Those Stubborn Facts: Why Health Security Should “Trump” Free Trade for Americans

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active pharmaceutical ingredients, CCP Virus, China, coronavirus, COVID 19, European Union, exports, free trade, globalization, health security, India, medical devices, pandemic, pharmaceuticals, surgical equipment, Those Stubborn Facts, Trade

“[White House Office of Manufacturing and Trade Policy Director Peter] Navarro raised a lot of eyebrows when he warned that [international trade] fights over [healthcare-related goods] loomed and told Fox Business Network on Feb. 23: ‘People need to understand in crises like this, we have no allies.’ But what then seemed potentially alarmist now looks like foresight.”

– Bloomberg News, March 16, 2020

Number of countries that have curbed exports of healthcare-related goods*: 38**

 

*Includes pharmaceuticals, active pharmaceutical ingredients, medical devices, surgical appliances and supplies

**India, China, India, Taiwan, Indonesia, Belarus, Malaysia, Thailand, South Korea, Russia, United Kingdom, and the 27 members of the European Union

 

(Sources: “Export Wars Erupt as Officials Curb Supplies to Battle Virus,” by Shawn Donnan, Bloomberg News, March 16, 2020, https://www.bloomberg.com/news/articles/2020-03-16/trade-war-latest-welcome-to-the-coronavirus-export-wars-of-2020-k7uf1k01; “The Global Mask Shortage May Get Much Worse,” by K Oanh Ha, Ibid., March 10, 2020, https://www.bloomberg.com/news/articles/2020-03-10/the-global-mask-shortage-may-be-about-to-get-much-worse; “Export Trade News,” Foreign Trade Online [latest daily edition], https://www.foreign-trade.com/export_trade.htm; “The World Needs Masks. China Makes Them – But Has Been Hoarding Them,” by Keith Bradsher and Liz Alderman, The New York Times, March 16, 2020, https://www.nytimes.com/2020/03/13/business/masks-china-coronavirus.html; and “UK bans parallel export of two COVID-19 treatment candidates to protect national supply,” by Janet Beal, “Life Sciences,” IHS Markit, February 26, 2020, https://ihsmarkit.com/research-analysis/uk-bans-parallel-export-of-two-covid19-treatment-candidates.html)

(What’s Left of) Our Economy: Solid Manufacturing Jobs and Trade Numbers Despite Boeing’s Woes

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Boeing, China, exports, imports, Jobs, manufacturing, manufacturing jobs, manufacturing trade deficit, Phase One, tariffs, Trade, trade deficit, {What's Left of) Our Economy

You say U.S. manufacturing jobs keep growing too slowly? You say manufacturing’s trade deficit remains too high, and its exports inadequate? According to two big new government reports on the state of the American economy this morning, if you do, you should also be saying (with beaucoup de snark) “Thanks, Boeing!”

For it keeps getting clearer that the aerospace giant’s safety woes and resulting production halt of its (once) popular 737 Max model are sandbagging both measures of manufacturing’s performance – and not trivially. Don’t forget the silver lining, however.  Despite the Boeing effect, domestic industry has been holding up encouragingly well. 

The evidence is clearest from the trade figures. As reported last month in RealityChek, if not for a big deterioration in the civilian aircraft trade balance (until recently the sector of the entire economy with the biggest trade surplus), the full-year 2019 manufacturing trade shortfall would barely have grown over the 2018 level. And since industry itself increased output last year in pre-inflation terms, (at least through the latest – third quarter – data available), that represented a heartening sign that domestic manufacturing was becoming more self-reliant.

In January, the manufacturing shortfall actually fell month-to-month (by 0.38 percent, from $82.24 billion to $81.93 billion, and $850 million in absolute terms). The mix wasn’t exactly ideal: Imports were down 3.11 percent, but the value of exports (which are much smaller) fell by 5.58 percent.

But the civilian aircraft trade surplus plunged 44.43 percent – from $3.06 billion to $1.70 billion. So in January, had the sector simply equaled its December trade performance, the January manufacturing deficit would have been not $81.93 billion but $80.57 billion – the lowest total since last March’s $76.96 billion, and a monthly drop of 2.03 percent, not 0.38 percent. Further, manufacturing exports would have been $87.93 billion rather than $86.25 billion – or down only 3.74 percent, not 5.58 percent.

The picture is muddier for manufacturing employment because the data for civilian aircraft and their parts is reported one month after most other industry-by-industry jobs statistics. Another complication: The new jobs report overall goes up to February.

More puzzling still: Although latest statistics for the Boeing-related categories are January, they’re little changed from the December totals even though the 737 Max production suspension was announced in the middle of that month.

But it’s still legit to wonder whether they would’ve been better without the Boeing crisis. And how much better? Moreover, the vast aircraft supply chain encompasses dozens of manufacturing sectors beyond the engines and parts themselves. After all, these systems are in turn made of any number of components and materials. Boeing’s difficulties, therefore, could have been holding back manufacturing job growth broadly speaking for months.

Even so, industry as a whole added 15,000 jobs sequentially in February – it’s best such performance (except for a November increase that was aided by the end of the General Motors strike) since January, 2019’s 20,000.

