(What’s Left of) Our Economy: Some Manufacturing Pushback Versus Tariff Gloom-Mongering

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aluminum, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, metals tariffs, metals-using industries, steel, tariffs, Trade, trade war, {What's Left of) Our Economy

Is U.S. domestic manufacturing emerging from its recent funk? This morning’s Federal Reserve industrial production figures (for August) certainly supply some compelling evidence. And some of the nation’s major metals-using industries – widely portrayed as major victims of Trump administration tariffs that have been in place since early 2018 on steel and aluminum – led the pack last month.

August’s 0.53 sequential real output increase wasn’t enough to pull domestic industry out of its current technical recession. But it did shorten the length of the downturn considerably. As of the previous industrial production report, manufacturing had been in recession since April, 2018 – with its inflation-adjusted output down 0.004 percent.

Today’s data revealed that constant-dollar production has now fallen 0.36 percent since the previous August. In addition, since its latest bottom (this April), after-inflation manufacturing output is up 0.89 percent. And sequentially, this production is up three of the last four months.

Moreover, the strong August performance of the metals-using sectors was noteworthy. These industries have faced wide-ranging tariffs on steel and aluminum since March, 2018, with April being the first full month in which the duties were in effect. (Major appliances have been an exception – they have also been coping with separate levies on large household laundry equipment since February, 2018.) As reported by RealityChek last month, some of these metals-users suffered a miserable July, indicating that the metals tariffs were finally taking a measurable toll, either because of the higher input costs they created, the greater uncertainty they generated, the impact of retaliatory foreign tariffs, or some combination of all three.

But as demonstrated by the following table, they regained much of their momentum relative to the rest of manufacturing last month. These figures represent the changes in their real output since April, 2018, with the data for manufacturing overall used as a control group.

                                              April thru June    April thru July    April thru August

overall manufacturing:         +0.42 percent       -0.01 percent        +0.54 percent

durables manufacturing:      +1.57 percent       +1.37 percent       +1.98 percent

fabricated metals products:  +1.89 percent      +0.95 percent        +1.88 percent

machinery:                           +0.78 percent       -0.88 percent        +0.67 percent

automotive:                          +0.69 percent      +1.20 percent       +0.17 percent

major appliances:                 -4.84 percent       -4.39 percent        -2.04 percent

aircraft and parts:                +2.39 percent      +3.59 percent       +4.39 percent

With the exception of the automotive sector (where a big inventory overhang could finally be slowing output significantly) and aircraft and parts (which keeps chugging along, so far despite Boeing’s safety troubles) these major metals-using sectors enjoyed Augusts that were much stronger in terms of growth than their Julys. And in August, durable goods overall (the manufacturing super-sector in which the main metals-using industries are located), major appliances, and aircraft and parts have recaptured the relative growth lead they’d lost the previous month.

The effects of President Trump’s China tariffs have been much more difficult to ascertain for many reasons: Even the earliest have been in effect only since last summer. Their nature has been so on-again-off-again nature. The original tariff levels on some have been increased. Their use is so widely (but often so thinly and non-uniformly) spread throughout American industry. And the official lists of tariff-ed products don’t match up precisely with the classification system used by the Fed (and the rest of the U.S. government) to track trends in manufacturing and the rest of the economy.

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

                                                   Aug thru June    Aug thru July    Aug thru Aug

overall manufacturing:              -0.48 percent     -0.89 percent      -0.36 percent

ball bearings:                             -2.48 percent     -2.30 percent      -2.23 percent

industrial heating equip:           -4.96 percent     -4.16 percent      -2.52 percent

farm machinery & equip:         -6.44 percent     -6.91 percent     +9.71 percent

oil/gas drilling platform pts:   +2.18 percent     -0.84 percent       -1.04 percent

The sample size is obviously very small, and the results are almost as obviously a wash.

Looking ahead, domestic manufacturing – and especially the metals-using industries – faces at least two visible possible hurdles: Boeing’s ongoing woes, and a new strike at General Motors. And literally no one outside the Oval Office (assuming President Trump does) knows what the future will bring in terms of tariffs on imports from China, retaliation from Beijing. And don’t forget the Congressional vote on the U.S.-Mexico-Canada [trade] Agreement that may be coming.

