(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory No Matter How You Look at It

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CCP Virus, consumer price index, coronavirus, COVID 19, CPI, Fed, Federal Reserve, inflation, Jerome Powell, PCE, personal consumption expenditures index, supply chain, transitory, Wuhan virus, {What's Left of) Our Economy

I’m still in the “U.S. inflation is transitory” camp and still not overly worried about recent price increases because they look to be products of the CCP Virus and the sudden stop-start pattern is produced in the economy and not stronger, more lasting changes. But it’s important to note that my arguments have been based on only one of two major groups of official statistics – the consumer price index (CPI) kept by the Labor Department. (See, e.g., here.) 

The continuing growth of inflation worries among economists and the public indicates that this is a good time to look at that other data set – the personal consumption expenditures (PCE) price index tracked by the Commerce Department. Another good reason: This is the inflation measure preferred by the Federal Reserve, one of whose two main missions is preventing hot inflation (the other being maintaining employment), and of course this central bank’s monetary policy decisions are central to the nation’s success at keeping prices under control.

My bottom line: The PCE figures seem to support the transitory viewpoint as well.  The Fed believes this, too. But many other serious students of the economy, as indicated above, have taken exactly the opposite interpretation of the latest PCE results, so let’s try and identify what’s troubling them, and in the process, see how they differ from their CPI counterparts.

A big part of the answer comes from these side-by-side comparisons. The table below shows how both gauges have measured month-to-month price increases this year so far (through August) in percentage terms.

                          CPI                          PCE

Jan.                    0.3                            0.3

Feb.                   0.4                            0.3

March               0.6                             0.6

April                 0.8                             0.6

May                  0.6                             0.5

June                  0.9                             0.5

July                  0.5                              0.4

August             0.3                              0.4

Interestingly, although the PCE changes are steadier, they show that, at least on a monthly basis, inflation’s momentum displays no signs of speed-up – which matters greatly because inflation is a problem that can so easily feed on itself (as expectations of ongoing price increases spur businesses and consumers to increase their purchases more, boosting demand and thus pushing prices yet higher). In fact, the PCE numbers reveal deceleration, too on this basis.

Also worth stipulating: both these inflation measures include food and energy prices, which often have little to do with the economy’s underlying inflation prone-ness (but which certainly do impact price changes overall). And as known by anyone who’s gassed up a vehicle lately, energy prices in particular have been surging recently.

But inflation watchers also look closely – often more closely – at year-on-year price increases, and that makes sense because data over longer timeframes is less susceptible to random or otherswise misleading fluctuations than data over shorter timeframes. So here are those year-on-year results for both inflation indices in percentage terms for the first eight months of this year:

                          CPI                          PCE

Jan.                    1.4                            1.4

Feb.                   1.7                            1.6

March               2.6                             2.5

April                 4.2                             3.6

May                  4.9                             4.0

June                  5.3                             4.0

July                  5.3                              4.2

August             5.6                              4.3

These numbers clearly are the cause of the inflation concerns, as they do show not only strong but accelerating momentum.

But they don’t show it conclusively or, in my view, in any way that undermines the transitory school of thought. And the reason is that inflation was so low in pandemic-dominated 2020 that a combination of mean reversion and virus-induced supply chain disruptions and consequent shortages was bound to generate higher than normal price increases.

This table makes the point, by showing how low the yearly inflation increases in percentage terms were for the bulk of last year, and especially during the early spring, when the economy fell into a deep (but short) recession.

                          CPI                          PCE

Jan.                    2.5                            1.9

Feb.                   2.3                            1.8

March               2.6                             1.3

April                 0.3                             0.5

May                  0.2                             0.5

June                  0.7                             0.9

July                  1.0                             1.1

August             1.5                             1.4

It’s still possible to argue that, however low 2019-2020 inflation became, it quickened to some extent starting in June (according to both measure). And because the 2020-2021 results also show increasing post-June momentum, inflation is still worsening.

My rejoinder – the post-June inflationary momentum this year so far is much slower than last year’s. Between June and August, 2019, for the PCE, the yearly inflation rate increased by 55.56 percent (from 0.9 percent to 1.4 percent). Between this June and August, that increase was just 7.5 percent (from four to 4.3 percent).  For the CPI, you can see that this difference was even bigger.

Moreover, even this year’s modest post-June inflation speed-up has only lasted for two months.

But don’t think for a minute that the inflation news is all good. Principally, even the optimistic Fed now believes that the transitory developments that have pushed inflation higher this year will last longer than it had been expecting. Just last week, Chair Jerome Powell said it was “frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”

In other words, “transitory” may be pretty long-lasting, and the longer it lasts, the more pressure the Fed will face to cool the economy off faster, probably slowing job creation and wage increases, whether it holds to its diagnosis or not.

(What’s Left of) Our Economy: No Delta Effect on U.S. Manufacturing Growth In Sight. Yet.

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aerospace, aircraft, aircraft parts, appliances, automotive, Boeing, CCP Virus, coronavirus, COVID 19, Delta variant, electrical components, electrical equipment, fabricated metal products, Fed, Federal Reserve, inflation-adjusted growth, inflation-adjusted output, machinery, manufacturing, medical supplies, medicines, personal protective equipment, petroleum and coal products, pharmaceuticals, plastics, PPE, real growth, recovery, reopening, rubber, textiles, vaccines, {What's Left of) Our Economy

The after-inflation U.S. manufacturing production data reported today by the Federal Reserve revealed plenty of newsy developments. But my choice for biggest is the finding that, in price-adjusted terms, domestic manufacturers’ output finally nosed back above its last pre-CCP Virus (February, 2020) level.

