(What’s Left of) Our Economy: Manufacturing’s (Latest) Recession Looks Like It’s Over

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aluminum, China, Commerce Department, Federal Reserve, Great Recession, industrial production, inflation-adjusted output, manufacturing, manufacturing production, metals tariffs, recession, steel, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Let’s do something a little different this time in RealityChek‘s monthly examination of the Federal Reserve’s latest domestic U.S. manufacturing output figures – which came out this morning and bring the story through December and therefore through full-year 2019 (at least preliminarily).

Instead of focusing on the industries most seriously affected by President Trump’s tariff-heavy trade policies (mainly the metals tariffs, given big measurement problems with the China duties), let’s look at the question of whether manufacturing remains in recession – which has big, trade war-related implications because this Trump campaign is widely blamed for many of manufacturing’s recent weakness.

There’s considerable evidence that the answer is “Yes” – that industry’s inflation-adjusted production (the measure used by the Fed) is back in growth mode, though just barely.

But the question remains an open one. That’s partly because the answer depends on which baseline date you use for the start of the manufacturing recession, which unit of time you use (along with which particular manufacturing output gauge you favor).

Among that evidence tilting toward “Yes” – today’s Fed data.  Specifically, December’s 0.16 percent monthly increase in constant dollar manufacturing output means that, since June, such production is up. Now it’s only up by 0.04 percent. But since that’s a cumulative increase over the last six months (i.e., two consecutive quarters), the technical definition of recession no longer applies.

Or does it? The same Fed figures show that, between December, 2018 and December, 2019, after-inflation manufacturing output was down – by 1.26 percent. So the recession is still on, right?

Maybe. But use another baseline – April, 2018. As RealityChek regulars know, that’s the first full month in which significant Trump tariffs went into effect (on imports of aluminum and steel). Since then, though, price-adjusted manufacturing production has grown by 0.38 percent. This result, therefore, indicates that, although the President’s trade policies seem to have delivered a hit to domestic manufacturing, it was pretty negligible, and it’s already over (at least for now).

To complicate matters still further, as RealityChek reported last July, according to the Fed’s figures, manufacturing has suffered several recessions since the current economic recovery began (in the middle of 2009).  Indeed, as of this morning, it  still hasn’t recovered from the Great Recession that began at the end of 2007!

At the same time, another set of U.S. government data support the conclusion that there has been no trade war-related manufacturing recession during the Trump years – or manufacturing recession of any kind.

These statistics come from the Commerce Department’s “GDP [Gross Domestic Output] by Industry” reports. They use the same measure used by the Fed for tracking manufacturing growth (or contraction), but they’re kept on a quarterly, not monthly, basis. As a result, these numbers aren’t issued as frequently.

Yet the latest results came out January 9, and although they stop at the third quarter of last year, they show that in real terms, domestic manufacturing under Mr. Trump never shrank on net for two straight quarters, much less over any longer time frame. Here are the quarterly change figures:

2Q 16-1Q 17 :+0.32%

1Q 17-2Q 17: -0.7%

2Q 17-3Q 17: +0.35%

3Q 17-4Q 17: +1.22%

4Q 17-1Q 18: +0.38%

1Q 18-2Q 18: +0.09%

2Q 18-3Q 18: +1.38%*

3Q 18-4Q 18: +0.38%

4Q 18-1Q 19: +0.43%

1Q 19-2Q 19: -0.38%

2Q 19-3Q 19: +0.67%

*those Trump metals tariffs began in this quarter

Indeed, what comes through loud and clear from them is that not only has there been no manufacturing recession on President Trump’s watch, but there hasn’t even been an output slowdown.

It’s always possible to point to the counter-factual – that is, in this instance, to try to figure out how matters would look without any Trump tariffs, or similar Trump efforts to transform U.S. trade policy. And it’s certainly conceivable that domestic industry would have fared even better had Trump abjured all tariffs.

But that’s not the only counter-factual. For example, what if the rest of the world had been able to deal with the pressure created by China’s steel dumping by dumping its own steel into the United States (which hasn’t happened because the Trump metal tariffs were global)? What if China itself had remained completely free to send artificially low-priced (because heavily subsidized) product into the US market? What if President Trump had kept the United States in the Trans-Pacific Partnership trade agreement (TPP), with its wide open back door for imports with lots of Chinese content, while China remained under no obligation whatever to open its market to U.S. products? It’s easy to see that U.S.-based manufacturing could have gone on the critical list.