But the August manufacturing production data were unquestionably solid. They continued a decent recent streak for the nation’s industries, and indicated considerable resilience – including possibly a growing ability to adapt to a radically different and volatile trade policy environment.

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(What’s Left of) Our Economy: Why Media Recession Cheerleading May Be a Thing

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confidence, Federal Reserve, Mainstream Media, National Federation of Independent Business, NFIB, recession, small business, Trade, trade war, Trump, uncertainty, {What's Left of) Our Economy

Can a national economy be talked into recession? And is this a danger for the American economy today? As known by anyone with even basic knowledge about economics, because psychology (and especially optimism and pessimism) so crucial determines business and consumer decisions, the answer to the first question unmistakably is “Yes,” at least in theory.

There’s a lively debate over whether that’s now a danger – with Donald Trump among others charging that his political and Mainstream Media opponents’ alleged determination to defeat him in the upcoming presidential election has turned them into prophets of doom – but obviously the winner can’t be determined until an actual downturn has begun.

But two notable clusters of evidence have just emerged lending at least some credence to the latter proposition. The first comes from today’s news coverage of a key measure of confidence in the economy – the monthly Optimism Index issued by the National Federation of Independent Business (NFIB), the nation’s leading small business organization.

In quintessential examples of unjustifiably downbeat reporting, the survey’s results were widely portrayed as a sign that the national economic sky is getting close to falling. “U.S. Small-Business Optimism Drops to Lowest in Five Months,” blared a Bloomberg.com headline. “Trump’s trade war is triggering a ‘sharp slowdown’ among American small businesses, warned Business Insider pointedly. “Small Business Optimism Index for August 2019 falls 1.6 points,” specified a brief YahooFinance.com item, which also blamed the Trump trade policies (as did the Bloomberg article).

But if you think about it, two of these headlines themselves strengthen allegations of alarmism. After all, five months isn’t an especially long time period. And 1.6 percentage points isn’t exactly a nosedive.

More important were the points buried in these stories. For example, it wasn’t until the fifth paragraph (of eight) that Bloomberg readers were told that “Even with the decline [from a prior reading of 104.7], the NFIB gauge remains elevated by historical standards, though it’s below the average level since Donald Trump was elected president in 2016.”

And get a load of this statement from the NFIB’s leader, which appeared in a gloomily headlined Dow Jones piece:

“‘In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country,'” NFIB Chief Executive Juanita Duggan said in prepared remarks. ‘Small business owners continue to invest, grow, and hire at historically high levels, and we see no indication of a coming recession.'”

Further evidence of media fear-mongering – also tightly linked to Mr. Trump’s trade wars – has appeared in a new study from the Federal Reserve. In a September 4 report titled “Does Trade Policy Uncertainty Affect Global Economic Activity?” a team of Fed staff economists seek to document the widespread (and entirely reasonable) belief that “Higher uncertainty could lead firms to delay their investment and reduce their hiring, lower consumer confidence and spending, and ultimately curtail economic activity around the world” – including in the United States.

To make their point, they created and use two measures of uncertainty. The first “is based on searches of newspaper articles that discuss trade policy uncertainty.” The publications comprising this database were “Boston Globe, Chicago Tribune, Guardian, Los Angeles Times, New York Times, Wall Street Journal, and Washington Post.” The second was constructed “in an analogous way from automated text searches of the quarterly earnings call transcripts of U.S.-listed corporations.”

Anyone with even a rudimentary knowledge of trade policy and its recent history might well immediately recognize one serious potential problem with the business-based uncertainty gauge: Public companies have been among the strongest and most influential supporters of pre-Trump trade policies, and have understandably been among the loudest critics – since the President’s pushback threatens established business models that have greatly boosted profits via sales to the high-wage U.S. market from offshored or other factories located in super low-cost countries like China and Mexico, and through the use of subsidized and artificially cheap inputs from numerous mercantile foreign economies.

But much more interesting and revealing: However strongly these companies logically would be expected in their public statements to harp repeatedly on the reality and potential of trade war-related problems (which can be considerably hyped, as I’ve demonstrated), the newspapers in the Fed report’s gauge cited such actual and possible difficulties much more – as the chart below shows. That’s why the solid line in the chart, showing the media’s mentions of uncertainty, has consistently been higher than the businesses’ mentions until very recently. (I know it’s a little hard to eyeball, but make the effort.)