The new number isn’t an all-time high – that came in December, 2007, just as the financial crisis was about to plunge the entire U.S. economy into its worst non-pandemic-related downturn since the Great Depression of the 1930s. As of this July, real manufacturing production is still 5.94 percent below that peak.

Measured in constant dollars, however, such output is now 1.15 percent greater than just before the virus arrived in the United States in force. Not much, and of course any Delta variant-prompted curbs on economic activity or extra caution in consumer behavior could wipe out this progress. But you know what they say about a journey of a thousand miles.

Had this milestone not been reached, I’d have led off this post by noting that although some really unusual seasonal factors in the volatile automotive sector definitely juiced the excellent July sequential output gain, U.S.-based industry outside automotive performed impressively during the month as well.

Specifically, as the Fed’s press release noted, the whopping 11.24 percent jump in the price-adjusted output of vehicles and parts contributed about half of overall manufacturing’s 1.39 percent growth. That automotive figure was the best monthly improvement since the 29.39 percent rocket ride the sector generated in July, 2020 – when the whole economy was staging its rebound from that spring’s deep but brief virus-induced recession. And that overall real on-month production advance was the best for manufacturing in general since the 3.39 percent achieved in March – earlier in the initial post-pandemic recovery.

But in July, the rest of domestic industry still expanded by a strong 0.70 percent after inflation – its best inflation-adjusted growth since the 3.31 percent also recorded in March.

The revisions in this morning’s Fed data for the entire manufacturing sector were mixed. June’s initially reported 0.05 percent decline is now judged to be a 0.10 percent increase, and April’s previously reported 0.39 percent drop now stands as a 0.21 percent decrease. But May’s last reported increase – upgraded slightly to a strong 0.92 percent – is now estimated at just 0.65 percent.

Looking at broad industry categories, the big real output July winners in domestic manufacturing’s ranks aside from automotive were electrical equipment, appliances, and components (up 2.31 percent); plastics and rubber products (up 2.02 percent); machinery (1.91 percent); the broad aerospace and miscellaneous transportation sector (think “Boeing”), which rose by 1.90 percent; textiles (up 1.67 percent); and miscellaneous durable goods, which includes but is hardly confined to many pandemic-related medical supplies (up 1.55 percent).

As I keep noting, good machinery growth is especially encouraging, since its goods are used both throughout manufacturing and the economy as a whole, and strong demand signals optimism among manufacturers about their future prospects – which tends to feed on itself and impart continued momentum to industry.

The list of significant losers was much shorter, with real fabricated metal products output 0.42 percent lower than June levels and petroleum and coal products shrinking by 0.60 percent.

Turning to narrower manufacturing categories that remain in the news, despite Boeing’s still serious manufacturing and safety problems, and ongoing CCP Virus-created weakness in air transport, inflation-adjusted production of aircraft and parts continued its strong recent run. June’s initially reported 5.24 percent monthly output surge was revised down to 3.57 percent. But that’s still excellent by any measure. And July saw production climb another 2.78 percent. As a result, real output in this sector is now 9.95 percent higher than it was just before the pandemic’s arrival in the United States in February, 2020.

Real output in the pharmaceuticals and medicines sector (which includes vaccines) grew by 0.77 percent sequentially in July, and its real output is now 11.35 percent greater than just before the pandemic. But those revisions!

June’s initially reported 0.89 percent increase is now judged to be a 0.34 percent decrease, and May’s previously downgraded 0.15 percent rise has now been upgraded all the way to 1.54 percent.

An even better July was registered by the vital medical equipment and supplies sector – which includes virus-fighting items like face masks, face masks, protective gowns, and ventilators. Monthly growth came in at 1.71 percent. But revisions here were puzzling, too.

June’s initially reported 0.99 percent sequential real production improvement is now seen as a major 1.54 percent falloff. And May’s monthly constant dollar growth, already upgraded from 0.19 percent to 1.18 percent, is now pegged at 1.86 percent.

I’m still optimistic about domestic manufacturing’s outlook, and that’s still based on domestic manufacturers’ own continued optimism – which as shown by the two major private sector monthly manufacturing surveys remained strong in July. (See here and here.)

But I also continue to view U.S. public health authorities’ judgment as suspect when it comes to the balance that needs to be struck between fighting the virus and keeping the economy satisfactorily open. So as long as new virus variants pose the threat of higher infection rates (though not at all necessarily of greater damage to Americans’ health), my own optimism has become more tempered.

(What’s Left of) Our Economy: How Pre-Trump Trade Policies Devastated U.S. Protective Gear Capacity

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apparel, CCP Virus, China, coronavirus, COVID 19, Fed, Federal Reserve, free trade, garments, health security, manufacturing, manufacturing capacity, NAFTA, non-durable goods, North American Free Trade Agreement, offshoring, textiles, Trade, Trump, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

Recently I put up a post expressing gratitude that, despite their best efforts, pre-Trump U.S. trade policies didn’t manage to send the entire U.S. textile and apparel industries offshore. After all, companies in these sectors are the companies with the greatest expertise and capabilities in making all the personal protective equipment (PPE) crucial in the anti-CCP Virus fight.