And let’s not forget – industry achieved this employment gain even though the “Phase One” trade deal with China has left stiff U.S. tariffs on hundreds of billions of dollars worth of imported goods from China, as well as on much foreign steel and aluminum.

No doubt the coronavirus outbreak could send the manufacturing performance arrows pointing down again, or leveling off, in the next few months. But the new jobs and trade data make clear that despite an external (Boeing) shock that has nothing to do with President Trump’s trade wars, and despite the trade curbs he has enacted, domestic manufacturing has been on the rebound lately, and showed impressive resilience that bodes well for its future – and the entire economy’s.

(What’s Left of) Our Economy: 2019’s Biggest U.S. Trade Industry Winners & Losers, Part 2

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exports, goods trade deficit, imports, manufacturing, Trade, trade deficit, Trump, {What's Left of) Our Economy

Wednesday’s RealityChek post showed that, although in 2019, the United States made significant progress in curbing the growth of its chronic and massive trade deficits, the sectoral makeup of those deficits (and the group of industries that ran surpluses) changed significantly only in terms of those parts of the economy whose trade balances improved and worsened the most year-on-year. (The post only covered goods trade, as will this one, since detailed data for services industries isn’t yet available.)

Indeed, compared with the trade flows of 2016 (the final year of the Obama administration, and therefore the final year of a multi-decade U.S. trade policy status quo that President Trump is trying to overturn), the industries that dominated last year’s list of sectors with the biggest trade surpluses and deficits stayed practically the same – including in ranking. But the list of sectors whose trade balances changed the most for good or ill saw almost complete turnover.

Today’s post examines the export and import figures as such (rather than the deficits and surpluses) to see if the same trends have unfolded. And the overall picture looks pretty similar. The biggest difference is that there was somewhat less turnover between the 2016 and 2019 lists of industries with the fastest import and export growth than between the 2016 and 2019 lists of industries with the fastest changes in trade deficits and trade surpluses.

Let’s lead off with the Top 20 exporting industries. As with the trade surplus lists presented yesterday, these industry categories come from the now-standard U.S. government system for slicing and dicing the nation’s economy – the North American Industry Classification System (NAICS). And the categories are those comprising NAICS’ most granular level of disaggregation – the 6-digit level.

In addition, this export list and the list of the fastest export growers leaves out an aerospace category that, due to reporting limitations, lumps together aircraft and their parts and components – figures that can be highly misleading in an era where those goods are often produced both in the United States and abroad. (You will, however, notice other aerospace categories that purport to distinguish between the finished good and its parts. Even though they don’t seem to track with the numbers provided for that catch-all aerospace category, I’m including them anyway where they come up.)

A final anomaly: Although trade figures are provided by the government for a (combined) crude oil and natural gas category for 2016 (and years before), this sector disappears in 2018 and 2019. And it’s not clear what, if anything has replaced it. Given the big recent swings in America’s energy trade, that’s anything but a trivial omission.

And now the list of Top 20 exporters, in descending order of export value. In the right-hand column, you’ll see where these same industries ranked in the Top 20 in 2016.

Leading 2019 export sectors                                              2016 rank

(including annual percentage change)

1. petroleum refinery products: -9.9 percent                           1

2. special classification goods: +5.2 percent                           4

3. semiconductors: +3.8 percent                                              3

4. autos and light duty trucks:: +9.3 percent                           2

5. broadcast & wireless communs equip: -6.4 percent           5

6. misc basic organic chemicals: -5.5 percent                        7

7. plastics materials & resins: -1.0 percent                            9

8. jewelry & silverware: -8.5 percent                                     6

9. pharmaceutical preparations: +14.4 percent                       8

10. computer parts: -6.5 percent                                           10

11. non-diagnostic biological products: +11.5 percent         13

12. used or second-hand merchandise: -3.8 percent             14

13. waste and scrap: -4.9 percent                                          16

14. surgical and medical instruments: +3.5 percent              15

15. soybeans: +9.1 percent                                                   12

16. non-poultry meat products: -0.2 percent                        18

17.semiconductor machinery: -14.9 percent                        19

18. misc motor vehicle parts: -4.7 percent                           17

19. misc basic inorganic chemicals: -2.8 percent                 –

20. construction machinery: -6.9 percent                             –

Just like the list of the Top 20 trade deficit and trade surplus industries, the 2016 and 2019 lists of top exporters are very similar. Not even the specific rankings have changed very much, with the exceptions of waste and scrap (which moved from 16^th place in 2016 to 13^th place in 2019) and soybeans (which fell from twelfth place in 2016 to 15^th place last year).

The soybean results of course are interesting for another reason: They clearly stem in part from tariffs placed on them by recent mega-customer China in 2018 following Mr. Trump’s early trade war levies. Beijing didn’t begin resuming short-term purchases until last summer, and greatly boosted purchases beginning last fall, as negotiations leading to the eventual Phase One trade deal continued.

Also of interest – despite the retaliatory tariffs by China and other countries, 15 of these top 20 exports in 2019 were manufactured products, a slightly higher percentage than the 14 of 20 in pre-trade war 2016.

