(What’s Left of) Our Economy: Has the U.S. Seen Peak Manufacturing Output for the Virus Era?

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(What's Left of) Our Economy, appliances, automotive, capex, capital spending, CCP Virus, coronavirus, COVID 19, Federal Reserve, furniture, household appliances, housing, inflation-adjusted growth, Institute for Supply Management, machinery, manufacturing, real growth, recession, recovery, Wuhan virus

Today’s monthly Federal Reserve report on U.S. manufacturing production was full of surprises, but not enough were of the good kind. And with signs of economic slowing on the rise, the new figures – for September – could mean that, for the time being, industry’s relative out-performance during the pandemic era will begin weakening markedly as well.

The surprises start with the overall figure for the September monthly change in inflation-adjusted output for American factories. Despite an abundance of encouraging data from so-called soft surveys like those issued by the private Institute for Supply Management and the Fed system’s regional banks (see, e.g., here) real manufacturing production dropped by 0.29 percent sequentially. The decrease was the first since April, when national economic activity as a whole bottomed due to the spread of the CCP Virus and resulting shutdowns and stay-at-home orders.

The biggest bright spot in the report came from the upward nature of most revisions. August’s initially reported 0.96 percent monthly gain is now judged to have been 1.13 percent. The July result was upgraded from 3.97 percent to 4.30 percent. And June’s previous 7.64 percent improve was reduced to 3.61 percent. Further, these advances built on similar upward revisions that accompanied last month’s Fed report for August.

In fact, the revisions effect was strong enough to leave domestic industry’s cumulative after-inflation production performance during the virus-induced downturn better than the Fed’s estimate from last month. As of that industrial production report (for August), manufacturing constant dollar production had fallen 6.39 percent from its levels in February – the final month before the pandemic began impacting the economy. Today’s new September release now pegs that decline at only 5.81 percent, and even the monthly September decrease left it at 6.08 percent.

Nevertheless, the breadth of the September monthly decrease in overall price-adjusted manufacturing output unmistakably disappointed. Yes, the automotive sector (vehicles and parts combined) saw its on-month production tumble by 4.01 percent. But in contrast to most of the manufacturing data during the CCP Virus period, automotive didn’t move the overall manufacturing needle much, as real output ex-auto rose only fractionally in September.

Also discouraging –and unexpected, considering the good recent capital spending data reported by the Census Bureau (see, e.g., the “nondefense capital goods excluding aircraft” numbers for new orders in Table 5 in this latest release) – was the 0.41 inflation-adjusted production decline in the big machinery sector following five months of growth.

And even though the U.S. housing sector has been booming during the recession, real output of furniture also slumped for the first time in six months (by 0.96 percent), while price-adjusted household appliances production was down 4.99 percent after its own good five-month run.

As indicated by today’s revisions, these glum September manufacturing output figures could be upgraded in the coming months. Yet given the CCP Virus’ return – which will at best greatly complicate the challenge of maintaining recovery momentum for industry and the entire national economy – no one can reasonably rule out the possibility that, for now, Americans have seen peak post-virus manufacturing production.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: How Certain Should We be About Trade War-Spurred Business Uncertainty?

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business investment, capex, China, Dallas Federal Reserve, manufacturers, manufacturing, Philadelphia Federal Reserve, tariffs, tax incentives, Trade, trade war, Trump, {What's Left of) Our Economy

Among my most vivid memories of my years trying to make some sense out of the economy is one of a conversation with my late father. Since he was a tax lawyer for many decades, I once asked him if he supported some ideas that keep coming up for strengthening American manufacturing, chiefly making permanent the tax credit for corporate research and development (which Congress approved in 2015), and permitting companies to claim deductions for spending on machinery and equipment sooner rather than later, and even immediately (which the tax bill passed in 2017 allowed in some circumstances).

His answer: They’re small beans. His explanation: Any business-person with The Right Stuff will try and capitalize on new business opportunities whatever the tax laws allow (within reason).

I’ve been thinking of that conversation often as President Trump has waged his trade wars, especially against China (a long-time trade and broader economic predator), particularly in regard to the widespread claims that unanswered questions about his real aim (a bilateral level playing field? Decoupling the two economies?), and the herky-jerky nature of his tariff announcements and postponements have created enough uncertainty to paralyze business investment in new products and processes. Of course, that’s the type of activity that fosters healthy, sustainable, and not bubble-ized, growth.