Of course, the nation is therefore reliant for these and other medical products on countries, like China, which have responded to the emergency at various times with export bans. And in the case of pandemic-prone China, much production of all kinds was shut down temporarily because of the original virus outbreak.

Thanks to the release of the latest Federal Reserve industrial production data, it’s possible to quantify the damage done to these vital industries in ways other than the output figures I presented in that previous offering. That’s because the Fed’s monthly releases report in detail not only on increases or decreases in after-inflation output for manufacturing (and related) sectors. They also report the monthly changes in industrial capacity – the resources and facilities available to turn out various goods.

The results through last month are below. They use as baselines the month the North American Free Trade Agreement (NAFTA – which has now been turned into the U.S.-Mexico-Canada Agreement) went into effect, and the month that China entered the World Trade Organization (WTO). NAFTA’s January, 1994 onset signaled to many the transformation of U.S. trade policy into U.S. offshoring policy (see my book, The Race to the Bottom, for this argument). The January, 2002 beginning of China’s WTO membership gave the People’s Republic  overall, and its even-then-immense textile and especially apparel sectors, invaluable protection against American responses to its various forms of trade predation. (Limited safeguards versus “market-disrupting” surges in imports from China were written into the WTO agreement.)

For comparison’s sake, the industrial capacity changes for non-durable goods manufacturing (the super-sector into which textiles and apparel are grouped), and total manufacturing are provided as well:

                                                       Since NAFTA onset    Since China WTO entry

Textiles:                                              -37.05 percent              -44.05 percent

Apparel & leather goods:                   -81.97 percent              -77.18 percent

Non-durables manufacturing:           +17.06 percent                -2.23 percent

Total manufacturing:                         +75.54 percent             +10.78 percent

Clearly, the decimation of apparel capacity sticks out prominently. But although the more capital-intensive textiles industry didn’t suffer nearly as much, it fared much worse than either manufacturing in toto or the non-durables sectors overall. That’s largely because as the apparel industry disappeared, so did a prime domestic customer for textiles producers.

It’s also obvious for all these categories that although NAFTA was, to say the least, hardly a bonanza, the big trade-related damage was done by China’s WTO entry. Afterward that event has been when the shrinkage of textiles capacity accelerated, when the vast majority of the post-NAFTA apparel damage was done, when non-durables capacity gains shifted into reverse, and when total manufacturing capacity growth slowed to a crawl.

Calls are now abounding for remedies to the resulting shortages – like greater stockpiling and various tax and subsidy incentives for reshoring at least some of this production. But material in stockpiles can decay if unused too long, and companies would be foolish to spend heavily on new U.S. factories if they still face the likelihood of being subsidized and dumped out of existence by predatory foreign trade policies. As a result, there’s no substitute for stiff tariffs, and a credible national resolve to keep them in place, for ensuring that America’s health security never becomes so degraded again.

(What’s Left of) Our Economy: Early Virus-Era U.S. Manufacturing Winners and Losers

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(What's Left of) ur Economy, aircraft, automotive, Boeing, CCP Virus, coronavirus, COVID 19, durable goods, Fed, Federal Reserve, industrial production, manufacturing, non-durable goods, Wuhan virus

Hey! I’m a manufacturing geek (among other things)! It’s part of what I do! Even so, I hope you agree that it’s worth looking in some detail at yesterday’s U.S. manufacturing output report from the Federal Reserve – because it offers a first look at domestic industrial winners and losers in the Age of the CCP Virus.

As always, these numbers will show inflation-adjusted production changes from month to month – in this case, between February and March. Of course, the time lag means that these data only partly reflect the first wave of the full CCP Virus hit.

As I wrote yesterday, that hit has been hard for domestic manufacturing as a whole – its real output sank by 6.27 percent on month – the biggest such fall-off since the post-World War II demobilization in 1946!

Looking at the super-categories first, the biggest sequential production nosedive came in durable goods – which are supposed to be usable (or shelve-able) for at least three years. Think steel, motor vehicles and parts, machinery, aircraft and parts, home appliances, information technology hardware and the like – include medical products except for pharmaceuticals and vaccines. Constant dollar production of these products plunged by 9.14 percent. So they fared much worse than manufacturing as a whole, and that’s especially discouraging since they’re the bigger of the two super-sectors.

Speaking of which, the other super-sector – non-durable goods (which include textiles and apparel, pharmaceuticals and all other chemicals, plastics and resins, petroleum products, paper, and foods and beverages) – saw a monthly real output decrease of only 3.21 percent.

But we can go into much more detail than that. For convenience sake, let’s limit ourselves to examining industries classified at the 3-digit level of the North American Industry Classification System (NAICS), the U.S. government’s main typology for slicing and dicing the entire economy. Here are the results for the February to March period, leading off with the durable goods sectors.

Wood products:                                                                     -4.22 percent

Non-metallic mineral product:                                             -6.56 percent

Primary metal:                                                                      -2.82 percent

Fabricated metal product:                                                     -8.28 percent

Machinery:                                                                            -5.56 percent

Computer and electronic products:                                       -1.89 percent

Electrical equipment, appliances, and components:             -2.24 percent

Motor vehicles and parts:                                                   -28.04 percent

Aerospace & miscellaneous transportation equipment:       -8.12 percent

Furniture and related products                                           : -9.99 percent

Miscellaneous manufacturing:                                             -9.94 percent

(contains most of those non-pharmaceutical healthcare goods)

Clearly, these results are all over the place, with the automotive sectors being the big standouts. Within automotive, the biggest losers were vehicles factories, where after-inflation production cratered by 34.76 percent. Real parts output was off “only” 21.80 percent.