Figure 1: Trade Policy Uncertainty

 

Do these findings mean that the economy has no serious problems, that the odds of a recession in the foreseeable future are negligible, and that Mr. Trump’s trade policy decisions may not exact significant economic costs? Of course not. They don’t even prove the charge that the media is seeking to oust the President by talking the economy down. But do they indicate that a “bad news sells” bias is pervading media coverage of the economy (and the trade war) at an especially crucial stage of the business cycle – and the political cycle? The above evidence makes this allegation look awfully credible.         

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

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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: Just When Did U.S. Manufacturing’s Current Recession Begin?

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Federal Reserve, industrial production, inflation-adjusted growth, manufacturing, recession, {What's Left of) Our Economy

U.S.-based manufacturing went into its latest recession in April, and I missed it. Or did I? Once I realized my apparent oversight, I went back to the figures and realized that, although the definition of a recession that I’ve long used (two consecutive quarters of cumulative output shrinkage) is clear enough, figuring out what start date to use has been anything but throughout the current economic recovery.

For example, between April, 2018 and April, 2019, inflation-adjusted manufacturing output (the measure I’m using here, and the measure used by the Federal Reserve when it puts out its industrial production statistics each month) dropped by 0.14 percent. So even though it wasn’t down much, it was down on net for a full year – or four straight quarters.

That recession came to an end in May of this year, when industry’s after-inflation production grew by 0.25 percent on-month. But manufacturing was still mired in another recession – one that began in July. How could that be? Because between May and July of last year, price-adjusted output climbed by 0.43 percent – enough to push it back to 0.39 percent higher than the May, 2019 level. Since that time period covers more than two consecutive quarters, it qualifies as a new technical recession.

Moreover, even though between May and June of this year, constant-dollar (i.e., inflation-adjusted) manufacturing production advanced by another 0.43 percent, that still wasn’t enough to push it out of technical recession territory. The reason? Between last June and July, such output improved – by 0.43 percent itself. So since last July, it’s still down by 0.36 percent on net.

And if real manufacturing production doesn’t pick up even faster over the next few months, its current recession could continue for several more months, because last year, it continued growing healthily through December.

Interestingly, even though the U.S. economy has been in recovery mode since June, 2009, this current technical manufacturing recession is far from the first. I’ve counted five alone between January, 2012 and November, 2016. Here they are:

Jan., 2012-Oct., 2012 (down 0.22 percent)

Dec., 2012-July, 2013 (down 0.75 percent)

Aug., 2013-Jan., 2014 (down 0.01 percent)

Feb., 2014-Sept., 2016 (down 0.11 percent)

Jan., 2016-Nov., 2016 (down 0.19 percent)

In addition, those last two entries show the type of rolling, overlapping character like that seen since April, 2018. And I’ve spotted at least one more such instance – the downturn that took place between February and August of 2013, when real manufacturing output dipped by 0.04 percent.

And one more – big! – complication: Although the U.S. economy began recovering from the recession that began at the end of 2007, American manufacturing still hasn’t. Sure, it’s grown since it hit bottom (also in June, 2009). But as I’ve been pointing out ever since, it’s never grown enough to better that December, 2007 peak and in fact at present remains 2.09 percent smaller in terms of after-inflation production that at the recession’s onset. That’s more than a decade. And at its current rate of growth, the slump could easily turn eleven at the end of this year.

So getting back to my original question, is it fair to say that I missed manufacturing’s most recent recession during the current economic expansion if its post-2007 downturn never ended? As always, let me know your answers.

(What’s Left of) Our Economy: New Signs of Life in U.S. Manufacturing Output – Including in Tariff-Affected Industries

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

This morning’s Federal Reserve industrial production report provided further evidence that domestic U.S. manufacturing is moving past a spring rough patch. Rebounding also – output in many of the metals-using industries supposedly being decimated by President Trump’s tariffs on aluminum and steel.

As usual, though, because reliable data is so difficult to come by, the impact of U.S. duties on imports from China is much harder to gauge. But certainly there’s no reason to believe claims that industries using tariff-ed Chinese inputs are experiencing anything close to the damage widely reported.

Not that U.S.-based manufacturing is out of the woods. Its real output in June did improve on a monthly basis by 0.43 percent – its best such performance since December’s 0.64 percent gain. But domestic industry remains in a technical recession, with inflation-adjusted production down 0.36 percent since August – a stretch longer than the two straight quarters of cumulative decline that qualify as a downturn for most economists.