I’m not unsympathetic to the difficulties of planning in this environment. But my father’s analysis makes me wonder if – assuming the uncertainty narrative is correct – too many American executives have lost their nerve. And this suspicion has just been borne out by a report spotlighting how many companies look to be plowing ahead with upgrades and innovations, trade war or not.

The evidence came from the latest monthly survey of mid-Atlantic state manufacturing published by the Philadelphia branch of the Federal Reserve system. As often the case, the October edition, released a week ago, featured responses to questions posed by “Philly Fed” researchers seeking regional manufacturers’ views on specific economic issues and challenges, and the current queries included:

>”Do you expect the following capital expenditure categories over the next year (2020) to be higher than the same, or lower than in the current year”; and

>”How has trade policy (including tariffs) affected your expected capital spending for 2020 compared with 2019?”

Here are the answers to the first question, by spending category measured in percentage of responses:

                                                            Higher           Same            Lower

Noncomputer equipment:                     41.1              44.6              14.3

Software:                                              28.6              58.9               12.5

Energy-saving investments:                 21.3              68.1               10.6

Computer and related hardware:         26.8              55.4                17.9

Structures:                                           32.1              45.3                22.6

Total:                                                   39.1              41.3                19.6

No overwhelming evidence of uncertainty-induced paralysis here. If anything, mid-Atlantic manufacturers seem pretty determined to take steps they deem necessary to bolster their competitiveness even though the trade wars are far from over. Especially encouraging are the results for noncomputer equipment and structures, since they’ve been capital spending laggards lately.

And here are the answers to the second, more specific, question, about trade policy’s effects on capital spending plan, again measured in percentage of responses:

Significantly increase: 5.3

Modestly increase: 8.8

No change: 54.4

Modestly decrease: 15.7

Significantly decrease: 1.8

All increases: 14.1

No response: 14.0

All decreases: 17.0

These results add slightly to the case that Trump-ian trade policies are depressing capital spending. But only slightly.

Trade war opponents can point out that this year’s business investment has been weaker than the previous year’s, so that some capital spending increase was inevitable barring concerns about a major economic slowdown or recession. But supporters can observe that such spending was rising strongly from spring, 2017 through summer, 2018, and so some cooling off was just as inevitable (and not only for mean-reverting-type reasons, but because it would be natural for companies to try to finish current projects before starting new ones).

It’s also possible that mid-Atlantic manufacturers are simply pluckier than their counterparts elsewhere in America. But similar responses to similar questions were provided by southwestern companies in the Dallas Fed’s June manufacturing sounding. In other words, there’s lots of uncertainty surrounding the trade war-related uncertainty claims.

(What’s Left of) Our Economy: The Offshoring Lobby Admits Americans are Standing Tall in the China Trade War

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2020 elections, capex, Charles Koch, China, CNBC.com, consumers, Democrats, inflation, manufacturing, national security, recession, slowdown, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

Another trade war myth bites the dust! And its demise is especially big news, given that its killers are some of the leading myth-makers.

Specifically, as reported by CNBC,com, top officials of a major lobbying campaign aimed at forcing President Trump to overturn his tariff-heavy trade policies, and in particular, to make nice with China, have openly admitted that the ace-in-the-hole they thought they held turned out to be joker. According to a CNBC posting yesterday, the political network funded partly by billionaire libertarian Charles Koch has concluded that their efforts to restore the pre-Trump, offshoring-happy, U.S. trade policy status quo have failed because it completely misread the American public’s willingness to pay an economic price for combating China’s trade predation.

This news comes on the heels of ongoing evidence that, contrary to widespread predictions from economists, think tank hacks, globalist politicians, and the Mainstream Media reporters who keep taking their cues from all these trade zealots, raging American inflation has not been ignited, business investment has not been paralyzed, domestic manufacturing has not suffered a death blow (though it’s been in a shallow recession for a year), and the economy has not plunged into recession (though growth has slowed).