In fact, leaving out these two automotive industries, inflation-adjusted durable goods output fell by just 5.84 percent – versus the 9.14 percent plummet including these products. And real manufacturing production would have been down by just 5.84 percent, not 6.27 percent.

Also of note: Aircraft and parts production dropped by 10.36 percent, for reasons partly due to the CCP Virus (and the impact on air travel), but also partly due to Boeing’s long-running safety problems. In fact, the March results mark the first that indicate major Boeing-related losses – although surely the impact has been felt previously throughout a vast domestic supply chain that includes lots of industries outside the aerospace complex as such.

Here’s the list of non-durable winners and losers:

Food, beverage, and tobacco products:                                   -0.76 percent

Textiles:                                                                                 -14.05 percent

Apparel and leather goods:                                                   -16.54 percent

Paper:                                                                                      -2.04 percent

Printing & related activities:                                                 -18.18 percent

Petroleum and coal products:                                                 -5.93 percent

Chemicals:                                                                              -1.65 percent

Plastics and rubber products:                                                 -7.60 percent

Other manufacturing (different from miscellaneous):           -5.37 percent

As with investment, past results are no guarantee of future performance, especially since the new economic slump is biologically, not economically caused. But some of these figures look like they have staying power – e.g., we’ll continue eating, we’ll keep using computers, we won’t be flying as much. One big puzzle – will car buying stay this depressed? As I like to say, my crystal ball is far from crystal clear. But that just makes it all the more important to keep track of these detailed manufacturing production figures as they come in, especially what leads an economy down is often what leads it back up.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Show No Burst So Far in Anti-CCP Virus Goods Output

Tags

(What' Left of) Our Economy, CCP Virus, coronavirus, COVID 19, facemasks, Fed, Federal Reserve, healthcare goods, industrial production, inflation-adjusted growth, manufacturing, manufacturing output, medical devices, medical equipment, PPE, protective gear, ventilators, Wuhan virus

No one should have been surprised by this morning’s manufacturing output report from the Federal Reserve, which judged that industry’s inflation-adjusted production tumbled by 6.27 percent in March from February’s levels – which was revised downward slightly from a 0.12 percent gain from a 0.02 percent dip. In other words, “Thanks, China!” for the CCP Virus that’s caused an unprecedented shutdown of huge sections of the U.S. economy.

Lately, however, some manufacturing sectors of special concern have emerged – the healthcare goods sectors. And the results are below.

Unfortunately, the statistics in the relevant sectors aren’t very granular. In particular, they don’t enable us to distinguish between, say, masks and ventilators, or between final pharmaceutical products and vaccines, or between CAT-scan and MRI machines and non-medical high tech instruments. Still, the following sequential results must have some significance, given the overall skid in after-inflation manufacturing production. And for February-March, they are:

soaps, cleaning compound, & toilet preparation:      +1.85 percent

pharmaceuticals & medicines:                                  +0.50 percent

  (includes vaccines)

medical equipment & supplies:                                 -1.55 percent

  (includes everything from ventilators to facemasks)

Less helpful is learning that constant dollar output in a category called “navigational, measuring, electromedical and control instruments” decreased by 2.39 percent on month.

Keep in mind that since these data were compiled, all manner of manufacturing companies have volunteered, or been officially pressured, either to ramp up their existing healthcare goods production greatly, or to enter the field. So next month’s Fed industrial production report – for April – should be more revealing. For now, however, the March numbers don’t show much in the way of surge production.

Nor should anyone expect the Fed’s figures on manufacturing capacity and capacity utilization to shed much light on healthcare-related surge performance and surge capacity. The categories simply aren’t this detailed.

Maybe one of the CCP Virus-induced changes in government will be involve tracking healthcare-related manufacturing data in more detailed? Stay tuned. And send all such suggestions to

Jerome Powell, Chair, Board of Governors of the Federal Reserve System, 20th St. and Constitution Ave. NW, Washington, D.C.  20551

 

(What’s Left of) Our Economy: Is the Fed Taking Us to Economics Infinity – & Beyond?

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big govenment, CCP Virus, coronavirus, COVID 19, credit, economics, Fed, Federal Reserve, finance, fiscal conservatism, Franklin D. Roosevelt, Great Depression, Great Recession, Jerome Powell, moral hazard, New Deal, stimulus package, Wuhan virus, {What's Left of) Our Economy

Since I’ve never liked recycling my own material, I’ve rarely written here on specific arguments I make on Twitter. (And I make a lot of them!) But since these times are so exceptional, and have just generated such an exceptional response from the Federal Reserve, an exception here seems more than justified. So here are three longer-than-a-tweet expressions of concern about the broadest impacts of the massive support for the everyday economy (as opposed to the financial system) just announced by the central bank in response to the CCP Virus.

The first has to do with the perils of super-easy money. Fed Chair Jerome Powell has just again made clear in remarks this morning that there’s “no limit” to the amount of credit the central bank can pump into the economy to create a “bridge” over which imperiled businesses large and small, and now state and local governments, can cross in order to return intact to “the other side” of the pandemic.

