(What’s Left of) Our Economy: So Much Manufacturing Data…So Few Trade War Answers

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Census Bureau, core capex, Federal Reserve, Jerome Powell, manufacturing, Markit.com, Philadelphia Fed, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

What a day for U.S. manufacturing data! It no doubt raises major questions over whether President Trump’s tariff-centric trade policies are finally showing signs of damaging American domestic manufacturing (as has been widely claimed for months, despite an almost total lack of statistical evidence). Unfortunately, it’s a mixed and pretty muddy verdict that’s delivered by the separate reports from the Census Bureau (on national spending on the kinds of “core” capital goods made by U.S. manufacturers), the Philadelphia Federal Reserve Bank (on manufacturing in the mid-Atlantic states), and private sector consultancy Markit.com (on the overall state of domestic industry).

To be sure, the headline figures collectively were worrisome. The Census reading was both worse than expected, and strengthens the case that there’s been a softening on business expenditures on machinery and equipment not meant to build defense-related products (which, after all, reflect government decisions, not economic fundamentals) or aircraft (where demand is thought to be unusually volatile, and therefore likely to produce results that distort the figures for industries as a whole).

The Philadelphia Fed reading was the first such monthly reading since May, 2016 showing regional industry to be contracting rather than expanding. And the Markit report – something of a national version of the Philadelphia survey – signaled “the slowest improvement in business conditions since September, 2017.”

But the obstacles to drawing any broad conclusions, much less trade- and tariff-related conclusions – are formidable to say the least.

In the first place, it’s always dangerous to place major emphasis on a single month’s worth of results. In addition, the three surveys cover different time periods. The Philly Fed and Markit results purport to show conditions for February. The Census capital spending release only brings the story up to December. Not to mention that it came 35 days late due to the partial federal government shutdown.

Moreover, the Markit and Census results are preliminary. Revisions are rarely game-changers, but can sometimes turn contractionary readings expansionary – and vice versa.

It’s also crucial to distinguish between absolute drops in activity and relative drops. The Philly Fed report – which provides the most recent data – and the Census results describe absolute contractions in their indicators. But the Markit headline figure remains in expansion territory – it’s just not quite so expansionary.

As RealityChek regulars are used to reading, “Don’t ignore the internals.” And all three releases were filled with intriguing details. On the positive side, for example, the February Philly Fed report found that hiring by regional manufacturers not only kept increasing – it increased at a faster pace. That’s unusual for a manufacturing sector that’s supposedly contracting. And in fact, respondents professed to be slightly more optimistic about their future prospects in February than they were in January. Markit also reported strong February manufacturing employment along with other signs that “manufacturers remain firmly in expansion mode.” 

On the negative side, the Philly Fed reported big drops (both into absolute contraction) in both new orders and shipments. The former in particular seems like bad news for future business. And the Census capital spending results also are viewed as a forward-looking indicator – although they’re two months old.

Most challenging of all is figuring out what role the Trump tariffs have been playing, since they’re hardly the only development influencing manufacturing’s health. The economist who writes the Markit reports sums up the situation aptly, in my opinion:

“Businesses that experienced a soft patch for production cited a range of factors holding back growth, including adverse weather, worries about the global economic outlook and ongoing international supply chain uncertainty.” That last phrase refers to trade conflicts and their possible impacts. But of course, even assuming that such uncertainty was indeed a major cause of the soft patch, let’s not forget that soft patches often firm up quickly.

And don’t forget the Federal Reserve! Last October, Chairman Jerome Powell spooked investors by suggesting that the central bank would keep raising interest rates well into this year. Such “tightening” usually slows down growth by increasing the cost of borrowing for consumers and businesses. But in mid-November, Powell indicated he was having second thoughts and, after financial markets suffered through a terrible December, in early January convinced investors that he was serious about continuing easy money with an early January statement.

So as I see it, there’s still no significant evidence that the Trump tariffs themselves have already been hurting American manufacturing, and no compelling evidence yet that they will. But since no one has a whizbang crystal ball, and the stakes are so big, the intellectually honest course to take is to keep monitoring the data and report on them as accurately and as dispassionately as possible.