What’s certain, however, is that according to the most authoritative data available, claims of tariffs-led disaster for U.S. manufacturing have been either much ado about nothing, or much ado about very little. Could the coming months finally bear out the worst fears of cheerleaders for pre-Trump trade policies and other globalists? Of course. But that’s simply speculation, which counts much less than facts.

Making News: Updating the Trade Wars on National Radio Tonight, a Major Video Interview Now On-Line…& More!

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America First, Breitbart.com, Edward Harrison, Federal Reserve, foreign policy, Gordon G. Chang, IndustryToday.com, inflation-adjusted output, John Carney, Making News, manufacturing, Phase One, RealVision.com, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that I’m scheduled to be returning to John Batchelor’s nationally syndicated radio show tonight to help John and co-host Gordon G. Chang figure out where the U.S.-China trade conflict stands after the “Phase One” deal announced recently.  The segment is slated to begin at 10 PM EST, and you can listen live on-line here for what’s sure to be a great discussion and look forward.

In addition, on December 16, John Carney of Breitbart.com quoted from my critical assessment of the agreement in his own (more positive) examination of Phase One.  Here’s the link.

In early December, I recorded a lengthy interview with Edward Harrison of the RealVision.com financial news network on whether or not President Trump is carrying out “America First”-style trade and foreign policies, and why they’re necessary.  Click here to watch.

Finally, yesterday, IndustryToday.com reposted my report on the Federal Reserve’s November manufacturing production figures.  You can see it at this link.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: GM and Boeing Effects Still Affecting U.S. Manufacturing Output

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737 Max, aircraft, aluminum, Boeing, China, durable goods, Federal Reserve, General Motors General Motors strike, GM, inflation-adjusted output, manufacturing, manufacturing production, metals-using industries, steel, supply chain, tariffs, trade war, {What's Left of) Our Economy

Like its immediate predecessor, this morning’s Federal Reserve release on inflation-adjusted U.S. manufacturing output made clear how the recent strike at General Motors have grossly distorted the latest results, as well as how Boeing’s mounting 737 Max aircraft safety woes remain difficult to identify from these production statistics.

First, let’s look at the overall numbers. According to the Fed, constant dollar American manufacturing output in November jumped sequentially by 1.15 percent. That was the best such increase since October, 2017’s 1.36 percent, and quite the turnaround from October’s 0.70 percent monthly drop-off (which was revised slightly downward).

These figures still left domestic industry in a recession, but not much of one. Since July, 2018, its price-adjusted output is down by 0.14 percent.

But the big role of the GM strike’s end in November’s turnaround couldn’t be clearer. In October, combined U.S. combined vehicle and parts output sank by 5.98 percent after inflation from September’s total. That decline was considerably less than the 7.65 percent nosedive reported last month, but still the worst such performance since the 7.18 percent decrease in January.

Last month, however, thanks to the return of the striking workers, real automotive production skyrocketed by a whopping 12.45 percent – the best monthly performance since the 29.95 percent surge of July, 2009 – as the last recession (which was especially woeful for auto and parts makers) came to an end.

Another way to look at the automotive effect: Without the GM strike, October’s 0.70 percent overall manufacturing after-inflation production decrease would have been a much better (but by no means great) 0.28 percent decline. And without the GM strike’s end, the 1.15 percent jump in price-adjusted manufacturing output would have been only 0.25 percent.

But the impact of Boeing’s safety troubles is as unclear as those of the GM strike are obvious. In November, American aircraft and parts production rose another 0.40 percent on month in real terms. Moreover, since March (when governments around the world began grounding the 737 Max or banning it from their airspace), such production is only down a total of 0.34 percent. Since April (the first full data month since that March flood of bad news), it’s actually up by 2.32 percent.

Therefore, as has been the case recently, the aircraft sector as such has kept outgrowing many of the biggest industries making up its domestic supply chain (which extends way beyond finished parts and into the materials they’re made from). Here’s how these big supplier industries’ output has changed since April, with the overall manufacturing sector’s performance and that of the durable goods super-category in which most are found included for comparison’s sake:

overall manufacturing: +0.68 percent

durable goods: +1.25 percent

primary metals: -1.13 percent

fabricated metals products: -0.54 percent

machinery: +0.16 percent

The above results also indicate that at least some of the economy’s biggest metals-using industries still lack the relative production strength they displayed for the first several months after steel and aluminum tariffs were imposed in March, 2018. Here are their latest numbers from April (the first full data month affected by these levies) through November, also with the overall manufacturing and durable goods results included:

                                          Old Ape thru Oct    New Apr thru Oct    April thru Nov

overall manufacturing: –      0.54 percent            -0.81 percent         +0.33 percent

durables manufacturing:    -0.32 percent            -0.40 percent         +1.75 percent

fabricated metals prods:   +1.42 percent           +1.26 percent         +1.48 percent

machinery:                        -0.81 percent            -0.77 percent          -1.02 percent

automotive:                    -12.24 percent           -11.34 percent          -0.30 percent

major appliances:             -9.14 percent            -9.08 percent          -6.31 percent

aircraft and parts:            +3.59 percent           +4.37 percent         +4.79 percent

One interesting bright spot apparent from the above – a nice improvement for production of major appliances, a sector that’s been dealing since February, 2018 with an additional set of product-specific tariffs. But in machinery and fabricated metals products in particular, where output tends to be less volatile than it’s been in automotive and appliances, recent performance clearly has been worse than that from April, 2018 through, say, this past January:

                                                          April, 2018 through January

overall manufacturing:                               +1.07 percent

durables manufacturing:                            +1.74 percent

fabricated metals prods:                            +3.42 percent

machinery:                                                +3.69 percent

automotive:                                               -3.32 percent

major appliances:                                      -1.43 percent

aircraft and parts:                                     +4.19 percent

Will the new “Phase One” trade deal announced with China make it any easier to gauge the impact of tariffs on most of the imports heading to the United States from the PRC? That’s already been difficult enough, because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries). And chances are this challenge will become more difficult, given both that it’s far from clear when follow-on talks will begin; and given Treasury Secretary Steven Mnuchin’s suggestion that the next phase may consist of many different phases.

Surely adding to the complications will be the Boeing effect, which seems certain to start appearing more conspicuously in the data now that the company has announced that 737 Max production will be suspended starting next month, as well as its failure to say how long the halt will last.

So just about all that can be said for sure is that domestic manufacturing had a good month in November – however unclear it remains whether this improvement has legs.

(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: Were the US Washing Machine Tariffs Really Failures?

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consumers, Federal Reserve, General Electric, imports, jobs multiplier, large residential washers, LRWs, manufacturing jobs, metals tariffs, safeguard tariffs, South Korea, tariff-rate quota, tariffs, U.S. International Trade Commission, University of Chicago, USITC, washing machines, Whirlpool, {What's Left of) Our Economy

It’s as close to a slam dunk conclusion as can be – at least according to economists, think tank hacks, and Mainstream Media journalists: The early 2018 U.S. tariffs on large household laundry machines have been a dismal failure.

Or have they been?

The levies belong in a category different from those of the main Trump administration trade-limiting measures because they were first mandated by an independent federal agency (the U.S. International Trade Commission, or USITC) via a long-standing legal process.  And they’ve been panned for supercharging costs for consumers, and padding the profits of the domestic industry to extents that dwarfed the new production and jobs they fostered. (Here’s a typical example of the press’ evaluation, drawing on equally typical research from the venerable University of Chicago and the even venerable-er Federal Reserve.)

What has gone oddly unreported has been the verdict rendered by the USITC – which came out in August. Sure, the agency is grading itself. At the same time, it’s privy to the most authoritative data (taken from the domestic and foreign companies involved themselves), and it’s surely worth noting that the Commission paints a significantly different , and brighter, picture.

The tariffs, put in place in February, 2018, affected the nation’s total global imports of these products, but mainly impacted such “large residential washers” (LRWs) from China, Mexico, South Korea, Thailand, and Vietnam – the biggest foreign suppliers to the U.S. market. The duties’ aim: stemming a sudden surge of LRWs that injure U.S.-based manufacturers. But they don’t shelter the domestic industry forever.

After three years – the amount of time the Commission has determined these domestic manufacturers need to adjust – they’re phased out for both the final products and many of the parts covered in the “safeguard order.” In addition, consistent with their surge focus, they only apply to imports above a certain level of units – a trade curb known as a “tariff-rate quota.” In all, moreover, the ultimate objective is to give victim industries time to adjust and then stand on their own two feet. That’s why detailed adjustment plans are a condition of receiving tariff relief.

To some extent, the USITC’s judgment doesn’t contrast dramatically different from that of the tariffs’ critics. Both noted (in the Commission’s words) “generally increased prices” and “decreased imports.” The Commission, though reported some developments generally missed by the critics (especially “some improvement in the financial performance of continuously operating [domestic] producers,” and market share gains for these companies) and some given decidedly short shrift (“increased production by two new U.S. producers” – both of whose owners come from South Korea, undoubtedly because the option of supplying the American market through exports was sharply limited).