Yes there are conditions – mainly, the borrowers need to be creditworthy (though the definition of “creditworthy” has been expanded). So at least in principle, previous individual or business “bad behavior” won’t be rewarded and thereby enabled going forward – a practice economists call incurring “moral hazard.” That’s (again, in principle) different from the previous financial crisis-related bailouts, when lots of bad or incompetent behavior, especially by Wall Street and the automobile industry, was generously rewarded.

(More encouragingly, other, impressive conditions have been placed on beneficiaries of previously announced fiscal economic aid – the type provided with taxpayer money by the Executive Branch and Congress – including temporary bans on stock buybacks.)

But moral hazard doesn’t necessarily result from the behavior of apples that are already bad. The concept is so powerful (and has long been so convincing) in part because it holds that showering borrowers with easy (and now free money) tends to turn good apples bad. That’s because a credit glut greatly reduces the penalties created for poor decisions by the normal relative scarcity of capital and the price (interest rates) that lenders normally demand in order to impose some degree of discipline.

The lack of adequate discipline on borrowers is surely one big reason why the post-financial crisis economic recovery had been so historically sluggish: Capital wasn’t being used very efficiently, and therefore wasn’t creating as much output and employment as usual. Maybe, therefore, all these new stimulus programs, whether desperately needed now or not, are also setting the stage for a dreary repeat performance?

Which brings up the second issue raised by the latest Fed and other federal rescue operations: Their sheer scale, and the Powell’s “no limits” declaration strongly undercuts the most basic assumption behind the very discipline of economics: that resources will be relatively scarce. That is, there will never be enough wealth in particular to satisfy everyone’s needs, much less wants.

Think about it. If all the wealth needed or wanted could somehow be automatically summoned into existence, why would anyone have to think seriously about economic subjects at all? What would be the point of trying to figure out how to use resources most productively, or even how to distribute them most equitably?

I remain deeply skeptical about the idea that money literally “grows on trees” (as most of our ancestors would have put it). But Powell’s statement sure seems to lend it credence. Moreover, I’m among the many who have been astonished that the United States hasn’t so far had to pay the proverbial piper for all the debt that’s been created especially since financial crisis hit. So it’s entirely possible that I – and others who have fretted about the spending and lending spree the economy had already been on before the pandemic struck – have had it completely wrong.

It would still, however, seem important for economists and national leaders to make this point at least more explicitly going forward. For if it’s true, why even lend out money? Why have banks and financial markets themselves? Why shouldn’t the government just print money and distribute it – including to government agencies? Why for that matter tax anyone, rich or poor?

Just as important, if “on trees” thinking remains wrong – and possibly dangerous – folks who know what they’re talking about had better make the possible costs clear, too. Because if enough Americans become persuaded that there is indeed this kind of massive free lunch, what would stop them from demanding it? Why wouldn’t it be crazy not to? And how could elected leaders resist?

In fact, I’m also concerned about the emergence of a shorter term, more humdrum version of this situation. (This is my third worry for today.) Specifically, Powell clearly views the new Fed programs as emergency measures, which will be dialed back once the emergency is over. Similarly, at least some of the nation’s supposed fiscal conservatives are claiming that they’ve supported the sweeping anti-CCP Virus because it amounts “restitution” for all those individuals and businesses whose “property and economic rights” have been taken from them by the government decision to shut down the economy.

Nonetheless, let’s keep in mind that as former President Franklin D. Roosevelt was rolling out his New Deal programs to fight the Great Depression of the 1930s, he continually justified them as emergency measures. The President himself tried returning to his previous backing for budget balancing once some signs of recovery appeared.

His optimism, as it turned out, was premature, and helped bring on a second slump. Nonetheless, even had this about-face not failed, is it remotely likely that many other New Deal programs, ranging from Social Security to the Tennessee Valley Authority to the Federal Deposit Insurance Corporation to federal mortgage support agencies wouldn’t be alive and kicking, to put it mildly. Obviously that’s because however much most Americans may talk a small government game, they understandably like big government when it delivers tangible benefits.

As a result, when Powell, and others, promise that “When the economy is well on its way back to recovery…we will put these emergency tools away,” you’re free to smirk. The first clause in this sentence alone is grounds for caution, stating that the aid won’t be withdrawn once the worst is over, or when a rebound starts, but when normality is a certainty. If the national experience following the last financial crisis is any guide, when the Fed, for example, even pre-CCP Virus kept interest rates super low for many years after some growth had returned, “the other side” is going to be a place whose location will keep receding for the foreseeable future.

So the specter of the economy remaining hooked on massive government stimulus both for economic and these political reasons could be another reason for bearishness about a robust near-term rebound. (And no, I’m not trying to give out any investment advice here.)  

I’m not necessarily being critical here of the stimulus packages. Just trying to spotlight the safest bets to make, and the need to examine the future with eyes wide open. Is there any viable alternative?

(What’s Left of) Our Economy: Boeing Woes Finally Smack (Otherwise Encouraging) Fed Manufacturing Data

Tags

737 Max, aircraft, Boeing, China, China trade deal, Commerce Department, Fed, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, manufacturing production, manufacturing recession, Phase One, recession, tariffs, Trump, {What's Left of) Our Economy

The Federal Reserve’s report on January industrial production is out, and it not only finally makes clear the impact on manufacturing output of Boeing’s safety woes. It also strongly suggests that whatever (mild) recession industry has experienced is now over.