The advertising-focused Koch drive sought to convince President Trump to back off his strategy of trade pressure by exploiting the selfishness of U.S. consumers in particular and the supposed vulnerabilities of the U.S. political system. The apparent central assumptions (and they’ll be familiar to anyone who’s been following Mainstream Media coverage of trade issues): Affluent, and indeed spoiled, Americans have much less tolerance for economic pain than their long impoverished Chinese counterparts; and China’s dictators will find it much easier to resist any public pressure that did develop than American leaders. Therefore, the Koch operatives reasoned, stoking fears that Mr. Trump’s tariffs would supercharge retail prices in particular and kill jobs by prompting retaliatory Chinese measures and slumping American capital spending would set off a political firestorm that the President would need to extinguish if he hoped to win reelection.

But at a briefing it held in New York City yesterday, a Koch official told reporters that “The argument that, you know, the tariffs are adding a couple thousand dollars to the pickup truck that you’re buying is not persuasive. It doesn’t penetrate with the people that are willing to go along with the argument that you have to punish China.”

Nor did the Koch campaign make this decision lightly. The CNBC.com piece noted that “the network came to this conclusion after conducting weekly focus groups on trade policies.” Also cited in the post was a recent national poll showing that “63% of registered voters believe tariffs will ultimately hurt the United States more than China, but 67% of the electorate is convinced it’s necessary to confront China over its trade practices.”

In other words, the American public is wiser and more farsighted than the U.S-owned businesses that have worked overtime to help strengthen the Chinese economy – including by voluntarily transferring to the Chinese the technology they need to upgrade their mechanisms of repression and modernize their military. And everyday Americans are much smarter than those companies that China has begun victimizing once Beijing concluded they’d outlived their usefulness, but that keep hoping against hope that enough boot-licking will save their corporate skins in the Chinese market. Because the American public evidently understands that U.S. prosperity and national security alike require reversing these China-enabling policies, and that slightly more expensive imports from China are a small price to pay for preserving and achieving these goals.

Ironically, the poll indicates that the Koch campaign (along with similar efforts) has succeeded in one respect: It represents some evidence that Americans believe that their country is more vulnerable to a trade war than China – even though the Chinese economy is much more trade dependent, and even though, as noted above, the United States keeps growing (albeit more slowly), and its overall inflation remains subdued by any reasonable standard.

Maybe that’s why the Koch network says it’s far from giving up, and is considering delivering the same message with different tactics. Two seem especially promising to these Friends of China:

>“putting together a team of almost 100 business leaders to call on the Trump administration and lawmakers to end the trade war with China”; and

>educating “100,000 activists in at least 35 states about the potential negative impact of using tariffs to battle China. Those volunteers will then be expected to start reaching out to their congressional leaders. The network hopes these activists can convince lawmakers on Capitol Hill to stand up against the administration’s current trade policy. The latest phase of the Koch campaign is expected to cost the network millions of dollars.”

Of course, short of a major economic downturn, if the Koch network has already established that the public is rejecting its advertising-carried China fear-mongering, it’s unclear why President Trump would be more responsive to the 100 business leaders than he’s been to date? And why would most Members of Congress not already backing China coddling pay more much attention to the 100,000 activists?

That’s a question that also needs to be asked by some other major actors in the U.S.-China trade war: the majority of current Democratic presidential candidates, who clearly believe that there’s lots of voter China-related trade whining that they can turn into votes, and ultimately into victory over Mr. Trump; and Chinese dictator Xi Jinping himself, who just as clearly believes that if the President is defeated, he’ll be back to dealing with Uncle Sucker on trade – and so many other fronts.

Following Up: Many (and Maybe Most) U.S. Manufacturers Aren’t Buying the Tariff Fear-Mongering

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capex, Dallas Federal Reserve, exports, Following Up, growth, Jobs, manufacturing, NAM, National Association of Manufacturers, Sikich, tariffs, Trade, trade wars

What a week for polls seeking to shed some light on whether and how much President Trump’s tariffs-heavy trade policies have affected American domestic manufacturing! Monday’s post reported on findings from the Dallas Federal Reserve bank pointing to the answer, “Not nearly as much damage as widely supposed, and some benefits.”

Since then, the results of two more surveys have been published, and they, too, indicate that the situation is much more complicated than portrayed by the gloom and doom claims and predictions from globalization cheerleaders in politics, the media, and the U.S. Offshoring Lobby. And one of them shows that more domestic American manufacturers are expecting net gains, not net losses, from the trade wars – and even that many are coping with more and higher tariffs by boosting their production at home. 

