(What’s Left of) Our Economy: September Sees Bigger Hurricane Toll for U.S. Manufacturing but Fractional Overall Production Gain

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automotive, chemicals, Federal Reserve, Great Recession, hurricanes, industrial production, inflation-adjusted growth, manufacturing, non-durable goods, petroleum refining, recovery, {What's Left of) Our Economy

The Federal Reserve’s new industrial production figures show greater hurricane-related damage to real U.S. manufacturing output in September than in August, with the losses in chemical industries using oil and gas feedstocks great enough to plunge all of domestic industry into a technical recession. Inflation-adjusted manufacturing production is now 0.14 percent lower than in February. Yet on month, overall after-inflation manufacturing output eked out a 0.10 percent gain.

Most seriously affected by the devastation of the energy-rich Texas and Louisiana Gulf coasts were organic chemicals (where monthly production plunged by 14.71 percent), and plastics materials and resins (down 8.16 percent) — both post-recession worsts. The volatile artificial and synthetic fibers and filaments sector, whose after-inflation sequential output was reported to have sunk by 11.25 percent on month in August saw that figure upgraded to an 8.44 percent decline and boosted its monthly real output in September by 5.83 percent – its best since last September (9.67 percent). Price-adjusted oil refinery production for August was slightly downgraded to a 2.52 percent fall-off (its biggest since January, 2010’s 2.75 percent), but September monthly production dipped only fractionally.

The non-durable goods supersector containing these chemical industries saw its constant dollar output slump by the greatest rate (0.89 percent) since January, 2015 (1.20 percent). Revisions for real manufacturing output as a whole were negative, with August’s reading slightly upgraded but July’s downgraded from a slight increase to a significant drop.

Good news came from the automotive sector, however, especially its first back-to-back monthly real production increases since the May-October period last year, and a strongly upgraded August gain (3.56 percent) that was the sector’s best since June, 2016 (3.89 percent). As of September, however, in inflation-adjusted terms, American manufacturing is 4.26 percent smaller than when the last recession began at the end of 2007 – more than nine years ago.

Here are the manufacturing highlights of the Federal Reserve’s new release on September industrial production:

>Although September’s manufacturing production figures showed hurricane-related damage to American industry to be considerably worse than in August, and indeed bad enough to plunge the entire sector into a technical recession, industry managed an overall 0.10 percent real monthly production increase during the months.

>Due to major constant dollar output drops in chemicals and especially sectors heavily reliant on oil and gas feedstocks from the storm-struck Texas and Louisiana Gulf coasts, domestic manufacturing output after inflation was 0.14 percent lower in September than in February – a seven-month stretch that conforms with the standard definition of a recession (two consecutive quarters of economic contraction).

>The worst September sequential real output losses were suffered by organic chemicals (14.71 percent), and plastics materials and resins (8.16 percent). These decreases were the biggest experienced by these industries since recessionary September, 2008 (24.92 percent), and December, 2008 (11.72 percent), respectively.

>Interestingly, an artificial and synthetic filaments and fibers sector whose (volatile) real production fell sequentially by an initially reported 9.10 percent saw that result now judged as an 8.44 percent drop (still its biggest since recessionary November, 2008’s 11.25 percent). Moreover, its September production is now pegged as rising by 5.83 percent – the best such on month increase since last September’s 9.67 percent.

>Similarly, although inflation-adjusted petroleum refinery output in September dropped sequentially by 2.52 percent (the biggest such fall-off since January, 2010’s 2.75 percent), the monthly August decrease was revised up from 1.93 percent to a minimal 0.06 percent.

>All the same, these results were enough to depress monthly constant dollar output in the enormous chemicals industry by a downwardly revised 2.31 percent in August and another 2.62 percent in September. The latter result was the sector’s worst such result since recessionary December, 2008’s 4.85 percent shrinkage.

>And in the larger non-durable goods supersector, although August’s monthly production was upgraded modestly to a 0.63 percent decline in real terms, real output decreased by another 0.89 percent – its worst such figure since winter-affected January, 2014’s 1.20 percent.

>Despite the fractional inflation-adjusted September production uptick in manufacturing overall, , and August’s upward revision from a 0.26 percent sequential decline to 0.20 percent, July’s results were changed from a 0.04 percent rise to a 0.35 percent drop – big enough to turn overall revisions negative.

>Nonetheless, the automotive sector produced some good news.

>It’s true that July real output for this industry, which has led manufacturing’s bounceback during most of the current economic recovery, was revised down from a 4.16 percent drop to 4.85 percent – its worst since winter-affected January, 2014’s 5.87 percent. But August’s month-on-month improvement – revised all the way up from 2.16 percent to 3.56 percent – was its best since June, 2016’s (3.89 percent).