I say “whatever (mild recession)….” because several official measures of manufacturing output indicate that no downturn took place at all. For example, the Commerce Department’s GDP-by-Industry data series (which gauge factory production on a quarterly basis, not a monthly basis like the Fed) shows that manufacturing’s real gross output (analogous to the Fed’s inflation-adjusted manufacturing output figures) has not declined for two consecutive quarters during the entire current economic recovery. At the same time, it has registered several two-quarter (and longer) stretches periods during which manufacturing by this measure of inflation-adjusted output fell cumulatively.

Commerce’s tables for real value-added (a measure of manufacturing production that tries to prevent counting the production of inputs both as such, and as parts, components, and materials of finished goods) do report that industry’s production dropped between the fourth quarter of 2018 and the first quarter of 2019, and between the first and second quarters of this year. Cumulatively, moreover, this production level was lower in the second quarter of this year than in the third quarter of 2018 – revealing that on this basis, manufacturing suffered a three-quarter downturn.

At the same time, according to this series, both by the consecutive quarters and the cumulative methodology, the manufacturing recession ended in the third quarter, when it topped both the second quarter level and the output figure for the third quarter of 2018.

And don’t forget: According to the Fed’s real manufacturing output figures, domestic industry’s price-adjusted production peaked in December, 2007 – i.e., it’s never pulled out of the slump that began with the Great Recession. Further, as I documented last month, the Fed’s data show that within this long manufacturing recession, several shorter recessions have begun and ended by the cumulative criterion.

So that’s some of context needed for the Fed finding that after-inflation U.S. manufacturing production fell by 0.09 percent in January. That represented its first sequential decline since October, and left year-on-year production down 0.72 percent. By that standard alone, therefore, manufacturing’s recession has continued.

At the same time, industry’s constant dollar production is up since last April – by 0.70 percent. It’s also up 0.34 percent since April, 2018 – the first full month when the Trump administration’s tariffs on steel and aluminum imports went into effect,  and signaled that the President’s tariffs-heavy approach to trade had begun in earnest.

But the Boeing effect also needs to be considered as well. January saw a nosedive in aircraft and parts production of 1.07 percent sequentially, due to the company’s December announcement that production of its flawed 737 Max model would be suspended. The drop-off was the sector’s biggest monthly decline since the nearly 24 percent plunge in recessionary September, 2008.

I’ve wondered whether Boeing’s troubles had already been dragging down manufacturing output – given the company’s huge domestic supply chain, and given that the 737s had been grounded or banned from national airspaces nearly worldwide since March. But today’s report leaves no doubt that their effects have shown up. Indeed, the Fed explicitly stated that “excluding the production of aircraft and parts, factory output advanced 0.3 percent” on month in January.

So without the Boeing effect, January manufacturing output would be up cumulatively since last February – by 1.09 percent, not by 0.70 percent. And the increase since the advent of the main Trump tariffs would have been 0.74 percent, not 0.34 percent. These figures certainly don’t reveal a manufacturing boom – or even close. But given that even after the Phase One trade deal was signed with China, tariffs on hundreds of billions of dollars worth of Chinese products remain in place (many of them levied against goods that are manufacturing inputs), they cast new doubt on how damaging the President’s trade war has been for domestic industry.

Boeing’s 737 Max crisis will end some day. But the company itself warned that it could last “several quarters” more. Moreover, Boeing’s troubles scarcely end with this ill-fated aircraft. In other words, the company’s woes will keep impacting both all U.S. manufacturing data for the foreseeable future. Therefore, it’s up to the nation’s economists and journalists (along with think tank hacks, no matter who’s funding them) to keep this in mind when judging the effect of the President’s trade wars and other economic policies. Let’s see how many can meet this challenge.

(What’s Left of) Our Economy: Trade Wars’ Impact on U.S. Manufacturing Output Still Clouded by GM and Boeing

Tags

737 Max, aircraft, aluminum tariffs, automotive, Boeing, Fed, Federal Reserve, General Motors, General Motors strike, GM, household appliances, inflation-adjusted growth, inflation-adjusted output, manufacturing, metals-using industries, safety, steel tariffs, supply chain, tariffs, Trade, trade wars, {What's Left of) Our Economy

If you read last month’s Federal Reserve report on after-inflation U.S. manufacturing output (for September), then there wasn’t much reason to read yesterday morning’s report on after-inflation manufacturing production (for October). For it described the same puzzling picture: American industrial performance clearly dragged down by the recently ended strike at General Motors (GM), but apparently completely unaffected by Boeing safety woes that have sharply reduced the aviation giant’s enormous exports.

The top-line figures released by the Fed were definitely gloomy. Last month, real U.S. Manufacturing output dropped by 0.62 percent sequentially – the worst such result since April’s 0.87 percent fall-off. Inflation-adjusted motor vehicle and parts output, however, plunged by 7.65 percent – its worst such performance since the 7.97 percent nosedive of April, 2011. Moreover, September’s previously reported 4.22 percent monthly automotive price-adjusted automotive decrease was revised all the way down to a 5.49 percent slump.

As the Fed observed, without the huge October monthly plunge in inflation-adjusted automotive output, the overall manufacturing production decline would have been just 0.14 percent – which obviously doesn’t show any strength, either.

But this is where the Boeing puzzle comes in. There’s still no sign of it in these Fed data. Most curiously, constant dollar production for aircraft and parts production rose a solid 0.57 percent on month in October. It’s down since March, when governments the world over began grounding its popular but now troubled 737 Max jet or banning it from their national air spaces.