The patterns were rather different for export growth. Below are the Top 20 for 2019. As with the trade balance change figures from yesterday, these are drawn from the hundred biggest export industries, to avoid the “law of small numbers” problem. They leave out that catch-all aerospace sector, too.

Leading 2018-19 export growers                                      2016 rank

1. aircraft: +122.2 percent                                                        1

2. oil & gas field mach & equip: +27.7 percent                       –

3. wheat: +14.8 percent                                                            –

4. petrochemicals: +14.6 percent                                             –

5. pharmaceutical preparations: +14.4 percent                        –

6. light trucks and utility vehicles: +13.7 percent                    6

7. aircraft parts & auxiliary equip: +11.8 percent                   15

8. non-diagnostic biological products: +11.5 percent              8

9. misc non-ferrous metals extruding: +11.3 percent              –

10. dried, condensed, evap dairy products: +11.3 percent      –

11. search, detection, navigation devices: +9.9 percent         17

12. autos & light trucks: +9.3 percent                                     –

13. soybeans: +9.1 percent                                                       2  

14. tree nuts: +8.4 percent                                                        –

15. surgical appliances & supplies: +7.9 percent                     –

16. misc foods: +5.7 percent                                                   12

17. motors & generators: +5.4 percent                                     –

18. turbines & turbine generator sets: +5.2 percent (t)             –

18. other special classification items: +5.2 percent (t)             –

19. electromedical devices: +5.1 percent (t)                            –

19. in vitro diagnostic substances: 5.1 percent (t)                  10

20. opthalmic goods: +4.7 percent                                           –

The difference with the list of top exporters is clear, as there’s much less overlap with this group of industries and its 2016 counterparts. At the same time, another noteworthy difference deserves attention: There’s significantly more overlap between these two lists of exporters than between the list of top trade surplus industries and biggest trade balance improvers, or than between the lists of top importing industries and sectors whose trade balances worsened the most.

The overlap above consists of seven of the twenty sectors found on each list. Moreover, three of these seven made significant moves in the rankings (both up and down): soybeans (way down); search, detection, and navigation devices; and aircraft parts and auxiliary equipment (both up considerably).

By contrast, only four industries appeared on both the list of the biggest trade balance “improver” industries for 2016 and for 2019.

The numbers also contain good news for the President’s objective of boosting domestic manufacturing: In 2019, 18 of 22 of the biggest export growers were manufacturing sectors – up from 16 of 23 in 2016 (counting industries whose export growth rates were tied).

The same kinds of developments generally appear on the import side. Below is a table showing the Top 20 importing industries (again, drawn from the top hundred importing industries and excluding the catch-all aerospace sector, and with their 2016 ranking in the right-hand column).

Leading 2019 import sectors                                                            2016 rank

(including annual percentage change)

1. autos & light trucks: +1.1 percent                                                       1

2. broadcast & wireless communs: -8.4 percent                                      2

3. pharmaceutical preparations: +12.3 percent                                        4

4. goods returned: +13.4 percent                                                              5

5. computers: $73.68b                                                                               6

6. petroleum refinery products: -0.8 percent                                             9

7. female cut & sew apparel: -1.7 percent                                                 8

8. non-diagnostic biological products: +15.8 percent                             19

9. semiconductors: -4.9 percent                                                                7

10. misc motor vehicle parts: -1.9 percent                                               11

11. misc basic organic chemicals: -6.8 percent                                        13

12. jewelry & silverware: -11.6 percent                                                   10

13. male cut & sew apparel: +4.0 percent                                                15

14. audio & video equipment: -2.5 percent                                              12

15. non-aluminum, non-ferrous metal smelting, refining: -3.1 percent   14

16. aircraft engines & engine parts: +18.2 percent                                   –

17. iron & steel & ferroalloy products: -20.00 percent                            17

18. footwear: +2.1 percent                                                                       16

19. light trucks & utility vehicles: +16.7 percent                                     –

20. misc plastics products: +3.8 percent                                                   –

Major overlap comes through loud and clear between the 2016 and 2019 lists, and only non-diagnostic biological products made a significant move (way up).

Here, however, the manufacturing news wasn’t as good for Trump-World or for the American economy (if you believe, as you should, that a strong manufacturing sector is crucial for sustainable prosperity). In 2016, 17 of the 20 biggest importing industries were in manufacturing. In 2019, this number rose to 19.

Leading 2018-19 import growers                                                     2016 rank

1. aircraft engines & engine parts: +18.2 percent                                   –

2. light trucks & utility vehicles: +16.7 percent                                     4

3. non-diagnostic biological products: +15.8 percent                            3

4. aircraft: +15.2 percent                                                                        –

5. goods returned: +13.4 percent                                                           –

6. pharmaceutical preparations: +12.3 percent                                     –

7. surgical & medical instruments: +11.0 percent                               10

8. misc electrical equipment & components: +10.1 percent                –

9. construction machinery: +8.9 percent                                             –

10. bread & bakery products: +7.6 percent                                         –

11. distilled liquors: +7.4 percent                                                       –

12. surgical appliances & supplies: +7.0 percent                               –

13. non-potato vegetables and melons: +6.3 percent                         7

14. aircraft parts & auxiliary equip: +5.6 percent                             –

15. electromedical apparatus: +5.1 percent (t)                                  –