The table below presents the output data for the major metals-using sectors for the period since April, 2018 – the first full month in which the steel and aluminum tariffs were in place. As usual, the numbers for manufacturing overall are used as a control group.

                                             April thru April      April thru May      April thru June

overall manufacturing:          -0.14 percent        +0.11 percent         +0.54 percent

durables manufacturing:       +0.60 percent        +0.68 percent         +0.98 percent

fabricated metals products:   +1.93 percent        +1.14 percent         +1.09 percent

machinery:                             -1.28 percent        +0.91 percent          +0.12 percent

automotive:                            -3.94 percent         -1.75 percent          +1.05 percent

major appliances:                   -8.89 percent         -1.64 percent           -5.99 percent

aircraft and parts:                  +3.25 percent        +1.17 percent           +2.37 percent

These figures make clear that better constant-dollar output has been achieved during the last two months for manufacturing as a whole, for durable goods manufacturing (the super-category that contains most of the main metals-using sectors) and for three of the five leading specific metals-users. Especially interesting are the comeback being staged by major appliances (which face both metals tariffs and separate levies on large household clothes washers and dryers that began in February, 2018), and the deterioration apparent in aerospace (which arguably is being undercut by the safety problems experienced by Boeing).

Nonetheless, applause should be muted. For earlier in the post-metals tariffs periods, these metals users were clear production out-performers.

Statistics related to the China tariffs (whose first full month in effect was last August, 2018) continues to be plagued by great variations concerning the tariff-ed goods’ role as inputs for a wide range of domestic U.S. industries, uncertainties stemming from the differing classification systems used in the U.S. Trade Representative’s official tariff list and by the Federal Reserve in classifying manufacturing industries, and both the shorter duration of the levies and the increase in coverage since the first tranche was announced.

Keeping these enormous caveats in mind, 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.

                                                Aug thru April       Aug thru May      Aug thru May

overall manufacturing:            -1.03 percent         -0.79 percent        -0.36 percent

ball bearings:                           -1.77 percent         -2.62 percent        -2.89 percent

industrial heating equip:          -8.00 percent         -4.13 percent        -9.04 percent

farm machinery & equip:      -10.27 percent         -7.51 percent        -6.44 percent

oil/gas drilling platform pts:  +2.41 percent         +3.93 percent       +2.13 percent

On the one hand, these numbers provide the tariff opponents with some ammunition for claiming harmful effects from the levies, but not much. Two of the four specific sectors have lost momentum compared with the rest of manufacturing (ball bearings and industrial heating equipment), one has gained (farm machinery and equipment), and once has displayed a slight momentum loss – but also major monthly variation.

On the other hand, given that widespread (though highly uneven) use of Chinese inputs, the recent bounce-back in overall manufacturing production indicates that, if the China duties have been holding industry back – because of increased uncertainty or whatever other reasons have been offered – the impact has been both minimal and offset by other sources of strength. If true, that’s hardly a trivial consideration in judging the wisdom of and prospects for the Trump China trade war – since with each new batch of its own data, China is finding it more difficult to make that claim about its own economy.

(What’s Left of) Our Economy: More Evidence that Trump’s Trade Wars are Winning for America

Tags

capital spending, Dallas Federal Reserve, Federal Reserve, Jobs, manufacturers, manufacturing, output, production, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Here’s how weird today’s (covering June) Dallas Federal Reserve Bank manufacturing report is. It’s prompted me to write my first ever RealityChek post on an individual regional Fed manufacturing report. And I’m writing this subject instead of my original plan to blog on the Iran/Persian Gulf crisis – which is of course generating lots of headlines.

The main reason? The Dallas findings include considerable evidence that domestic U.S. manufacturing is withstanding President Trump’s trade wars quite well thank you – at worst – and that his tariffs are bringing back a good deal more production to the United States than widely supposed. 

For readers not familiar with such reports, every month, several of the regional branches in the national Federal Reserve system issue results of surveys they conduct on the state of manufacturing in the geographic districts they monitor and whose financial sectors they help regulate. The Dallas Fed’s “jurisdiction” is Texas, northern Louisiana, and southern New Mexico. And because Texas is such an important manufacturing state, the Dallas reports are considered especially important in judging the health of American manufacturing as a whole.