But although Boeing’s exports have deteriorated sharply, too, the real output shrinkage has only been 1.48 percent since March, and since April (the first full data month since those March woes), after-inflation production of aircraft and parts has actually risen 1.15 percent. That’s considerably better than the output performance of domestic manufacturing as a whole during this period. And it’s much better than the output of key supplier sectors, although surely they’d been affected by the GM strike as well:

overall manufacturing: -0.19 percent

durable goods: -0.81 percent

primary metals: -1.62 percent

fabricated metals products: -0.60 percent

machinery: +0.37 percent 

It’s true that export sales and production don’t move in lock step for aircraft, or for any other industry.  But with foreign markets representing well over half of Boeing’s revenue last year, the former sinking while the latter keep growing isn’t easy to explain.

Something else that needs to be considered: Whatever the Fed data actually show, they’re not able to show much about how aircraft parts and production would have fared without the Boeing troubles. And they’re even less capable of showing such counterfactuals regarding how supplier sectors might have fared.

As for the impact of the trade wars, as usual, the consequences of the President’s tariffs on aluminum and steel are easiest to gauge, since they’ve been on the longest, and the major metals-using industries (the presumed leading victims) are so easy to identify. The table below represents the changes in their real output since April, 2018 (the first full month in which the levies were in effect), with the data for manufacturing overall used as a control group, and durable goods included because it’s the super-category in which most of the main metals-using industries are located:

                                          Old Apr thru Sept    New Apr thru Sept    Apr thru Oct

overall manufacturing:       +0.09 percent            +0.08 percent         -0.54 percent

durables manufacturing:    +1.25 percent            +0.87 percent         -0.32 percent

fabricated metals prods:    +1.85 percent             +1.63 percent        +1.42 percent

machinery:                            0 percent                 -0.96 percent         -0.81 percent

automotive:                        -3.92 percent             -5.53 percent       -12.24 percent

major appliances:               -2.19 percent            -2.03 percent          -9.14 percent

aircraft and parts:              +5.43 percent           +3.00 percent         +3.59 percent

In absolute terms, the results are still all over the place, and a GM strike effect is clearly evident for supplier industries like fabricated metal products and machinery. The interruption of GM production also seems to have aggravated – but not caused – the loss of relative momentum exhibited by the metals-users – meaning, that their production slowdown has gotten faster relative to that of overall manufacturing, even leaving out the cratering of automotive output. Interestingly, that momentum loss is now affecting aircraft and parts, too – whose September production figures were also revised down significantly.

Also noteworthy – the steep monthly production dive in major appliances in October. Yes, they’ve experienced their own product-specific tariffs (on large household laundry equipment) as well as the metals tariffs. Production of these products is pretty volatile, too. But the 7.26 percent real monthly output drop was the biggest since it plummeted 8.29 percent between September and October, 2013. Even stranger – the housing sector, which drives much appliance buying and therefore indirectly production – registered a major uptick in growth in the third quarter after six quarters of substantial decline.

As for the impact of the China tariffs on manufacturing output, since that’s much more difficult to gauge than the effects of the metals tariffs (e.g., because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries) it seems to make less sense than ever to examine them, given the possibility of the Boeing effect lasting months more.

And somewhat depressingly, I find myself wondering if that’s going to be true for following any manufacturing-and-trade-relevant data for at least a month or two more. (Though I’m sure I’ll keep soldering on!)

(What’s Left of) Our Economy: Manufacturing’s Recession Lengthens but Tariffs’ Role Stays Fuzzy

Tags

aluminum, China, Fed, Federal Reserve, industrial production, manufacturing, metals, metals tariffs, metals-using industries, real output, steel, tariffs, Trade, Trump, {What's Left of) Our Economy

The modest momentum showed by domestic manufacturing in the previous two Federal Reserve industrial production reports disappeared in this morning’s edition of the monthly survey, as overall real manufacturing output in July fell month-to-month (by 0.36 percent) for the first time since April. Worse, the new data lengthened domestic industry’s recession, with inflation-adjusted production now off by a hair (0.004 percent) since April, 2018 – a stretch much longer than the two straight quarters of cumulative decline that qualify as a downturn for most economists.

This morning’s Fed numbers also provide some additional evidence that President Trump’s tariff-centric trade policies have begun to erode manufacturing’s performance. But only some. Specifically, whereas in the first months following the imposition of metals tariffs in particular, metals-using sectors were handily beating the rest of manufacturing by every major metric, July’s industrial production numbers showed that their more recent relative performance continues to have been much more mixed.

As usual, nearly all of the best evidence concerns the impact of the tariffs on steel and aluminum, for reasons including their relatively long duration (April, 2018 was the first full month they were in place), and the ease with which metals-using sectors can be identified. And as usual, the table below presents the output data for these sectors since April, 2018, with the data for manufacturing overall used as a control group.

                                              April thru May      April thru June       April thru July

overall manufacturing:          -0.20 percent        +0.36 percent             0 percent

durables manufacturing:       +0.96 percent        +1.47 percent        +1.23 percent

fabricated metals products:  +1.34 percent         +1.89 percent        +0.95 percent

machinery:                            +0.86 percent        +0.57 percent         -0.57 percent

automotive:                           -1.88 percent         +0.60 percent        +0.43 percent

major appliances:                  -2.00 percent          -4.47 percent        -5.99 percent

aircraft and parts:                 +0.73 percent         +2.46 percent        +4.23 percent

These figures show that for three of the five major metals-using sectors tracked (fabricated metals products, machinery, and major appliances), constant dollar output has worsened compared with such production in manufacturing as a whole. Relative performance for automotive and aircraft and parts, however, has improved – as it has for the durable goods super-sector in which the metals users are located.