Let’s start with the poll supporting the “tariffmageddon” narrative most strongly. It’s the National Association of Manufacturers’ (NAM) Quarterly Outlook Survey for the second quarter of 2019. The headline number for trade mavens: 56 percent of the 689 respondent companies called “Trade uncertainties” their “primary current business challenge.” This concern trailed only “Attracting and retaining a quality workforce” (68.6 percent). During the first quarter, trade uncertainties were the top concern of only 52.6 percent of respondents – so that number’s up, but not dramatically.

For good measure, along these lines, the expected growth rate for exports over the next year was just 0.4 percent – the lowest such figure provided in eleven quarters (going back to the third quarter of 2016).

In addition, respondents’ expectations of major performance indicators also weakened from the first quarter’s results, including their own company’s outlook, and the growth of sales, production, hiring, and capital spending.

But again, the difference between the first and second quarter responses wasn’t game-changing. Indeed, nearly 80 percent of the companies described their outlooks as positive (down from nearly 90 percent in March, sales growth predictions declined from 4.4 percent to 3.4 percent, ditto for production growth, full-time payroll growth dropped from 2.1 percent to 1.6 percent, and capital spending from 2.8 percent to 2.2 percent. The only indicator that slipped into negative territory was inventories (from 0.4 percent growth to 0.1 percent contraction).

So that’s the glass-half-empty evidence. And now for something if not completely different, pretty substantially so. It’s a survey of manufacturers from Sikich, a Chicago-based accounting and consulting firm, and its headline finding: More executives reported feeling optimistic about the impact of recent and ongoing trade developments (38 percent) than expected a negative impact (35 percent). And the most optimistic respondents came from larger companies (45 percent) and “companies with operations outside the U.S.” (51 percent).

Even better for the Trump administration and its trade policy supporters – Sikich’s findings about how companies are responding to these trade developments: “The action cited most often was manufacturing more products, or components, in the United States (45%).” At the same time, “a substantial portion of companies are looking to diversify procurement by sourcing purchased materials from new countries (36%) and sourcing raw materials from new countries (33%).” (Note: These answers aren’t necessarily mutually exclusive.)

In terms of their overall assessment of the economy, only 27 percent of the Sikich respondents believe that a U.S. recession over the next year is “extremely or very likely.” Interestingly, in light of their above trade-related responses, 49 percent of executives from larger companies – nearly twice as great a percentage – were expecting such a downturn.

And especially encouraging for all Americans: Not only were 63 percent of respondents nonetheless preparing for the possibility of a recession. But 53 percent of the total said they were “increasing the efficiency of production/business processes to reduce costs.” Such productivity-boosting measures are much more constructive – and economically beneficial – actions than whining about an imminent end to access to government-subsidized, artificially cheap inputs from places like China.

Nor do the Dallas Fed and Sikich results look like outliers. Their results are very much in line with those of polls I reported on last September – from the big Swiss-owned investment bank UBS, and Yahoo Finance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Could Trump’s Business Tax Cuts Be Working (Kind of) as Advertised?

Tags

capex, capital spending, dividends, Factset.com, mergers and acquisitions, research and development, Standard & Poor's 500, stock buybacks, tax cuts, taxes, Trump, Washington Post, {What's Left of) Our Economy

One of the biggest stories in economics and politics over the past year has been the tax bill championed successfully by both the Trump administration and the Republican-controlled Congress. Economically it’s widely judged to have failed in its primary stated mission: encouraging more productive investment in the U.S. economy. And because it supposedly did little more than shower cash on already profit-rich corporations that overwhelmingly put it to supposedly unproductive uses like share buybacks and dividend payments (see, e.g., here and here), the American public rightly recognized it as a giveaway to tycoons and The Rich generally, and viewed it as one big reason to vote GOP candidates out of office in the recent midterm elections.

What a surprise, then, to come across evidence that the $1.5 trillion in business tax cuts so far have done a respectable job of working as advertised.

According to the Washington Post‘s Michael Heath, new research from Standard and Poor’s shows that since the tax package was passed, the firm’s well-known group of the 500 largest publicly traded U.S. companies have performed as follows:

>Through the first three quarters of this year, they’ve boosted share buybacks – which support the value of company stock and in the process enrich executives paid largely based on the increase (or decrease) in these stocks’ value – by 11.84 percent.