Today’s Dallas Fed report began unusually enough, with a series of seemingly contradictory findings stemming from its usual indicators. For example, the so-called headline figure – which purports to measure district manufacturers’ perceptions of overall industry conditions for a particular month – not only worsened for the second straight month. It sank even deeper into numerical territory that supposedly signals manufacturing contraction.

At the same time, these companies’ reports on their output (like all the regional Fed manufacturing surveys, the Dallas Fed’s gauges “sentiment,” or companies’ descriptions of their activities, rather than measuring the activity itself), rose slightly higher into the numerical territory signaling manufacturing expansion. So did the “new orders” indicator – though it was slightly weaker in absolute terms. (That is, it wasn’t signaling expansion as strongly as the output indicator.)

Dallas Fed district manufacturers also stated that they were continuing to hire, and work their employees more hours per weak – though the growth here slowed from that they reported the previous month. The only indicator which registered a major monthly drop was capital spending. It dropped by double-digits percentage points to a two-year low, but still remained in expansion territory.

Interestingly, the Dallas results roughly mirrored the June report from another closely watched Fed district – Philadelphia’s.

But what was really weird about today’s Dallas Fed report were the answers regional manufacturers gave to a series of “Special Questions” about the impact of President Trump’s tariffs. The responses from 115 companies made clear that they believed that the levies effects were more damaging than last September, when they previously answered these questions (and when Texas and national manufacturing was going great guns).

But the difference was anything but dramatic. By many key measures, strong majorities reported that the tariffs had “no impact” on their fortunes. The companies expected the tariff damage to fade considerably within two years. And many of them were responding to tariff pressures they faced by replacing foreign suppliers with domestic suppliers. In other words, they were replacing imports with domestic orders and production.

For example, between last September and this month, the share of Texas manufacturers stating that the U.S. and foreign retaliatory tariffs had had “no impact” on their production levels fell only from 65.9 percent to 60.9 percent. The share reporting “no impact” on employment dipped from 82.1 percent to a still lofty 78.3 percent, and on capital spending from 69.4 percent to 64.9 percent. I.e., these results don’t exactly scream “Tariffmageddon!”

For those companies that did report tariff-related changes, the gap for each of these indicators between those reporting damage and those reporting benefits definitely widened in favor of damage. But again, the differences – over a nine-month period during which lots of tariffs were actually imposed or increased – were on the limited side. The biggest deterioration, for example, took place in capital spending. In September, 20 percent of the manufacturers responding reported that the tariffs were leading them to cut such investments. This month, that share rose to 27.2 percent. Slightly behind capital spending in this respect was output, with the “decrease” share increasing from 20 percent to 26.1 percent.

The share of companies reporting benefits from the tariffs declined, too – but much more modestly. And in June, they still averaged close to ten percent.

By contrast, the companies’ views on their ability to cope successfully over time with the U.S. and foreign retaliatory tariffs brightened through 2021. The share expecting net tariffs damage dropped from 41 percent to 32 percent, and the share expecting net benefits doubled – to 18 percent.

And potentially most interesting of all – many more companies that reported net negative impacts from tariffs were responding by replacing imports with domestic production, not with non-tariff-ed foreign products. The sample size here is small (46 firms), but 17.4 percent said they were “mitigating” the tariff damage by finding new domestic suppliers and another 17.4 percent were bringing “production or processes” back in-house. Only 10.9 percent answered “finding new foreign suppliers.”

When it comes to China, I’ve long maintained that any reduction in Chinese industrial capacity benefits the United States, even if imports from China are replaced by imports from elsewhere. But the Dallas results show that the number of companies responding by bringing production back home in one way or another – as President Trump has promised – could be much higher than many skeptics have claimed and predicted.

Sentiment surveys like the regional Fed reports are no substitute for the actual data (largely for the “survivorship bias” problems I’ve explained in this post). But if more of these institutions could keep track of their manufacturers’ stated experiences with and responses to the Trump trade wars – and on an ongoing, not sporadic, basis – they could help the nation better understand the real consequences.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Nudge Tariffmageddon a Bit Further Away

Tags

aluminum, China, Federal Reserve, industrial production, inflation-adjusted growth, manufacturing, metals, metals tariffs, metals-using industries, real growth, steel, tariffs, Trade, trade war, {What's Left of) Our Economy

Today’s industrial production figures from the Federal Reserve showed not only that U.S. domestic manufacturing regained some strength in May following a string of poor monthly results. They also provided more evidence that President Trump’s tariffs have had little, if any, effect on the performance of either the metals-using industries impacted by levies on steel and aluminum imports, or of sectors supposedly affected by China-related duties.