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(What’s Left of) Our Economy: The New Jobs Report Shows that the Metal Tariffs Sky Keeps Not Falling

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aluminum, core capex, Jobs, Labor Department, manufacturing, metals tariffs, metals-using industries, private sector, steel, tariffs, Trade, {What's Left of) Our Economy

This is getting just embarrassing. Economists and mainstream media reporters and pundits keep claiming that President Trump’s metals tariffs are already damaging the U.S. economy – and especially industries that heavily use the steel and aluminum that have become more expensive because of the levies on imports of those goods. (Here’s a new example.)

And the most authoritative data available keep demonstrating that these claims so far are absolute hokum. (See this RealityChek column for a summary and relevant links.) The latest evidence: this morning’s August jobs report from the Labor Department. It shows emphatically that those metals-using sectors have mainly created net new jobs at a faster pace than domestic manufacturing overall, and that several have boosted payrolls more rapidly than the entire private sector (including service industries that are not heavy metals users).

Here are the numbers showing the relevant rate of employment changes from April (the first full month in which the metals tariffs were in effect) through both July (where they stood as of the previous monthly jobs report) and through August:

                                                       thru July                        thru August

entire private sector:                 +0.53 percent                   +0.64 percent

overall manufacturing:              +0.73 percent                   +0.47 percent

durable goods:                          +0.96 percent                   +0.57 percent

fabricated metals products:      +1.10 percent                   +1.17 percent

non-electrical machinery:         +1.43 percent                   +1.04 percent

automotive vehicles & parts:    +1.06 percent                  -1.08 percent

household appliances (thru June): -0.63 percent           +0.16 percent (thru July)

aerospace products & parts (thru June): +1.05 percent  +2.03 percent (thru July)

 

There have been some shifts within this list. But with the exception of automotive, no metals-using sector has slacked off more than manufacturing as a whole, and three of these industries (fabricated metals products, appliances, and aerospace) have picked up the pace. And even the metals-using durable goods super-sector as a whole didn’t fade much more on the employment front than manufacturing overall.

In addition, yesterday’s official business investment numbers confirmed that, through July, new orders for core capital goods (such machinery and equipment minus demand for defense and the volatile numbers for aircraft) have now advanced sequentially for four straight months. Since “core capex” is rightly viewed as the economy’s best proxy for business’ confidence in its future prospects, these results stuck a new fork in the narrative that the Trump tariffs would vitiate such spending by boosting that predominant bugaboo of corporate planning – uncertainty.

The new jobs report did contain some disquieting news for domestic manufacturing. Payrolls fell on month in August (by 3,000) for the first time since July, 2017. And the revisions pretty much cut the previously reported impressive June and July gains in half. (The new July increase of 18,000 is still preliminary.)

But today’s employment release also made clear that, after several months of metals tariffs, the fears about their impact are no more than fears. Why is that not considered newsworthy?

Glad I Didn’t Say That: More Fake News on Trump Tariffs Fallout

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business spending, Catherine Rampell, core capex, Glad I Didn't Say That!, tariffs, Trade, Trump, uncertainty

“Threats of additional tariffs and lingering uncertainty over trade policy are also causing firms to reevaluate or delay investment, as University of Chicago Booth School of Business professor Steven J. Davis noted recently.”

– Catherine Rampell, The Washington Post, September 3, 2018

U.S. “core capex”* spending since first Trump non-trade law tariffs (late March): +0.92 percent

U.S. “core capex” spending during comparable (April-June) period, 2017:  -0.03 percent

U.S. “core capex” spending during same period, 2016: -1.63 percent

U.S. “core capex” spending, advance reading, June-July, 2018: +1.40 percent

*business spending on non-defense capital goods excluding aircraft

(Sources: “Trump promised farmers ‘smarter’ trade deals. Now he has to bail them out,” by Catherine Rampell, The Washington Post, September 3, 2018; New Orders, Nondefense Capital Goods Excluding Aircraft; Manufacturers’ Shipments, Inventories, and Orders, Time Series/Trend Charts, Business and Industry, U.S. Census Bureau; “Monthly Advance Report on Manufacturers’ Shipments, Inventories, and Orders,” Release Number: CB 18-118 M3-1 (18)-07, U.S. Census Bureau, August 24, 2018, https://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf)

(What’s Left of) Our Economy: Where’s the (Trump Tariffs-Created) Uncertainty?

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capital spending, Census Bureau, core capex, durable goods, tariffs, Trade, Trump, {What's Left of) Our Economy

When something widely predicted keeps not happening, maybe it’s time to start de-emphasizing speculation as to when it might happen, and start focusing instead on why the predictions have been off-base.