15. sporting & athletic goods: +5.1 percent (t)                                 –

15. relays & industrial controls: +5.1 percent (t)                              –

16. misc manufactures: +4.5 percent (t)                                          20

16. wines, brandy & brandy spirits: +4.5 percent (t)                      16

17. semiconductor machinery: +4.4 percent                                    –

18. misc measuring & controlling devices: +4.2 percent                –

19. male cut & sew apparel: +4.0 percent                                       –

20. non-poultry meat products: +3.9 percent                                  –

There’s much less overlap between this list and its 2016 counterpart than between the 2019 top importers list and its 2016 counterpart. But whereas the 2016 lists of top importers and top trade balance “worseners” had only three sectors in common, the 2019 lists have six sectors in common. And three of them (miscellaneous manufactures, vegetables and melons except for potatoes, and surgical and medical instruments) shifted significantly in the rankings.

Again, however, no improvement came about from a manufacturing standpoint. In 2016, 18 of the 20 industries whose trade balances deteriorated the most were found in manufacturing. In 2019, the figure was 20 of 23. 

The trade landscape of course will change dramatically this year.  An agreement with China expressly providing for massive increases in U.S. exports has been signed, as has an updated version of the North American Free Trade Agreement (NAFTA).  At the same time, stiff tariffs on hundreds of billions of dollars worth of prospective imports from China remain in place, along with levies on steel and aluminum imports from numerous major foreign producers. 

In other words, the next few years could speak volumes about whether a New (and better) Normal has set in for U.S. trade flows both at the macro- and micro-economic levels, or not.  

(What’s Left of) Our Economy: So You Think Trade is an Engine of Productivity Growth?

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economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

(What’s Left of) Our Economy: New Data Show Continued U.S.-China Decoupling & Broad Trade Performance Improvement

Tags

aircraft, Boeing, China, decoupling, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, merchandise trade, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

With all the China trade war headlines in the news lately, the release this morning of the latest (for October) monthly U.S. trade data couldn’t be timelier. Indeed, one of the biggest takeaways from the results is that, as has been the case since the conflict began, the decoupling of the American and Chinese economies continues apace.

A second big takeaway: Boeing aircraft’s safety woes remain a major drag on domestic U.S. manufacturing’s trade performance and hence overall production (currently in mild recession) – and one having nothing to do with President Trump’s tariffs or foreign retaliation. 

And a third important conclusion:  Aside from the China trade account, the new report shows considerable improvement in some of the most important trade deficits run by the economy for decades.

One measure if decoupling is the humongous merchandise trade deficit the United States has run with China for so long. As of October, it’s down 14.60 percent year-to-date – even though the U.S. economy keeps growing. And in that vein, America’s overall non-oil goods trade deficit (the best global proxy for U.S.-China trade) rose by 4.04 percent during the same period.

The same trends are visible on the individual export and import sides, too. From January through October of this year, U.S. goods exports to China accounted for 7.13 percent of America’s worldwide total. For the comparable period last year, that figure was 8.22 percent. The analogous merchandise import figures were 19.78 percent and 23.28 percent.

Other highlights of the new monthly trade report:

>The combined goods and services trade deficit fell 7.63 percent sequentially in October, from a downwardly adjusted $51.10 billion to $47.20 billion. The October total is the lowest since May, 2018’s $44.35 billion. And the monthly drop was the biggest since January’s 12.61 percent.

>The downgrade of the September overall trade deficit was an unusually large 2.57 percent.

>The combined goods and services trade deficit is now running just 1.35 percent ahead of last year’s level. That’s a much slower rate of increase than the 13.89 percent rise between the two previous January-through-October periods.

>The overall trade deficit’s slower year-to-date increase was mainly the result of a dramatic decrease in the U.S. petroleum trade deficit – from $46.97 billion in the first ten months of 2018 to $13.93 billion between January and October of this year. That 70.34 percent nosedive contrasts with the aforementioned 4.04 percent increase in America’s non-oil goods trade deficit.

>At the same time, this “Made in Washington trade deficit” (so called because oil and services trade have little to do with the terms of U.S. trade agreements and other trade policy decisions) has been rising at a considerably slower pace this year (the aforementioned 4.04 percent rate) compared with last – when the January-through-October increase was 12.74 percent.

>Total U.S. exports dipped by 0.21 percent in October, from $207.55 billion to 207.12 billion – their lowest level since April’s $206.87 billion.

>Total U.S. exports are down 0.04 percent year-to-date – compared with a 7.45 percent rise between the preceding January-through-October period.

>”Made in Washington” exports are down 1.35 percent year-to-date, with October’s monthly $119.96 billion total the lowest since October, 2017’s $118.19 billion. Between the first ten months of 2017 and the first ten months of 2018, they grew by 5.98 percent.

>”Made in Washington” imports are up 0.55 percent year-to-date, with October’s monthly $187.54 billion total the lowest since November, 2017’s $186.99 billion. Between the first ten months of 2017 and the first ten months of 2018, they climbed by a much faster 8.26 percent.