>During the same period, they’ve hiked capital spending (on new plant and equipment) by 19 percent.

>Over this span, they’ve boosted research and development spending by 34 percent.

>During the first eleven months of the year, their dividend payouts have been virtually unchanged.

When the entire American business universe is examined, the picture looks somewhat different – at least through the first half of this year. According to this summary of research from Goldman Sachs:

>buybacks rose 48 percent

>capital spending rose 19 percent

>research and development spending rose 14 percent.

What’s noteworthy about these figures, though, is that they indicate that the larger, indeed multinational U.S.-based companies spent their tax windfalls more productively than smaller, largely domestically focused firms. That’s noteworthy because one of the principal objectives of the tax cuts was to persuade the multinationals to stop stashing so much of their earnings abroad and bring these monies back home to stoke growth and jobs. So it appears that, to a significant extent, that’s what they’ve done.

Of course, the real results of the effects of the tax cuts (or any other policy initiative) can only be assessed accurately not simply by comparing year-on-year rates of change in various metrics, but examining how these rates of change have differed (if at all) from those of years before the initiative went into effect. I haven’t yet located the data for most of these indicators, but the chart below combined with the Washington Post figures for capital spending for the S&P 500 makes clear that it’s been growing much faster since the cuts were passed than before.

One area the Post didn’t look at, though, can’t be neglected: mergers and acquisitions. The numbers indicate that, measured by value, such activity increased much faster between 2017 and 2018 (for the first three quarters of the year) than between 2016 and 2017 – by 33.47 percent to 1.05 percent. (My sources are the 2016-18 data published by Factset.com.  Here’s its latest report.) The absolute numbers are sizable, too – the value of these transactions rose by more than $387.5 billion from January-through-September, 2017 to the same period this year. (Note: These figures are only authorized expenditures – but reportedly there’s evidence that 85 percent wind up getting made.)

But here (as elsewhere, for that matter) is where we run into a big complication that comes up whenever a policy initiative is judged: What changes are attributable to this move, and what changes to other factors? These other factors include other policies (like interest rate movements both announced and suggested by the Federal Reserve, or regulatory or trade policy changes), or existing or evolving business decisions on deploying capital (based on corporate judgments regarding likely customer demand that stem from the overall state of the economy or particular markets, and on how these situations are considered likely to change).

But all the same, a reasonable, defensible bottom line conclusion seems to be that productive business spending since the tax cuts’ passage is rising at a faster rate than before passage, and that the tax package has played a discernible role. Moreover, some of the other plausible reasons for this acceleration also are arguably attributable to Trump administration policies – at least in part.  Faster overall economic growth and regulatory reform are two examples. Trade policy might be a third.

Moreover, I’m making these points as someone who’s argued that President Trump’s prioritization of the tax cuts and Obamacare repeal was a major first-year mistakes, at least politically. Both should have taken a backseat to infrastructure building in particular. I’ve even expressed skepticism about the cuts’ likely economic impact.

But economically, the administration and its supporters seem to have had (and still have) a pretty good story to tell about the tax cuts – which could have bolstered their political appeal. Which means that a bigger mystery than the cuts’ actual effects could be why the administration told it so ineffectively.

(What’s Left of) Our Economy: A New JOLT to the Manufacturing Conventional Wisdom

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capex, factory orders, Federal Reserve, industrial production index, Janet Yellen, job openings, Jobs, JOLTS, Labor Department, manufacturing, wages, {What's Left of) Our Economy

Since Janet Yellen is a leading labor economist as well as Federal Reserve Chair, and she closely follows the monthly so-called JOLTS reports, so do I. So should you if you’re interested in how the U.S. labor market is faring and therefore (to a great degree) whether the central bank will move to stimulate the economy or cool it off.

My main interest in these data has focused on what light they shed on job quality – and specifically on whether the job openings reported in these surveys of employment turnover have come mainly in low-wage or high-wage sectors. (My work shows it’s the former.) But this morning’s JOLTS numbers from the Labor Department contained such astonishing results for manufacturing that they deserve special attention – and not simply because the April data were so exceptional, but because since the last recession began, they have contrasted so strikingly with other measures of manufacturing’s performance.