I’m not saying that that time has yet arrived when it comes to the impact of President Trump’s tariff-heavy trade policies on the U.S. economy – which have triggered any number of forecasts of disaster, or at least serious slowdown, but which have, as I’ve reported, so far brought nothing of the kind. But with the release this morning of the Census Bureau’s latest advance gauge of orders for durable goods industries, the time to start reassessing predictions of trade-mageddon clearly continued to get closer.

The biggest contrarian piece of evidence in these durable goods numbers (which go through July) is the finding on American business spending on new orders for capital goods minus defense products. This data series is widely, and rightly, regarded as the best available evidence of corporate purchases of machinery and equipment, and therefore a highly revealing sign of business optimism or pessimism – and of the economy’s prospects.

For if businesses are spending strongly on such goods, they’re surely expecting good times to continue, or less-than-good times to become good. If such spending is weak, then the opposite conclusion is certainly reasonable to draw.

In this vein, a central argument against the Trump trade policies is that, at the least, they’ll increase what businesses supposedly like least – uncertainty about the future – and that as a result, corporations will either freeze or cut capital goods spending and set off a downward economic spiral. But the newest Census data show that nothing of the kind is yet happening.

According to the new release, spending on non-defense capital goods excluding aircraft (defense spending is excluded because it’s the result of government policy, not market forces, and therefore says relatively little about the fundamentals of the economy; aircraft figures are excluded because they can be highly volatile) rose a healthy 1.40 percent between June and July.

If this sequential increase is confirmed in the final July numbers, which will come out in early September, then it will represent the fourth straight monthly advance. And what’s revealing about the time-frame is that the first tariffs to be imposed by the Trump administration per se (as opposed to levies imposed by the independent U.S. International Trade Commission) came in late March in the form of the steel and aluminum tariffs. So these “core capex” findings seem to indicate substantial certainty on the part of American business.

Skeptics can (correctly) point to signs that the pace of core capital spending has slackened since the tariffs’ advent. As indicated above, the final core capex numbers only go through June, but they show that from January through April, such spending rose a total of 2.68 percent, but only 0.92 percent since April.

Yet looking over the comparable data for previous years – when such tariffs were only vague talk (2017) or off the table (before Mr. Trump became president) – shows that this pattern is nothing out of the ordinary. Here are the January-thru April, and the April-thru-June final core capital spending changes for 2014 through 2017:

                                              January-April                   April-June

2017                                     +2.08 percent                  -0.03 percent

2016                                      -1.61 percent                  -1.73 percent

2015                                      -2.43 percent                   -1.35 percent

2014                                      -2.16 percent                   +4.32 percent

Yes, as emphasized in previous such posts, the time-frames are short, many more tariffs could lie ahead, and they could take a major toll on the American economy. But until this damage starts appearing, perhaps the Mainstream Media and the other economic and business powers-that-be might begin investigating why it may not?

(What’s Left of) Our Economy: Factory Orders Keep Falling and Slowing the Recovery

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business investment, capital spending, core capex, factory orders, manufacturing, recession, recovery, {What's Left of) Our Economy

This morning, I reported on the new U.S. labor productivity statistics just published by the government, which revealed that this crucial measure of the economy’s efficiency continues to grow at historically low rates. Now let’s look at the second major set of full-year, 2015 statistics issued this morning that illuminate the state of the American recovery. They cover factory orders and, they’re considerably worse.

This new orders data shows how much new business is being won by manufacturers in various sectors, and the main category of company economic observers look at is “non-defense capital goods excluding aircraft.” Purchases from these firms, often referred to as “core capital spending” (“core capex” for short), get special attention because they’re a good proxy for the nation’s level of business investment – excluding the volatile (but big!) aircraft, and defense spending (which of course isn’t driven by free market spending). Such investment in turn can be a powerful engine of overall long-term growth.

Unfortunately, capital spending currently is helping to lead the economy’s slowdown. Core capex fell by 1.44 percent from November to December, its biggest monthly drop since winter-affected January, 2015 (2.21 percent). Ignoring such weather-distorted data, you need to go back to June, 2012 (1.89 percent) to see a bigger sequential plunge.