>The also chronic and huge U.S. manufacturing trade deficit rose by 5.45 percent between September and October – from $87.91 billion to $92.70 billion. The increase followed two straight sequential declines.

>Manufactures exports in October improved by 5.03 percent, from $91.84 billion to $96.45 billion. But the much larger amount of manufactures imports increased by a faster 5.23 percent, from $179.75 billion to $189.15 billion.

>Year-to-date, the manufacturing trade deficit is up 2.76 percent, from $847.21 billion to $870.62 billion. That’s a much slower rate of increase than the 11.26 percent rise between January-through-October, 2017 and the same 2018 period.

>Interestingly, the safety woes of longtime manufacturing export superstar didn’t weigh heavily on the industry’s latest trade figures. Exports of civilian aircraft actually edged up sequentially in October – from $3.29 billion to $3.33 billion. Imports rose more, from $1.35 to $1.60 billion, but the result contributed only $210 million to the $4.79 billion monthly rise in the total manufacturing trade deficit.

>Longer term, though, it’s a much different story. For the first ten months of this year, civilian aircraft exports have decreased from $46.03 billion to $37.21 billion. Import, however, are up from $10.06 billion to 12.16 billion.

>As a result, the civilian aircraft trade surplus is down on a year-to-date basis from $35.97 billion to $27.15 billion. And this $8.82 billion drop-off represents 37.68 percent of the $23.41 billion worsening of the overall manufacturing trade balance so far from 2018 to 2019. Moreover, it’s a far cry from the days when the civilian aircraft sector was strengthening the U.S. manufacturing trade balance.

It’s true that when examining the improvement of trade performance on an absolute or relative basis, the economy’s growth rate has to be taken into account. In this vein, though, the rates of improvement are all significantly faster than the slowdown being experienced by the wider economy. That development doesn’t lend itself to pithy headlines (or catchy campaign slogans). But by any reasonable standard, it’s solid progress.

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

Tags

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: Boeing’s Safety Woes are Hammering U.S. Manufacturing & Overall Trade Flows Under Trump

Tags

Airbus, Boeing, civilian aircraft, exports, imports, manufacturing, non-oil goods trade deficit, safety, services trade, tariffs, Trade, trade deficit, Trump, World Trade Organization, {What's Left of) Our Economy

When last month’s U.S. trade figures (for August) came out, I wrote about how the economic narratives about the woes of domestic manufacturing and America’s trade accounts during the Trump Tariffs Era have been turning into a story about the safety related troubles of Boeing. This morning, the September data were issued, and the Boeing drag on the trade performances of industry and the entire economy look bigger than ever. Especially interesting, the Boeing effect worsened during a data month when total U.S. trade, manufacturing trade, and civilian aircraft trade all took modest turns for the better.

Specifically, the overall U.S. trade deficit in September dropped by 4.70 percent, from an upwardly revised $55.04 billion to $52.45 billion. The total was the lowest since April’s $51.98 billion, and the sequential decrease the biggest since January’s 12.61 percent nosedive.

Partly as a result, the year-to-date trade deficit is up by 5.47 percent – a rate of increase less than half that of the previous year’s 12.68 percent.

Combined goods and services exports rose by 0.88 percent from $207.83 billion to $205.99 billion – their worst monthly performance since April’s $205.76 billion. Total imports, however, sank by nearly twice as much proportionately – 1.68 percent. And September’s $258.44 billion figure was also the lowest since April ($257.74 billion).

Services trade, however, provided an oddly glum counterpoint. It’s long been a trade surplus generator, and remained so in September. But the new monthly surplus of $19.27 billion was the lowest since December, 2012’s $18.55 billion. The main culprit? The fourth straight high for monthly services imports ($49.89 billion).

At the same time, the huge and chronic manufacturing trade deficit fell sequentially in September for the second straight month, from $92.08 billion by 4.53 percent, to $87.91 billion. That total was the best since June’s $83.63 billion. And this progress was mirrored in civilian aircraft. Their exports jumped month-to-month in September by 25 percent. Imports rose even faster – by 41.58 percent. But their amount is much smaller ($1.35 billion vs $3.29 billion). Therefore, the civilian aircraft trade surplus improved from $1.69 billion to $1.95 billion.

What, then, is the problem? It becomes glaringly visible upon examining trade in civilian aircraft during the entire stretch of Boeing’s current woes (which essentially began this past March with many national aviation authorities grounding the plane in their own countries’ airlines, and/or barring it from their national air spaces), and comparing it with the aircraft trade figures for the same periods of previous years, and with the performance of overall manufacturing exports and imports.

Last month, I described how civilian aircraft’s trade performance between this past April (the first full month in which the Boeing effect could be expected to begin showing up) and August had deteriorated markedly from the same period last year. Today’s trade data show that the deterioration has grown far worse.

As made clear in last month’s post, despite its reputation as a major American trade winner, the civilian aircraft sector has experienced ever poorer results since 2017, and the new trade figures confirm this trend.

Between April and September of 2017 and April and September of 2018, civilian aircraft exports fell by 10.32 percent, even though overall U.S. manufacturing exports increased by 6.84 percent. The industry’s record on the import side was better – they dropped during this time by 13.98 percent, while manufacturing imports in total climbed by 11.64 percent.