Two more points come through pretty loud and clear from the new figures on domestic industry’s inflation-adjusted growth. First, the weakness displayed in April by manufacturing as a whole and by metals-using sectors could well have been confined to that month. Second, the safety problems revealed in the Boeing Company’s aircraft have begun to influence the picture and may distort the readings for several more months.

The overall readings for manufacturing were mildly encouraging, with the 0.22 percent sequential rise in real output representing domestic industry’s best reading since December’s 0.64 percent improvement. Revisions were ever so slightly positive.

Most of the leading metals-using industries – where the role played by tariffs is relatively easy to identify – fared better in May than in April, too, as the following table shows. The columns show the changes in after-inflation output for these sectors starting with April, 2018 (the first full month the metals levies went into effect) and each of the last three data months of this year. And as usual, the numbers for manufacturing overall are used as a control group.

                                             April thru March   April thru April   April thru May

overall manufacturing:          +0.45 percent        -0.07 percent      +0.89 percent

durables manufacturing:       +1.34 percent       +0.68 percent      +0.98 percent

fabricated metals products:   +2.76 percent      +1.88 percent       +1.73 percent

machinery:                            +2.31 percent       -0.12 percent       +0.11 percent

automotive:                            -3.10 percent       -3.86 percent        -1.55 percent

major appliances:                   -5.27 percent       -8.24 percent        -3.27 percent

aircraft and parts:                  +5.75 percent      +3.34 percent       +1.15 percent

durable mfg ex-automotive: +2.10 percent       +1.48 percent       +1.41 percent

In general, it’s clear that the metals-using industries are still losing growth momentum versus the rest of manufacturing. But do the duties deserve all or even much of the blame? If so, then why did so many of these sectors turn in better growth numbers in May than in April – especially automotive and major appliances? The latter’s relative comeback is especially striking, given that it’s been experiencing not only metals tariffs, but separate levies on large household laundry equipment and a weakness in U.S. housing. Ditto for automotive, where output has been highly volatile for many months.

The Boeing effect is apparent, too, from the falling output numbers since March, when safety problems started generating grounding decisions and airspace national airspace bans for its widely used 737 Max models. Further, both automotive and aerospace are major users of machinery and fabricated metals products.

The impact of the tariffs on products from China remains much more of a puzzle, and for the same reasons that have been apparent since their onset, in August, 2018. They have covered thousands of products, most of which so far have been intermediate goods, and their role as these kinds of inputs for manufacturing industries varies dramatically from final product to final product. In addition, Washington uses different manufacturing classification systems for designating the tariff-ed products and for measuring manufacturing production. The levies have been in place for a shorter period of time than the metals duties. And their scope has widened since the first batch went into effect in August, along with many rates having changed.

Nonetheless, here are some figures for the handful of industries for which I’m sure the numbers create a reasonably accurate picture, with each column measuring real output changes since last August.

                                        August thru March   August thru April   August thru May

overall manufacturing:       -0.45 percent           -0.96 percent         -0.75 percent

ball bearings:                     +0.22 percent          +0.11 percent        +0.01 percent

industrial heating equip:     -0.83 percent          -5.41 percent          -4.70 percent

farm machinery & equip: -11.65 percent         -10.27 percent         -7.51 percent

oil/gas drilling platform    +4.08 percent          +2.58 percent         +4.59 percent

   parts

Unfortunately, no consistent trend emerges. Two of the sectors’ improved between March and May (farm machinery and equipment, and oil and gas drilling platform parts), and two worsened (ball bearings and industrial heating equipment).