Overall levels of core capex peaked in July, 2014, and on a monthly basis have fallen since then by 8.15 percent. In other words, the economy has suffered a technical factory orders recession (two consecutive quarters or more of cumulative decline) for nearly a year and a half. Moreover, between full-year 2014 and full-year 2015, these orders sank by 3.90 percent – the worst performance since recessionary 2008-09 (-18.50 percent). And since that sharp downturn began, in December, 2007, monthly core capex is up only 1.22 percent.

These figures give some credence to the notion – which I disputed recently – that American manufacturers are mainly being troubled today by a weakening of U.S. demand for industrial goods. I noted that continually rising imports indicate that demand for foreign-produced manufacturers keeps growing. Tomorrow we’ll get the first full-year 2015 trade data, which will shed more light on the relative importance of these factors. For now, though, it’s clear that weak factory orders are one more obstacle domestic manufacturing – and the larger economy – will need to overcome to speed up the recovery and place it on more solid, production-heavy, ground.

(What’s Left of) Our Economy: Worrisome Final Factory Orders Figures for November

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automotive, core capex, factory orders, manufacturing, manufacturing renaissance, {What's Left of) Our Economy

The final figures for American factory orders came out this morning, and they contained some notably bearish news for the manufacturing sector and the whole U.S. economy. In addition to overall orders dropping for the fourth straight month, orders for capital equipment excluding aircraft and defense goods dropped for the third straight month for the first time since the spring and summer of 2012.

Total manufacturing orders fell between last September and January, too (four straight months), but the January number was presumably affected by the harsh winter. (Truth to tell, however, I have never been clear on why bad weather would affect orders profoundly, as opposed to production or shipments.)

The decline in non-defense capital spending excluding aircraft is even more important because it’s a pretty good proxy for private sector business spending – which can generate the kind of healthy growth that the still heavily indebted American economy needs. Indeed, the final November monthly decrease of 0.5 percent was worse than the advance figure, published late last month, which showed no change.

The year-on-year increase in this “core capex” spending, moreover, slowed to 1.39 percent in November, the slowest rate since February’s winter-affected 2.36 percent. At least manufacturing still has a way to go before that “core capex” order decline matches the 2012 string, which reached seven months.

The new orders statistics for specific industry groups weren’t encouraging, either. The Census Bureau tracks such information for eight such categories: primary metals; fabricated metal products; machinery; computers and electronics products; electrical equipment, appliances, and components; transportation equipment; furniture; and nondurable goods.

New orders fell month-to-month in absolute terms for seven of these eight sectors. (Machinery was the only exception.) These orders were weaker month-to-month in four of the eight sectors – meaning that they fell at a faster rate than the month before, increased more slowly, or saw a gain turn into a loss. These sectors were fabricated metal products; computers and electronics products; transportation equipment; and furniture.

Underscoring the lead role it’s played throughout manufacturing’s recovery from a brutal recession, automotive orders rose in November for the third straight month and matched the record they had previously set in July, 2007 – $22.116 billion. But this continued out-performance also reminds that, outside this sector, a genuine American manufacturing renaissance is still Missing in Action.

(What’s Left of) Our Economy: The Most Reliable Manufacturing Gauges Keep Disappointing

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automotive, business spending, core capex, durable goods, manufacturing, {What's Left of) Our Economy

What a stinker this morning’s report on durable goods orders was!

The Census Bureau’s new advance look at demand for these products in September showed a 1.7 percent monthly decline in orders for capital equipment outside the defense sector and excluding the big (but highly volatile) aircraft industry. That was the second month-to-month drop in this widely followed gauge of business investment in the last three months. As a result, “core capex” (capital spending) is now up five percent year-on-year.

Interestingly, the month-to-month figures are presented in the press releases on a seasonally adjusted basis, but the year-on-year figures are not seasonally adjusted. To add to this mystery, you can get the seasonally adjusted year-on-year numbers from the Bureau’s interactive data base, but it’s one-month behind.

Looking at these seasonally adjusted year-on-year data from April on (to factor out the weather-depressed activity from winter and the equally distorted early spring catchup) shows that it’s up from 4.02 percent to a whopping 7.31 percent – which sounds great. But if you look at the 2013 data, you see that last year was a weak one for this business spending, so the annual comparisons are bound to look impressive. Barring a huge upward revision in the final Census report for September (due out November 4), the latest year-on-year growth won’t be nearly as good.