But the comparison between the following April-to-September periods looks considerably drearier for aircraft. Between April and September of last year and the same period this year, although manufacturing exports were down by 3.82 percent, civilian aircraft foreign sales sank by 26.80 percent. And although manufacturing imports edged up only 0.27 percent between these periods, American purchases of civilian aircraft surged by just over 26 percent.

Further, the impact of aircraft’s slump on manufacturing and overall U.S. trade has been substantial and growing. As of last month’s trade report, the fall in these products’ exports between the April-August 2018 and April-August 2019 periods accounted for 30.72 percent of the decrease in total manufacturing exports during that time, and 16.81 percent of the increase in total manufacturing imports.

As of today’s figures, the civilian aircraft share of manufacturing’s total export decline is up to 31.35 percent of the total, while their share of industry’s total import increase has shot up to more than half manufacturing’s total.

Expanding the focus to all U.S. goods trade except for energy products (which to date haven’t received significant attention in free trade negotiations or any other aspects of American trade diplomacy) also reveals a sizable Boeing effect. Between the April-September 2018 and 2019 periods, civilian aircraft’s export decline accounted for fully 42.39 percent of the total U.S. non-oil goods export decrease recorded then, and 20.61 percent of the non-oil goods import increase.

In addition, to repeat a crucial point, this major Boeing effect on manufacturing and overall trade has absolutely nothing to do with the Trump trade wars, since civilian aircraft so far have not been subjected to foreign tariffs on American exports imposed in retaliation for Mr. Trump’s levies. This situation will change due to recent and upcoming rulings in the long-running World Trade Organization case between Boeing and the European Union’s Airbus. But as of now, any evaluation of the Trump effect on U.S. trade flows ignoring the powerful drag created by Boeing’s troubles deserves a grade of “incomplete” – at best.

(What’s Left of) Our Economy: US Growth Remains Solid Despite a Notable Boeing Drag

Tags

Boeing, exports, GDP, General Motors strike, goods, gross domestic product, imports, real GDP, real trade deficit, services, Trade, trade deficit, {What's Left of) Our Economy

This morning’s first official read on U.S. economic growth in the third quarter not only beat expectations. Inflation-adjusted gross domestic product (GDP) expanded nicely despite potholes dug by the General Motors strike and Boeing’s ongoing safety woes.

Bad news wasn’t entirely absent, especially from a trade policy standpoint, as the overall U.S. trade gap edged up to a new record in absolute terms. But even here, mitigating circumstances can be cited – namely, foreign reluctance to purchase Boeing planes, which surely weighed on exports, and tariff front-running sparked by importers’ desire to buy products from China in particular to beat the imposition of threatened tariffs.

The third quarter’s 1.91 percent annualized increase in real GDP – the first of three near-term growth figures that will be issued – handily surpassed the latest 1.6 percent consensus of the forecasts tracked by CNBC and Moody’s Analytics. Moreover, the Boeing effect looks anything but negligible. As noted by Harvard University economist Megan Greene, the Trump administration believes that the aerospace giant’s troubles cut 0.40 percentage points from third quarter GDP, and private sector economists peg the cost at 0.25 percentage points.

The real trade deficit, however, was clearly no help. It wasn’t nearly as big a drag on inflation-adjusted growth as in the second quarter (when it subtracted 0.68 percentage points from that two percent annualized constant dollar expansion). But it still depressed the third quarter’s real growth by 0.08 percentage points – and edged up by 0.58 percent to a new record $986.4 billion on an annual basis. (The previous all-time high was the $983.0 billion level reached in the fourth quarter of 2018).

This after-inflation trade deficit as a share of the entire economy stayed virtually unchanged from quarter to quarter – at 5.16 percent. But these are the kinds of levels that haven’t been seen since late during the last, bubble-decade expansion (in the third quarter of 2007). Their only saving grace is that they’re still well off the current record of 6.10 percent of GDP, also set during that bubble decade (in the third quarter of 2005).  Nonetheless, the Boeing effect shouldn’t be discounted here, either, as demonstrated in my recent RealityChek post. 

As for other trade-related highlights of the new GDP report:

>Total annualized real exports increased by 0.19 percent, from $2.5175 trillion in the second quarter to $2.5222 trillion.

>Inflation-adjusted goods exports rose at a somewhat faster rate – 0.39 percent sequentially, from $1.7753 trillion to $1.7823 trillion.

>Constant dollar services exports fell on-quarter for the second straight quarter – from $748 billion annualized to $746.3 billion. That total was their lowest since the second quarter of 2017’s $740.7 billion.

>Combined after-inflation goods and services imports were up by 0.29 percent, from $3.4982 trillion annualized to $3.5085 trillion – the second highest total on record after the $3.5116 trillion record in the fourth quarter of 2018.

>Constant dollar goods imports inched up by 0.11 percent sequentially, from $2.9417 trillion annualized to $2.9450 trillion.

>Inflation-adjusted services imports rose quarter to quarter from $557.2 billion annualized to $563.2 billion. That total represents a new record, surpassing the previous all-time high of $558.1 billion set in the first quarter of this year.