And although as long as the China tariffs continue , the future will provide results over a more statistically significant time frame, because the footprint of Chinese inputs in most of U.S. Manufacturing sectors will continue to be so broad and deep, their costs are likely to remain just as hard to discern.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Show Industry is Still Nicely Withstanding the Metals Tariffs

Tags

aluminum, China, durable goods, Federal Reserve, growth, industrial production, inflation-adjusted growth, manufacturing, metals tariffs, metals-using industries, real growth, steel, tariffs, {What's Left of) Our Economy

This morning brought another poor result for U.S. domestic manufacturing – specifically, a 0.52 percent decrease in inflation-adjusted output that was its worst such performance since January’s 0.66 percent sequential decline. As a result, the temptation is to blame the Trump tariffs that have so dominated economic and business news headlines, but as usual, the data simply don’t support this claim.

Unquestionably, these new figures from the Federal Reserve point to a problem with American industry. Tariffs, however, look beside the point. Instead, the numbers reveal what looks like an April problem and an automotive problem, and especially where tariffs on metals are concerned – the major Trump-era levies that have been longest lasting, and where the affected manufacturing sectors are easiest to identify.

Here are the numbers for the economy’s chief metals-using industries. They start in April, 2018 (the first full months when the steel and aluminum levies went into effect). They show the growth rates between then and the last three data months. They include the statistics for overall manufacturing as a control group. And I’ve added two new pieces of information: the year-on-year real production changes for these sectors, and the data for durable goods manufacturing stripped of the automotive industry’s performance.

                                           Apr thru Feb   Apr thru March    Apr y/y prev  Apr y/y

overall manufacturing:          +0.48%             +0.52%              0.00%         +2.33%

durables manufacturing:       +1.31%            +1.35%             +0.40%         +2.49%

fabricated metals prods:       +2.87%            +2.72%             +2.14%         +4.44%

machinery:                           +1.49%            +1.92%              -0.69%         +4.05%

automotive:                          -1.71%             -1.93%              -4.43%          +3.07%

major appliances:                 -1.43%            -6.77%            -10.44%          +0.03%

aircraft & parts:                   +4.89%           +6.08%             +4.82%           -1.30%

durable mfg ex-automotive:  +1.82%        +1.91%              +1.21%          +2.41%

Comparing the automotive and the durables ex-automotive lines clearly shows both the automotive and April effects – with the latter suggesting the possibility of a production hiccup. Strengthening that interpretation: except for the major appliance category, nearly all the April, 2018-March, 2019 growth rates exceeded the April, 2018-February, 2019 growth rates. Moreover, the April automotive nosedive (which has taken place both on a month-on-month and year-on-year basis), is especially important because vehicle and parts production use so much in the way of machinery and fabricated metals products.

In addition, the safety issues encountered by Boeing may be responsible for the April aviation growth slowdown that may also have contributed to manufacturing’s broader woes that month.

The major appliances figures above continue to stick out like a sore thumb.  But of course, this sector has faced not only metals tariffs, but separate product-specific levies that went into effect in February, 2018.  In addition, America’s slumping housing sector has surely depressed sales and therefore production for reasons having nothing to do with tariffs.

As known by RealityChek regulars, gauging the impact of the tariffs on products from China is much more difficult for numerous reasons. Their role as inputs for manufacturing industries varies. The manufacturing classification system used by Washington for designating the tariff-ed products differs from that used for the Fed production statistics. The levies have been in place for a shorter period of time. And their scope has changed since the first batch went into effect in August.

Further, let’s not forget that the China tariff regime is due for some big changes starting in June, when President Trump has just decided that levies will rise on $200 billion worth of products from the People’s Republic. So the data below may tell us little about what to expect going forward. Here they are nevertheless for the handful of industries for which I’m sure the numbers create a reasonably accurate picture.

                                                      Aug thru Feb    Aug thu March    Aug thru April

overall manufacturing:                     -0.33%                -0.38%                -0.90%

ball bearings:                                  +0.32%                +0.25%               +0.14%

industrial heating equip:                 -2.60%                 -1.85%                -5.69%

farm machinery & equip:             -16.86%               -11.65%              -10.40%

oil/gas drilling platform pts:         +4.59%                +4.35%                +2.68%

Something of an April slump can be seen here, too (which in theory is hard to connect to the China tariffs), except for the farm machinery sector. 

The classic Wall Street sales pitch warns (eventually) that “Past performance is no guarantee of future results.” So especially considering the higher China tariffs on the way in two weeks, and the possibility that all goods imports from China will be hit by levies at some future date, predicting manufacturing’s growth performance for the rest of this year seems unusually chancy.