Keep in mind also that results for the major appliance sector also remain affected by a separate set of product-specific levies on large household laundry equipment that began in February, 2018.

In contrast with the metals tariffs, the first full month for China tariffs of any kind was August, 2018, and the set of goods involved was relatively small. Complicating matters further is the U.S. Trade Representative’s office’s practice of listing the dutied products according to a classification scheme that differs significantly from that used by the rest of the U.S. government to monitor most major indicators of economic performance – including industrial production.

And as previously noted, most of the Made in China products tariff-ed so far have been intermediate goods (parts, components, materials, etc.) whose use by American manufacturers varies widely. Therefore, the impact of tariffs on these products undoubtedly varies widely, too. Moreover, the number of Chinese goods facing tariffs has increased dramatically since last August. Not only were the levies extended to an additional $200 billion worth of such imports from China in late September, 2018, but these duties were raised from ten percent to 25 percent in May, 2019. (See this time-line for the specifics.)

All the same, here are results for a handful of sectors reasonably certain to have faced tariff pressure since last August. Each column measuring real output changes since last August.

                                         August thru May     August thru June     August thru July

overall manufacturing:     -1.09 percent            -0.55 percent           -0.90 percent

ball bearings:                    -2.20 percent            -2.46 percent           -2.27 percent

industrial heating equip:   -4.11 percent            -5.16 percent           -5.21 percent

farm machinery & equip: -7.51 percent            -6.53 percent           -6.91 percent

oil/gas drilling platform: +4.03 percent            +2.22 percent           -0.17 percent      parts

A greater percentage of these sectors (three of four) generated worse performance versus manufacturing overall than was the case for the metals-using sectors. But the sample size is so small, and the the uncertainties so considerable, that these more downbeat results should still be viewed with the utmost caution. Ditto for claims that the Trump tariffs are killing U.S. manufacturing.

(What’s Left of) Our Economy: Yellen Showing a Learning Curve on Trade?

Tags

currency manipulation, Fed, Federal Reserve, free trade, free trade agreements, Jobs, NAFTA, offshoring, Trade, wages, Yellen, {What's Left of) Our Economy

Fed Chair Janet Yellen made some minor trade-related headlines (in the greater scheme of things) when she reportedly told the Senate Banking Committee that she opposed including enforceable disciplines on currency manipulation in trade agreements.

Actually, Yellen said no such thing. In response to a question from Tennessee Republican Senator Bob Corker following her latest semi-annual testimony to Congress on monetary policy, Yellen stated that she would “really be concerned” about such a move, but she by no means told the lawmakers anything like “Don’t do it!”

But what I found at least as interesting as those remarks were others in which she indicated – and not for the first time – that her views on trade and its effects on American labor markets have undergone some real changes since the 1990s – including the period when she served on President Clinton’s Council of Economic Advisors.

Before this government service, Yellen joined many other leading academics in endorsing Congress’ passage of the North American Free Trade Agreement (NAFTA). Their joint 1993 letter predicted, “The agreement will be a net positive for the United States, both in terms of employment creation and overall economic growth. Specifically, the assertions that NAFTA will spur an exodus of U.S. jobs to Mexico are without basis. Mexican trade has resulted in net job creation in the U.S. in the past, and there is no evidence that this trend will not continue when NAFTA is enacted.”

In 1998, as a White House economist, Yellen wrote a journal article displaying similar confidence. Appropriate titled “The continuing importance of trade liberalization,” Yellen’s piece concluded a staunch defense of standard trade theory and its relevance to practice by declaring, “Trade liberalization might adversely affect a small fraction of American workers in their role as producers, but it benefits all workers in their role as consumers. The bottom line is that the benefits of increased openness and increased international trade are wide ranging: more efficient utilization of resources, faster productivity growth, higher quality goods, and lower prices, all of which raise living standards.”

After a decade-and-a-half’s worth of experience with NAFTA-inspired trade deals and related policies, Yellen’s tune sounds different. Last August, speaking to the annual central bankers’ conference in Jackson Hole, Wyoming, the Fed chair attributed sluggish wage growth during the current economic recovery to “changing patterns of production and international trade.” Indeed, she cited a paper commissioned for the conference that emphasized the toll taken on workers by “the offshoring of the labor-intensive component of the U.S. supply chain.”

In yesterday’s appearance before the Senate Banking Committee, Yellen made that latter point herself. (These remarks start a little after the 46-minute mark.) Again explaining the current recovery’s anemic wage inflation, she mentioned as one of the “longer-term structural factors” likely playing a role “the fact that many labor-intensive activities in the global production chain are being increasingly outsourced….” (If only some alert legislator would point out that many higher value links in these supply chains have been offshored as well!) And she expressed no optimism that trade-related developments would ever bring any relief to a trend that’s been at work “over the last decade or so.”

Yellen’s recent pronouncements on prospects for future increases in the federal funds rate makes clear she’s become acutely sensitive to matters of time and how its passage is described. She might consider that describing outsourcing helping to undercut wages over the last decade or so means that this process started right about the time NAFTA ushered in the current phase of U.S. trade liberalization policy.