(What’s Left of) Our Economy: New Data but Cloudier Skies on Trump’s Trade Policies and Manufacturing

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Barack Obama, China, Commerce Department, exports, GDP-by-industry, imports, manufacturing, manufacturing output, manufacturing trade deficit, tariff front-running, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

If only the Commerce Department’s data on gross domestic product (GDP) by industry didn’t come out on a basis timelier than once a quarter. For they’ve provided uniquely valuable information on how well the Trump administration is faring in its efforts to (1) reduce the humongous U.S. manufacturing trade deficit, and (2) reduce domestic industry’s reliance on imported parts, components, and materials, and boost total output and employment over the long-term by ensuring that more of the value in these manufactured products are Made in the USA.

More specifically, the data (whose latest edition came out this morning) shed light on the crucial question over whether the best business model for domestic manufacturing is that recommended by traditional trade theory, or whether an America First-type approach is more effective. The former, of course, holds that output of any kind is maximized by capitalizing on the principle of comparative advantage, and encouraging U.S.-based companies to use whatever inputs are made more efficiently abroad. The latter insists that such reliance on foreign inputs deprives the economy of the enormous output gains that are possible by encouraging growth in these very inputs.

Sadly, however, the reasonably clear analytical skies that permitted a reasonably clear verdict to be returned during the first two years of the Trump era in trade are rapidly clouding up, for a variety of reasons. And much of the growing confusion has been created by the President himself. 

During Mr. Trump’s first two (nearly) full years of the Trump administration (keeping in mind that the President didn’t take office until late January, 2017), his America First-style policies were looking pretty impressive. (It’s true that no new tariffs came on during the President’s first year. But he did put the kibosh on a major trade agreement signed by his predecessor, the Trans-Pacific Partnership, and made clear that levies were on the way.)

Since Mr. Trump actually began imposing tariffs in early 2018, however, the results have been harder to interpret for two main and related reasons. First, the administration’s tariff decisions have oscillated pretty dramatically, featuring not only steps to put in place, threaten, suspend, and remove such levies, but actual and threatened tariff rate changes on big chunks of imports (especially from China). Second, these policy swings have produced lots of “tariff front-running” – that is, U.S. importers speeding up their foreign purchases in order to avoid paying higher tariff-ed costs.

And this overall picture is exactly what’s been borne out by today’s figures (which incorporate revisions going back to 2014). The table below shows the new annual totals from 2011 (when the current economic recovery finished its early rapid bounce-back phase and settled into a more durable pattern) to 2018, The (slightly) revised numbers make clear that during the first two Trump years, domestic manufacturing did a much better job of generating healthy growth without ballooning manufacturing trade deficits (which reflect in part growing industry dependence on imported inputs) than during the previous Obama administration years.

The figure in the left-hand column represents U.S.-based manufacturing’s growth during the year in question (according to a gauge called “value added), the middle column represents the growth that year of the manufacturing trade deficit, and the right-hand column shows the ratio between the two growth rates (with the trade gap’s growth coming first). The higher the ratio, more closely linked manufacturing output growth is to the expansion of the manufacturing trade deficit. All figures are in pre-inflation dollars.

2011:             +3.93 percent           +8.39 percent            2.13:1

2012:             +3.19 percent           +6.27 percent            1.97:1

2013:             +3.36 percent          +0.77 percent             0.23:1

2014:             +2.93 percent        +11.78 percent            4.02:1

2015:             +3.72 percent       +13.65 percent             3.67:1

2016:              -1.19 percent         +4.66 percent                —

2017:             +3.99 percent         +3.16 percent            0.79:1

2018:             +6.23 percent         +3.96 percent            0.64:1

In other words, whereas during the Obama years, the manufacturing trade deficit nearly always expanded considerably faster than manufacturing output (and 3.67 and 4.02 times faster in 2014 and 2015), the first two Trump years saw both significantly higher output growth per se, and output growth that topped trade deficit growth. During 2018, moreover, numerous tariff were imposed, and not merely threatened.

This year, however, saw a major change. As shown below, the ratio of manufacturing output growth to manufacturing trade deficit growth returned to levels resembling the worst of the Obama years. And overall growth itself was feeble in comparison.

2Q 2017 – 2Q 2018:           +7.00 percent        +7.83 percent         1.12:1

2Q 2018 – 2Q 2019:           +2.03 percent        +7.27 percent         3.58:1

But here’s where the tariff front-running comes in, especially in the huge volume of trade with China – as made clear here. Unfortunately for trend-spotters, however, the administration’s success in fostering strong manufacturing output performance while weaning industry from imports won’t become any easier to identify anytime soon. The President’s China trade policies, after all, are likely to remain mercurial.  Further, the General Motors strike and Boeing’s safety problems are sure to distort the production numbers for at least the next quarter or two. Add a still-sluggish world economy that, along with foreign retaliatory tariffs, will keep weighing on U.S. exports, and you get uncertainty that could even dwarf that supposedly paralyzing American business investment.