The Commission didn’t address one of the critics’ most compelling points – that the new U.S. jobs were created at a cost to consumers (via the higher prices they’ve paid) of a whopping $817,000 per job. But the University of Chicago/Federal Reserve study actually conceded that this number might be an exaggeration, since manufacturing jobs (like all jobs) create a “multiplier effect” – that is, they foster additional employment in related industries ranging from suppliers of inputs to transportation, packaging, and warehousing services. What these researchers didn’t mention is that manufacturing’s jobs multiplier is unusually high.

Moreover, like virtually all scholars of trade, tariffs, and employment, the Chicago/Fed team neglected other benefits of manufacturing job creation (and prevention of further manufacturing job loss). These include:

>avoiding the wage losses suffered by displaced manufacturing workers who find work in lower-paid industries (an especially important consideration given today’s very low overall unemployment rates)

>avoiding the revenue losses incurred by these workers’ communities and the economy as a whole due to reductions in their taxable income;

>avoiding the increased pressure on social programs required to serve employees who can’t find new jobs – which encompass not only unemployment compensation but spending that seeks to address the pathologies that often follow working class Americans’ deteriorating personal finances, like divorce, delinquency, alcoholism, and opioid and other drug use, not to mention higher mortality;

>and the costs incurred by local businesses because of worker-customers who can no longer afford as many of their products and services, which of course reduces business’ own taxable income and additionally crimps public finance at all levels. (See, e.g., this highly cited study.)

The USITC report, moreover, shed light on another big reason that the costs-per-manufacturing-job-saved might be exaggerated: Not all of the increased costs of the tariff-ed products are due to the tariffs. In particular, the Commission listed no less than 14 factors other than import competition (and the tariffs placed on these goods) that affect the prices of LRWs. They range from raw materials, transportation, and energy costs to competition levels from substitute and between domestic producers, U.S.-based production capacity, productivity changes, labor contracts, and state and local government incentives, and demand levels at home and abroad (because all the U.S.- and foreign-owned manufacturers sell all over the world). The USITC then proceeded to ask producers, importers, and purchasers (retailers) to rate the importance of these factors on prices since the tariffs’ imposition in February, 2018.

The answers were reported in table III-26, and import competition levels were anything but dominant. Indeed, their importance consistently was rated by all three stakeholder as lower or no greater than that not only of raw materials costs (higher due to entirely separate tariffs on metals that were imposed by the Trump administration) but of energy costs, domestic production capacity (surely limited over time by the previous import flood), the allocation of this production capacity to other products, productivity levels, labor agreements, transportation and delivery costs, and domestic demand levels.

And adding to the case for reducing the costs per job figure: According to the official U.S. Bureau of Labor Statistics figures, after jumping by 16.31 percent from the February, 2018 onset of the tariffs through that November, they’ve since fallen by 9.73 percent (through September).

In fact, this development leads to a major point completely missed by the tariffs’ critics. As also indicated by the phaseout schedule and the linkage of the tariffs to the submission of adjustment blueprints, the levies were never intended to produce instant results, or to furnish crutches forever. The USITC describes the implementation of these plans starting on p. IV-5 and, more revealing, presents the evaluations of the retailers – who are bound to be the most demanding judges.

The reviews are mixed, but varying numbers of these companies stated that the two domestic recipients of the tariff relief – Whirlpool and General Electric – introduced new products (the most commonly cited improvement), upgraded product quality, expanded marketing campaigns, bettered their customer service, and taken other positive steps (Table IV-2).

Will these measures prove sufficient? Even after the tariffs come off, definitive answers will prove elusive, because as made clear, the LRW trade policy picture contains so many moving parts. What does look definitive, however, is that so far, the critics have engaged in a flawed rush to judgment.

 

 

(What’s Left of) Our Economy: A Thoroughly Muddled Manufacturing Production Figure

Tags

aluminum, Boeing, China tariffs, Federal Reserve, General Motors, General Motors strike, industrial production, inflation-adjusted output, manufacturing, metals tariffs, metals-using industries, recession, steel, supply chains, tariffs, trade war, {What's Left of) Our Economy

The latest U.S. inflation-adjusted manufacturing output numbers (for September) are now out, and they leave more muddled than ever the matter of how much (if any) damage American industry has suffered from President Trump’s tariff-heavy trade policies.