>Moreover, although September’s sequential output rise was a mere 0.07 percent, it produced the first two-month stretch of automotive output improvements since the May-October stretch of 2016.

>As of September, however, domestic manufacturing still had not yet completed its recovery from the historic Great Recession. Real production was 4.26 percent lower than when that slump began, more than nine years ago, in December, 2007.

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(What’s Left of) Our Economy: August US Manufacturing Output Joins List of Harvey’s Victims

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automotive, chemicals, durable goods, energy, Federal Reserve, Great Recession, Gulf coast, Hurricane Harvey, industrial production, inflation-adjusted output, Louisiana, manufacturing, natural gas, non-durable goods, oil, recovery, Texas, {What's Left of) Our Economy

Hurricane Harvey’s devastation of the energy-rich Texas and Louisiana Gulf coasts slammed into America’s after-inflation manufacturing output in August as well, as the Federal Reserve’s new industrial production figures showed real manufacturing output down 0.26 percent on month due mainly to fall-offs in chemical industries that use oil and gas as feedstocks. As a result, constant dollar non-durable goods output fell in August by its greatest monthly total (0.86 percent) since January, 2014 (1.20 percent), and overall chemicals production sank by its greatest sequential amount (2.15 percent) since recessionary December, 2008 (4.85 percent).

After-inflation production was off by the greatest monthly totals since that time in basic chemicals; organic chemicals; and especially in resins, synthetic rubber, and artificial and synthetic fibers and filaments. The most affected industry was fibers and filaments, where price-adjusted output plummeted by 9.10 percent – the worst such performance in this volatile sector since November, 2008 (11.25 percent).

Among the bright spots in the August manufacturing production figures: The automotive industry saw its first real output improvement in four months (2.16 percent), and revisions for manufacturing were positive. All the same, America’s real industrial production levels remain 4.03 percent lower than their pre-recession peak – more than nine years ago in December, 2007.

Here are the manufacturing highlights of the Federal Reserve’s new release on August industrial production:

>Hurricane Harvey’s devastation of the energy-rich Texas and Louisiana Gulf coasts devastated enough of the nation’s chemicals industry to create a 0.26 percent monthly sequential drop in real manufacturing output in August.

>The decline was heavily concentrated in chemicals, and especially in sectors highly dependent on Gulf oil and gas as feedstocks.

>The Harvey effects could first be seen in the non-durable goods sector in which chemicals industries are found. Its August inflation-adjusted production decreased by 0.86 percent – the worst sequential performance since January, 2014’s 1.20 percent fall-off.

>The enormous chemicals industry suffered as well, with price-adjusted production down 2.15 percent on month in August – its biggest such decline since December, 2008’s 4.85 percent, at the nadir of the Great Recession.

>Similar multi-year worsts were registered in basic chemicals, organic chemicals, and the resin, synthetic rubber, and artificial and synthetic fibers and filaments grouping. The latter two segments – which often displays volatile production patterns – saw real output dive in August on month by 9.10 percent, the greatest drop since November, 2008’s 11.25 percent.

>The hit to oil refineries so far has been more modest – their constant dollar output was off on month by just 1.93 percent. Nonetheless, this represented the biggest such decline since June, 2014’s 2.06 percent.

>Better news in August was generated by the U.S. automotive sector. Since leading domestic manufacturing out of its deep recessionary slump during most of the recovery, combined vehicle and parts production has tailed off recently – including a July sequential production plunge that has now been revised down (to 4.16 percent) to the worst such performance since June, 2015 (4.48 percent).

>In fact, combined vehicle and parts production had worsened sequentially for three straight months.

>But in August, after-inflation automotive output advanced by 2.16 percent sequentially, and helped the durable goods super-sector grow by 0.30 percent on month.

>In addition, the Fed’s real manufacturing output revisions were positive, including an upgrade for July from a 0.06 percent dip to a 0.04 percent rise.

>In fact, largely because real manufacturing output was so weak in 2016, August’s fair results were enough to push price-adjusted year-on-year output up to 1.63 percent from July’s 1.49 percent.

>Nonetheless, the August Fed figures make clear that U.S. domestic manufacturing has still not full recovered from the Great Recession. In terms of real output, it remains 4.03 percent smaller than its pre-recession high – reached more than nine years ago, in December, 2007.

(What’s Left of) Our Economy: Worsening Automotive Recession Drives Down Manufacturing Output

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aluminum, automotive, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, manufacturing production, recession, steel, tariffs, Trade, Trump, vehicles, {What's Left of) Our Economy

According to the Federal Reserve’s new industrial production figures, a sharp automotive drop-off in July helped pull real U.S. domestic manufacturing output down on month (by 0.06 percent) for the third time this year. Since May, 2015, sector’s inflation-adjusted production is down 2.33 percent – a period much longer than the two-consecutive-quarter definition of recession. July’s annual automotive real output decrease (4.98 percent) was the biggest since September, 2009’s 7.21 percent. And the sector’s 3.64 percent sequential output fall was its biggest since August, 2015’s 3.82 percent.