(What’s Left of) Our Economy: A Boeing Drag on US Manufacturing Unrelated to Trump’s Trade War

Tags

737 Max, aerospace, aviation, Boeing, exports, manufacturing, manufacturing recession, safety, tariffs, Trade, trade wars, {What's Left of) Our Economy

Ever since Boeing ran into safety problems that early this year resulting in the widespread grounding of one of its most successful airliners, authoritative (as opposed to anecdotal) signs have been elusive that the aerospace giant’s woes have been contributing to the slowdown being experienced by domestic manufacturing. This matter matters because a sizable Boeing Factor would rebut claims that President Trump’s tariff-heavy trade policies deserve nearly all the blame for industry’s recent troubles.

Boeing’s commercial jets, after all, haven’t been subjected to any retaliatory duties from tariff-ed foreign economies – largely because the company is half of a practical duopoly (along with Europe’s Airbus) in large passenger aircraft production. As a result, no countries (including China) want to be left with a single supplier. (Possible European responses to American levies on Airbus products authorized by a U.S. win at the World Trade Organization in a trade dispute long predating Mr. Trump’s inauguration could change that situation.)

Moreover, Boeing uses enormous amounts of manufactured intermediates to assemble its planes (which also include military aircraft), and especially durable goods ranging from fabricated metals products to machine tools. So hard times for Boeing will clearly mean hard times for all these suppliers if they haven’t already.

Last Thursday, however, a Boeing Factor finally became clear in official U.S. economic data – specifically in the monthly trade report (which contained figures through August). These statistics reveal that U.S. exports of civilian aircraft began falling sharply on a year-to-date basis beginning in May – just two months after national aviation authorities and airlines around the world began grounding the 737 Max 8 model or banning it from their airspaces.

Skeptics could still contend that a tariff-induced slump in global economic activity has reduced demand for Boeing’s jets, but the trade data also show significant strengthening of civilian aircraft imports, meaning that, at least in the United States, demand remains healthy.

The most important comparison entails the April-through-August results for civil aircraft exports and imports over the last few years. These ensure the best apples-to-apples findings over respectable periods of time.

According to the trade statistics, the U.S. civil aircraft industry dominated by Boeing hasn’t been killing it recently. From April-through-August, 2017 to April-through-August, 2018, its exports declined by 13.94 percent. And then between the same 2018-19 stretch, the rate of deterioration sped up markedly – to 24.51 percent.

Meanwhile, imports of civil aircraft performed a u-turn. From April-through-August 2017 to April-through-August, 2018, they fell by 7.95 percent. But then between the same 2018-19 period, they actually rose – and by a strong 18.37 percent.

Also pointing to a Boeing/civil aircraft-specific problem – the major difference between civil aircraft’s trade performance in recent years and that of domestic manufacturing as a whole. Between the April-through-August 2017 and 2018 periods, while civil aircraft exports were dropping, overall manufacturing exports rose by 6.76 percent. Between the following April-through-August periods, both kinds of exports decreased, but overall manufacturing exports were down only 3.44 percent versus aircraft’s 24.51 percent. And while civilian aircraft imports were surging, overall manufacturing imports edged up only 0.60 percent.

Could this great recent disparity between civil aircraft’s trade performance and overall manufacturing’s trade performance caused the manufacturing slowdown all by itself? Probably not. Current figures aren’t available for civil aircraft as such, much less for aircraft-specific supply chain output. But a 2016 study from the Federal Aviation Administration reported that in 2014, civilian aircraft and parts manufacturing totaled a little more than $100 billion (in 2012 dollars), and that inputs from the supply chain brought the figure up to just under $258 billion.

Since the Commerce Department pegged total American manufacturing output that year at just under $6 trillion (in those same 2012 dollars), civil aircraft production would have represented 4.27 percent of domestic industry’s total. It’s true that that share isn’t overwhelming. But given that the Federal Reserve’s (inflation-adjusted) manufacturing data show that the sector’s after-inflation output has edged down from only +0.90 percent to +0.89 percent between the April-through-August 2018 and 2019 stretches, civil aircraft’s seriously worsening trade situation may bear noteworthy responsibility. And it certainly could be behind a comparable share of the slight (just 0.36 percent) real output decline over the past year that represents manufacturing’s latest technical recession.

A big complication could still put the spotlight back on the trade wars: Although safety problems have plainly hurt Boeing orders and production, and therefore new business throughout its supply chain, civil aircraft production and sales both feature long time lags between orders and deliveries. Indeed, the company says that its backlog is still considerable – and growing.

Nonetheless, it’s also true that the company’s progress toward regaining its reputation has lagged far behind its initial predictions, and new problems keep emerging with the 737s and other planes . In addition, a leading aerospace industry consultancy reported in August that Boeing-related concerns were depressing civil aircraft production globally. And within Boeing, the damage hasn’t been confined to 737 Max production. The safety crisis is affecting output of other airliners, too.

Moreover, other non-trade-related problems obviously have been weighing lately on U.S.-based manufacturing, too – notably the confusion in Europe created by the ongoing Brexit mess and the long-time abject failures of the European Union and Japan to generate respectable growth. For now, there’s little evidence that Mr. Trump’s trade policies have been a net plus for domestic industry (although the counter-factual needs to be mulled, too – i.e., how would manufacturing be faring under a pre-Trump policy regime?). But the same, at very best, can be said for the Boeing Factor.