Drilling down into the details (and these figures include aircraft and defense spending), the new report reveals that new orders strengthened from August to September in four of seven major industry groups tracked (meaning either that they moved from contraction to growth, their growth sped up, or their contraction slowed down). These sectors were primary metals, fabricated metal products, transportation equipment, and miscellaneous durable goods). New orders weakened in machinery, computers and electronics products, and electrical equipment, appliances, and components.

New orders actually fell month-to-month in three of these seven sectors: machinery, computer and electronics products, and transportation equipment.

Also of note: New orders in the (heretofore) scorching hot automotive sector fell on month in September for the second straight month. Year on year, such spending is up only 4.7 percent – less than in an overall manufacturing sector its growth has been leading.

But because little is straightforward in American manufacturing data, at least in the short term, just after this lousy durable goods report came out, the Richmond, Va. branch of the Federal Reserve told us that manufacturing activity in its district continued on its recent tear. The October headline figure – which measures overall manufacturing activity – surged to 20 from 14 in September. All the key internals, like new orders and employment, looked strong, too.

Keep in mind, though, that like all of the monthly regional Fed manufacturing surveys, this Richmond report is vulnerable to “survivorship bias.” It measures how the region’s existing manufacturers say they’re faring, regardless of whether their numbers have grown or shrunk over any given time frame. And the same goes for the upcoming purchasing managers’ indexes from the Institute for Supply Management and Markit.

(What’s Left of) Our Economy: Finally! Genuinely Good News about Manufacturing!

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capital spending, core capex, investment, manufacturing, manufacturing renaissance, {What's Left of) Our Economy

Manufacturing renaissance or another (finite) investment cycle? That’s one question that’s inevitably raised by the manufacturers’ orders data like that released by the Census Bureau this morning. I took a deep-ish dive in the historical statistics available on the Census site and think it’s ultimately too soon to tell. But the numbers for what economists call “core capex” do provide some of the strongest evidence available that something good and lasting may be happening in domestic manufacturing.

Technically, core capex is spending on capital goods less aircraft and defense-related products. This category is seen as the best proxy for business spending on materials, equipment, and machinery because the defense sector dances to the government’s tune, not the free market’s, and aviation orders are highly volatile.

Today’s Census release told us that August orders for such goods increased a little less than 0.4 percent over July’s levels on a seasonally adjusted basis – less than the 0.6 percent rise reported in an advance report issued late last month. Year on year, these order are up 7.31 percent. (These figures are all unadjusted for inflation.)

How does that compare with manufacturing’s recent past? The year-on-year figure compares well with August-to-August totals going back to 1992 (the earliest easily available data) – not the economy’s best performance (the 17.78 percent annual surge during manufacturing’s strong 2009-10 rebound from the Great Recession), but far from its worst, even outside recessions.

But the most important message sent by these annual totals is that core capex doesn’t rise and fall steadily or gradually. Though not as dramatically up and down as aircraft, it’s pretty volatile, too. And its greatest jumps reliably follow its worst nosedives.

The biggest drop-off by far happened between 2008 and 2009, when the Great Recession took hold. On an August-to-August basis, it cratered by 25.62 percent. In fact, during the entirety of that recession, business purchases of these products sank by 25.37 percent. Yet the next year came that nearly 18 percent August snapback, which was followed by an 11.07 percent rise. In fact, so far in the present recovery, core capex spending is up 45.43 percent.

Impressively, these last five years of growth have been stronger than the recovery from the previous recession – which featured a 16.13 percent August-to-August decline in non-defense, non-aircraft capital goods spending. Over the five years once the early 2000s downturn ended (in November, 2001), core capex increased by only 28.82 percent.

Skeptics might argue that the last recession’s core capex drop was much deeper than the previous recession’s – so the rebound naturally was stronger. But this spending category’s performance also stacks up very nicely against such investment during the 1990s expansion – which was led of course by technology investment.

That expansion began in April, 1991 and continued for nearly 10 years. I only have data going back to February, 1992, but from then through the so-called Clinton boom’s end, core capex soared by 79.66 percent. The current recovery is now a little more than five years old – just over half the length of that 1992-2001 period – and its core capex spending is actually ahead of its predecessor’s pace.

So everyone concerned with domestic manufacturing’s health – and that should include everyone concerned with the overall U.S. economy’s health – is entitled be encouraged about the trends in core capital spending. Let’s hope tomorrow’s monthly trade and jobs reports contain equally good news.