissance, and that those who have been singing its praises – ranging from President Obama to the Boston Consulting Group – have simply been manufacturing and selling snake oil.

Making News: Talking China’s New Aerospace Prowess with John Batchelor Tonight

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aerospace, China, forced technology transfer, Gordon Chang, Making News, The John Batchelor Show

I’m pleased to report that I’m scheduled to be back on John Batchelor’s nationally syndicated radio show tonight to discuss China’s startling new inroads into the global civil aircraft industry — which owe largely to technology extorted from foreign competitors like Boeing.

The segment, which also features co-host Gordon Chang, is slated to start at 10:15 PM EST.  Listen live here.  And as usual, I’ll post a link to the podcast as soon as it’s available.

(What’s Left of) Our Economy: Boeing Hands China the Aerospace Rope

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aerospace, Boeing, forced technology transfer, manufacturing, technology transfer, training, {What's Left of) Our Economy

“Blowback” refers the dangerous backfiring of policies and other decisions that involve aiding dubious partners. Major recent examples include U.S. arms aid to anti-Soviet Muslim extremists who later became anti-American Muslim extremists, and voluntary technology transfers to China by American businesses that inevitably wound up teaching cyberhacking skills to the Chinese and helped create Chinese commercial rivals.

Now you can add to the list Boeing’s decision decades ago to start building aircraft parts and components in China, and training Chinese aerospace engineers. This offshoring strategy is finally enabling China to start building a jetliner that Boeing views as a formidable competitor.

Speaking at a conference last week, Boeing CEO Jim McNerney said that the company would launch a new narrow-body plane to preserve its position in this market both from longtime rival Airbus, and from a new prospective state-owned rival from China. Boeing’s entry in single-aisle jets is the 737, which as is typical for many commercial aircraft models, is already being updated.

But McNerney noted that Commercial Aircraft Corp. of China (Comac), is on track to deliver a single-aisle jet of its own by 2018, and that as a result, Boeing can’t count even on a revamped 737 to measure up. Therefore, the company will be aiming to build a wholly new aircraft for delivery before 2030 to remain competitive.

What Boeing failed to mention is how difficult it is to imagine China getting to this point anywhere near this fast without Boeing’s own help. As the company itself reports on its website, Boeing has been used Chinese-made parts and components on every one of its jets currently in service – including its newest and most innovative model, the 787 Dreamliner, for which the Chinese build the rudder, panels that reduce drag between the advanced carbon-fiber-constructed fuselage and the equally advanced carbon wings, vertical fin panels, and other composite parts.

Moreover, the Chinese are not manufacturing these parts in Boeing wholly-owned factories in China or in Boeing factories in China affiliated with private sector partners from the PRC or from any other country. These Made in China parts are manufactured either by factories in China owned and operated completely by China’s government-dominated aerospace industry, or by joint ventures between Boeing and these Chinese government facilities.

In addition, Boeing has provided “enhanced professional training to almost 50,000 Chinese aviation professionals” in fields including manufacturing and industrial engineering, and is conducting research with the Chinese Academy of Sciences and various Chinese universities. Projects worked on with these government-run or controlled institutions include “advanced materials and advanced computing technology for aviation and industry design.” The company is also working with four Chinese universities by providing, scholarships, funding programs, training faculty, and developing courses – all with an aerospace focus.

So far, Boeing – and the United States – have enjoyed a hefty payoff for all this cooperation. The company currently controls half the huge Chinese aviation market, and there can be no doubt that the offshoring and tech transfer price it has paid for these sales have resulted in major payoffs for U.S.-based workers both at Boeing itself and at its vast domestic supply chain.

And the company is unmistakably counting on such policies guaranteeing it and its U.S. Employees and suppliers, a big share of China’s future aviation market, which it believes will needs $870 billion worth of new aircraft (more than 6,000 planes) over the next 20 years.

The trouble is that China’s game plan doesn’t include granting non-Chinese players even a single percent of its market for anything a moment longer than it needs to. Given its still-wide edge over Chinese aircraft manufacturers, Boeing’s strategy looks like a winner for the U.S. economy for the foreseeable future. (The short-term impact on U.S. security of all this aerospace tech transfer and training could well be very different.) But with each bit of aviation knowhow it imparts to China – typically for reasons having nothing to do with free market practices, and everything to do with Beijing’s success at extorting these gains in exchange for pieces of the China market – Boeing brings the potential tipping point, and its own demise, a little closer.

(What’s Left of) Our Economy: Is Aerospace Really a Durable Goods Throwaway?

Tags

aerospace, data, durable goods, industrial production index, manufacturing, {What's Left of) Our Economy

This morning’s data from the Census Bureau on new orders for durable goods provides a great illustration both of why it’s vital to be careful reading and interpreting statistics, and why it’s so unavoidably difficult to measure and interpret economic trends.

This monthly data – today’s preliminary report for July will be revised on September 3 (and then several times more over the next few years) – is viewed as a key gauge of domestic manufacturing’s health, but the headline monthly change figure includes sectors that most specialists believe distorts the picture: defense-related goods and aircraft.

Their importance was spotlighted again in this morning’s report. New orders for defense-related manufactures fell by 15.3 percent on a monthly basis – after rising by 4.1 percent in June and dropping by 24.0 percent in May. In other words, these data are really volatile. Moreover, they’re heavily affected by political decisions – the size and growth of the defense budget. As a result, it’s understandable why defense-related orders aren’t seen as genuinely representative of domestic industry’s chops or prospects.

The distortion looks way more extreme for civilian aircraft in particular. Orders for airliners skyrocketed by 318.0 percent in July month-to-month according to the advance figures – after increasing by 11.1 percent in June and decreasing by 2.9 percent in May. It’s obvious, then, that these data are awfully volatile, too. Further, as predicted in The Wall Street Journal yesterday, these incredible aerospace numbers resulted from one great month for a single company – Boeing.

Largely as a result, total new orders for durable goods jumped by a record 22.6 percent in July on month – after growing by only 2.7 percent in June and actually shrinking by 0.9 percent in May. Meanwhile, the results for durable goods orders stripping out aircraft and defense goods – the ”core capital expenditures” number widely considered to be the very best indicator of manufacturing’s health – fell by 0.5 percent in July, after improving by 5.4 percent in June and dropping by 1.4 percent in May.

Here’s the (big) complication, though. Although orders for civilian aircraft can indeed fluctuate wildly from month to month, aerospace isn’t exactly a cottage industry. The Federal Reserve’s industrial production index makes this clear – even though unlike the durable goods numbers, it adjusts for inflation.

According to the Fed, in July, manufacturing represented just under 71 percent of the nation’s total industrial output. (The production of mines and utilities makes up the rest.) That’s down from 76.6 percent ten years ago. Last month, the aerospace industry (which includes missiles as well as aircraft parts, both for military and non-military plans) made up 4.6 percent of the industrial production index. But since July, 2004, this percentage has grown from a little less than 3.2 percent.

So however volatile, aerospace is becoming a greater and greater part of the total American manufacturing scene. And every month this trend continues, removing it from the core capital goods data becomes a little less justified.