According to the new JOLTS report, America’s manufacturers reported 415,000 job openings at their companies in April. That’s the second highest figure on record (the data go back to the end of 2000), which is newsworthy enough. But it also represents a 23.15 percent jump from the March total of 337. Just as interesting, the year-on-year increase is 23.15 percent, too.

Logically, this surge means that manufacturers became much more optimistic about their prospects in April. Why else would they be looking for so many new workers? Yet nothing else we know about domestic manufacturing in April would seem to justify this optimism.

For example, in inflation-adjusted terms, manufacturing production inched up only by 0.33 percent in April over the March levels – a decent performance by recent standards, but no standout. Since April, 2015, manufacturing output rose by only 0.54 percent.

Do future-oriented gauges of manufacturing signal the appearance of great expectations? New orders for manufactured goods in April did rise by 1.92 percent on month (these are not price adjusted), but that kind of improvement is nothing exceptional. Moreover, year-on-year, this measure of incoming work is down 1.80 percent.

But this disconnect between the job openings data and other manufacturing statistics doesn’t just stem from one month that could be a classic outlier. (Also, the data will be revised next month.) It’s been the case since the recession began.

During the downturn itself, JOLTS trends did follow the other gauges way down. Between the slump’s onset, in December, 2007, and manufacturing’s employment bottom, in March, 2010, industry’s job openings plunged by 45.11 percent. During this period, real manufacturing output sank by 14.92 percent, and factory orders dropped by 16.73 percent. So far so good.

But since March, 2010, the number of job openings reported by American manufacturers has skyrocketed by 184.25 percent. This increase has left in the dust the rise in constant-dollar industrial production (12.68 percent) and manufacturing orders (15.40 percent). And even if you take out the unusual April manufacturing job openings number, the gap is still enormous.

In fact, since the recession began more than nine years ago, manufacturing job openings are up by 56.01 percent, even though real output is down by 4.13 percent and factory orders have fallen by 3.91 percent.

This gap suggests that the conventional wisdom about the relationship between manufacturing employment and manufacturing output need some big rethinking. After all, it’s become a commonplace that manufacturing has no chronic output problem – it does, however, have a serious jobs problem (which is rarely described in this context as a problem) because technology makes it possible to turn out more products with fewer workers.

But the picture created by combining the JOLTS, production, and orders statistics indicates that modest gains in production and orders have been spurring a tremendous increase in the demand for workers. How can that be if the sector is so increasingly capital-intensive? Further, standard economic theory teaches that when businesses find themselves short of labor, they either boost wages in order to attract more applicants, substitute technology (machinery, equipment, software, etc.) if they don’t feel like offering higher pay, or respond with some combination of these steps.

Yet as I’ve exhaustively documented, until very recently, manufacturing wages have been going nearly nowhere. And businesses overall have displayed few signs of significantly increasing their capital spending (on that new machinery, etc.) – at best.

Of course, it’s possible that all of these government statistics are wrong. But I suspect it’s more likely that the so-called experts know much less about manufacturing than they think.

Following Up: Behind the Business Investment Slowdown

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business investment, capex, capital spending, casino capitalism, finance, financial deregulation, recovery, The Wall Street Journal, {What's Left of) Our Economy

Today’s Wall Street Journal piece about subpar levels of investment by U.S. corporations wasn’t mainly important for its update on this critical economic trend – which is surely connected with the subpar economic recovery the nation is experiencing. Instead, it was mainly important because it sheds new light on a major debate that’s been taking place about why such investment is lagging.

In particular, the article adds to the evidence that this humdrum investment performance is more a result than a cause of the lousy recovery. In other words, the sluggish economy goes farther toward explaining today’s investment levels than do factors such as financial regulatory policy changes that discourage productive uses of capital and encourage profit-and compensation-padding uses like stock buybacks and acquisitions. And that’s a case that I made most recently this past August.

The key is this chart, which tracks the growth of all forms of investment spending except for residential housing on the one hand, and the growth of consumer spending on the other. Moreover, it compares growth in these two areas as it unfolded during the last few economic recoveries, as well as the current version.

Just eyeballing the chart makes several trends clear. First, even though the growth of such business spending during this recovery has been nothing special by historical standards, its pace isn’t terribly different. Second, although the growth of such investment has been ordinary, it’s been faster than the growth of consumer spending during this recovery. Third, that’s typically been the case for recent recoveries – whether before or after 1980, when the new wave of productive-spending-crimping regulations is thought to have begun. And fourth, the most conspicuous outlier data line in this graphic is the growth of consumption during this recovery. It’s been substantially slower than during all of its recent predecessors.