Yet the April figures unmistakably show (yet again) that domestic U.S. manufacturing continues to withstand the metals tariffs with ease.

(What’s Left of) Our Economy: Why Tariffs are Off the Hook for Manufacturing’s Slowdown

Tags

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

Here’s all you need to know to recognize that domestic U.S. manufacturing is experiencing some kind of slowdown: Today’s real output numbers from the Federal Reserve showed that production flat-lined on month in March. And that was a significant improvement from the comparable February figure – a 0.37 percent drop!

So do these dreary results mean that tariff fear-mongers are finally right to claim that President Trump’s levies on imports of steel and aluminum, and on a wide range of goods from China are backfiring on American industry? Not according to the internals.

As has been the case for months, the most convincing evidence comes from the metals-using industries. After all, the tariffs affecting their products have been in place longer. (April was the first full month in which they were in effect.) The most relevant industries are easy to identify. And because (with despite numerous exemptions) the tariffs have been virtually worldwide in scope, there’s no need to wonder whether how extensively the steel and aluminum in question are being supplied by an individual country or even group of countries.

The table below presents the inflation-adjusted output changes in major metals-using industries from April through each of the Fed’s last three data months. This format differs from that used in my previous industrial production-related posts because late last month the Fed released a set of revisions going back to 2015. So rather the old and new figures for the previous data month aren’t comparable anymore, and I simply decided to use the new figures going back three months.

                                            April thru Jan.      April thru Feb.     April thru March

overall manufacturing:      +1.20 percent        +0.83 percent         +0.82 percent

durables manufacturing:   +2.05 percent        +2.05 percent          +1.96 percent

fabricated metals prods:   +3.53 percent        +3.08 percent          +2.85 percent

machinery:                       +4.33 percent         +2.24 percent         +2.71 percent

automotive:                      – 2.84 percent         -0.58 percent          -3.06 percent

major appliances:             -1.83 percent          -1.30 percent         -5.62 percent

aircraft and parts:            +5.45 percent         +6.15 percent         +7.43 percent

An overall manufacturing slowdown is apparent from the February and March columns in the top line. And the second line shows that it’s impacted durable goods to a slightly greater extent – a possible signal of a tariff effect since that’s the super-category in which the main metals-using sectors are located.

But tariff-mageddon claims, as has been the case so far, falter upon looking at the details. First, they’re not very consistent with the volatility much of this data display. (E.g., automotive and appliances.) Second, over the past month, the big machinery sector (which provides equipment serving many different markets) has gained momentum. And aircraft and parts-making just keeps growing faster and faster. (Of course, its performance will likely become a drag on manufacturing output going forward because of Boeing’s 737 Max problems and the damage that will harm not only aircraft production, and possibly the industry’s entire supply chain.)

If tariffs are becoming a challenge for these industries, it’s clear that their impact is being swamped by other influences on their performance – especially the distinctive characteristics and status of their individual markets.

Unfortunately, all of the reasons for considering these metals tariffs-related conclusions compelling cut the opposite way when it comes to evaluating the China levies’ impact. The first full month when the earliest were in place was only August. And identifying industries most plausibly affected is difficult both because the tariff list and the industrial production data use different manufacturing classification schemes, and because of the challenge of figuring out where tariff-ed Chinese products play crucial roles in American industry (in the form of parts, components, materials, and other intermediate goods).

As a result, the bottom line remains that only a handful of manufacturing industries look like strong candidates for producing any kind of a China tariff effect, and most of these suffer from one of the above complications. Sharp-eyed RealityChek regulars will notice that I’ve added oil and gas drilling platform parts to the list:

                                            Aug. thru Jan.       Aug. thru Feb.      Aug. thru March

overall manufacturing:      +0.29 percent         -0.08 percent          -0.09 percent

ball bearings:                     +0.27 percent        +0.19 percent         +0.11 percent

industrial heating equip:     -3.61 percent         -3.39 percent         -5.27 percent

farm machinery & equip:  +2.22 percent       -17.14 percent        -11.65 percent

oil/gas drilling platfm pts: +4.74 percent        +4.59 percent         +4.36 percent

The overall manufacturing slowdown is apparent from these statistics, too. But so is a bewildering range of results, along with a small sample size. Whatever problems American industry might now be facing, the case that tariffs bear much, if any, blame has yet to be supported by these or any other data.

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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