And it’s not just because of ongoing uncertainties about the effects of President Trump’s current and threatened China tariffs, and all the fluctuations in coverage and rates. It’s not just because of the month-long General Motors strike – which could end soon if the union rank-and-file approve the settlement agreed on by their leaders, and which the Federal Reserve itself (which tracks manufacturing output) fingered as a big culprit behind September’s lousy read. It’s also because of the impact of Boeing aircraft’s continuing safety woes (a subject on which the Fed has been strangely silent).

As I’ve reported, the Boeing effect finally showed up in the latest U.S. trade data – which is especially important given the aerospace giant’s reliance on exports. But it hasn’t appeared anywhere else, including the new manufacturing production figures, even though orders for Boeing jets have been dramatically slashed, and even though the company is a huge consumer of materials, parts, and components from other manufacturing sectors.

With all those cautions out on the table, here’s what the new Fed statistics showed. After-inflation domestic manufacturing output slid by 0.48 percent sequentially in September, the worst such result since April’s 0.87 percent decrease, and more than enough to keep industry overall in recession. Since July, 2018, its real output is down a total of 0.38 percent.

GM’s labor troubles clearly dragged the total number down. Constant dollar vehicles and parts production in September sank by 4.22 percent on month, its worst such performance since January’s 7.18 percent nosedive (when the federal government was still shut down, surely depressing consumer confidence).

The Fed made clear that “Excluding motor vehicles and parts, [its] overall [industrial production] index and the manufacturing index each moved down 0.2 percent.” (More precisely, the real manufacturing decline would have been only 0.15 percent without automotive.) Oddly, though, the Fed didn’t mention that any development that depresses vehicle and parts production is bound to ripple through all the industries making up its extensive supply chain, too.

Yet despite the export troubles revealed in the trade figures, the Fed’s statistics show that aircraft and parts production enjoyed a terrific September. Indeed, the 1.82 percent sequential jump was the biggest since March, 2014’s 2.42 percent.

Nor do sectors comprising the aerospace supply chain (which broadly overlaps considerably with automotive’s) seem to be lagging significantly, except for primary metals. For example, below are the inflation-adjusted output figures for some big supplier sectors and control groups since April (the first full data month following actions the world over grounding or banning from various air spaces Boeing’s 737 Max jets):

overall manufacturing: +0.44 percent

durable goods: +0.75 percent

primary metals: -3.38 percent

fabricated metals products: -0.17 percent

machinery: +1.19 percent

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 Aug   New Apr thru Aug   April thru Sept

overall manufacturing:        +0.54 percent          +0.57 percent       +0.09 percent

durables manufacturing:     +1.98 percent          +2.00 percent       +1.25 percent

fabricated metals prods:     +1.88 percent          +2.07 percent       +1.85 percent

machinery:                         +0.67 percent          +1.39 percent           0 percent

automotive:                        +0.17 percent          +0.30 percent        -3.92 percent

major appliances:               -2.04 percent           -1.22 percent        -2.19 percent

aircraft and parts:              +4.39 percent          +3.54 percent        +5.43 percent

The results are mixed – and obviously the most recent automotive number has little to do with the metals duties. Otherwise, three of the remaining four metals users have gained momentum versus the rest of manufacturing (durables, appliances, and aircraft), although their output performances remain subdued in absolute terms, and machinery has lost momentum.

Unfortunately, this kind of analysis not only remains much more difficult for the impact of the China tariffs. But every twist and turn in the trade talks saga only increases the challenge. Primarily because of uncertainties stemming from differences between the manufactured goods classification systems used by the U.S. Trade Representative’s office (which publishes the lists of tariff-ed items) and the main system used by other U.S. government agencies (like the Fed), the sectors below are among the handful that are reasonably certain to have faced tariff pressure since the first duties were placed in imports from China in July, 2018. Each column shows the real output changes since their first full month in effect through July, August, and September of this year:

                                                  Aug thru July      Aug thru Aug      Aug thru Sept

overall manufacturing:             -0.89 percent       -0.33 percent       -0.81 percent

ball bearings:                            -2.32 percent       -2.26 percent       -2.30 percent

industrial heating equip:          -4.58 percent       -1.72 percent       -1.01 percent

farm machinery & equip:        -6.91 percent      +9.71 percent       -0.69 percent

oil/gas drilling platform pts:   -0.86 percent       -1.38 percent       -1.38 percent

As is clear, these results are even more mixed than for the metals-using industries – to which all of these products belong. And with the President’s trade policies all too likely to stay ragged as the 2020 elections come closer, “more confusion” looks like the safest prediction possible regarding American manufacturing production 

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

Tags

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.

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

Tags

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

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

Tags

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.