I’m not saying that this chart clinches the argument for me. Some critics have argued that my decision to use inflation-adjusted data for measuring business spending is flawed.  As mentioned in the post cited above, when I checked, I didn’t find a major difference. It is true, however, that the growth of business spending’s share of the economy in current dollars was faster before the 1980s than after.

Others say that the best evidence of the U.S. economy’s degeneration into a short-term- and finance-obsessed capitalist“casino” isn’t best illustrated by corporate spending on physical assets like new factories and machinery, or even on research and development. Instead, to quote one, “the problem is in training, retaining, and rewarding employees.  That is what turns capex [capital expenditures] and R&D into productivity gains that get shared with workers.”

At the same time, this analyst (who wrote to me in a private capacity) allowed that this “is not to say that there one cannot learn a lot by diving into the data on capex and R&D. But there have been so many changes in the composition of industry (e.g., the rise of biotech), globalization of production, and accounting practices (often for tax purposes) since the 1970s that affect these macro indicators that the long-run trends should be just a starting point for serious discussions about what has gone on in the U.S. economy rather than a way to come to conclusions and end the discussion.”

I’m certainly in favor of being cautious about conclusions, and look forward to continue investigating this subject. At the same time, I think it’s fair to interpret the above position as an acknowledgment that the great financial deregulation wave that began around 35 years ago hasn’t notably soured Corporate America on spending more on physical assets and even intangibles like R&D. And that strikes me as pretty darned important when you consider the role that these assets have played in creating American prosperity – and the role they will need to play in restoring genuine economic health.

(What’s Left of) Our Economy: Concerns About the Quality of U.S. Growth Remain Amply Justified

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austerity, bubbles, capex, consumption, defense spending, GDP, government spending, gross domestic product, growth, housing, recession, recovery, {What's Left of) Our Economy

As usual, all the buzz about this morning’s final (for now) revisions to second quarter U.S. economic growth was about the quantity of growth. For a country that’s still pretty growth starved, that’s understandable. But I wish the powers-that-be paid more attention to the quality of growth. In the proverbial long run, the only sustainable growth is high quality growth. Or have you already forgotten the last decade’s historic bubbles and their bursting, and think that Americans can keep borrowing and spending their way to prosperity?

Today’s gross domestic product (GDP) numbers were by no means devoid of good news on this score. In line with my finding yesterday, business investment powered 25.65 percent of the second quarter’s 4.60 percent annualized growth. This role is much bigger than that played by such investment before the late-1970s, when Corporate America supposedly started to get hooked on fast buck strategies at the expense of genuinely productive uses of profits and credit. And measured as a share of real gross domestic product on a static basis, the latest 13.11 percent business investment number is historically elevated, too.

Another positive long run sign: The economy is growing in real terms even though government spending is falling. Since the recovery began, total public sector consumption and investment is off nearly seven percent adjusting for inflation. In fact, as noted by Rex Nutting of Marketwatch.com, in absolute terms, federal spending is now below its level at the start of the Great Recession. In fact, this spending has been dropping in abolute terms for seven straight quarters.

At the same time, it’s far from clear that the United States is on an austerity path. Since the recovery began officially, in mid-2009, nearly 56 percent of the decline in real federal outlays has come in defense. Moreover, state and local government spending during the recovery has dropped by only 5.99 percent – substantially less than the 8.53 percent federal spending decrease – and it’s up 1.47 percent over those last seven quarters during which federal spending fell.

Other signs also abounded that America remains far from creating what President Obama has called “an economy built to last” – one based on producing real wealth in the form of everyday goods and services, not simply binge consuming. Principally, the 2000s bubble was inflated mainly by soaring spending by households and by soaring spending on homes. The new GDP figures show that such spending now comprises 71.26 percent of the total economy after inflation. That’s lower than the 71.56 percent level in the first quarter of this year. But it’s higher than the 70.94 percent in the second quarter of 2009 and the 71.16 percent of the last quarter of 2007.

In other words, the economy has become more housing and consuming heavy not only since the recovery began, but since the last recession started. To me, that still sounds too much like an economy built to implode.