The vehicle sector performed even worse. Its year-on-year July constant dollar production plunge (9.20 percent) was its greatest since August, 2009 (12.54 percent). And vehicles’ July monthly after-inflation production slide (5.92 percent) was the steepest since August, 2015’s 6.31 percent. Largely as a result, July’s real vehicles production was the lowest monthly total since October, 2014.

With President Trump postponing his decision on tariffs for the import-battered steel and aluminum sectors, their price-adjusted production remained weak in July. The former’s sequential real production slumped by 1.50 percent, and although the annual figure rose by a strong 5.50 percent, the sector is still nearly 20 percent smaller in real terms than at the last recession’s onset. The latter’s July monthly real output inched down while growing slightly on a year-on-year basis, but this industry remains less than half its size when the recession struck. Indeed, for the entire manufacturing sector, after-inflation production in July was down four percent from the level hit as the recession broke out – back at the end of 2007.

Here are the manufacturing highlights of the Federal Reserve’s new release on July industrial production:

>The worst U.S. real automotive production performance in many years – especially in vehicles – helped pull the nation’s after-inflation manufacturing output down 0.06 percent on month in July. Although small, the sequential decline was the third so far this year.

>Leading the way was an automotive sector that had led manufacturing’s strong rebound from a deep recessionary dive.

>Combined vehicles and parts output sank by 3.64 percent on month in July, its biggest such downturn since August, 2015’s 3.82 percent.

>Year-on-year, constant dollar total automotive output was down in July by 4.98 percent – the worst such deterioration since September, 2009’s 7.21 percent.

>Largely as a result, real automotive production in July hit its lowest level since June, 2015.

>The automotive output drop in turn was led by vehicles. Final price-adjusted production in this sector plunged by 5.92 percent sequentially in July – its worst output month since August, 2015 (6.31 percent).

>The year-on-year figures for vehicles were much worse. Compared with the previous July, they plummeted by 9.20 percent – the biggest such decline since August, 2009 (12.54 percent).

>Largely as a result, as of July, real vehicle output stood at its lowest level since October, 2014.

>The new Fed figures also show that the American steel and aluminum industries continue to pay a price for floods of imports widely thought to benefit from government subsidies – and from the Trump administration’s hesitation to impose tariffs.

>July iron and steel production decreased on month by 1.50 percent in real terms. The 5.50 percent year-on-year result was much better, but was helped by favorable comps.

>Moreover, the steel sector’s real output is still 19.70 percent smaller than at the last recession’s onset – more than eight years ago.

>July primary aluminum production declined on month by 1.02 percent, but advanced by 2.90 percent on year.

>Yet primary aluminum production is down 53.49 percent since the last recession began.

>In fact, since that December, 2007 watershed, U.S. manufacturing’s output is down by four percent – meaning that it still hasn’t recovered from the recession.

(What’s Left of) Our Economy: New Fed Figures Support Case for U.S. Steel and Aluminum Tariffs

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aluminum, capacity utilization, Federal Reserve, Great Recession, imports, industrial production, inflation-adjusted output, iron and steel products, manufacturing, primary aluminum products, recovery, steel, subsidies, tariffs, Trade, {What's Left of) Our Economy

Today’s Federal Reserve industrial production figures contain data supporting claims that the American domestic steel and aluminum industries face heavy global competitive pressures rooted in predatory trade practices that require vigorous responses.

According to the new data, which update the U.S. manufacturing picture through June on a preliminary basis, inflation-adjusted output for all American factories rose by 0.19 percent month-to-month, and by 1.36 percent year-on-year.

Real production of iron and steel products fell by 0.51 percent sequentially in June, and are up by just 0.47 percent on year. For primary aluminum products, the figures are better: monthly after-inflation output improved by 0.26 percent, and it advanced by 1.79 percent over the June, 2016 levels.

Longer term, though, the trends in these two sectors, and in U.S. domestic industry as a whole, have diverged sharply. Since the Great Recession officially broke out, the Federal Reserve data show that American manufacturing’s constant dollar output still hasn’t fully recovered. Indeed, it’s still down by 4.03 percent.

But real iron and steel products production is still 18.55 percent lower than at the recession’s onset – more than nine years ago. Inflation-adjusted primary aluminum production stands at less than half its December, 2007 levels, having plummeted by 53.01 percent.

The plight of steel and aluminum is also apparent from the capacity utilization figures. For all of domestic American manufacturing, utilization rates were 75.88 percent. That’s 3.72 percent below the last pre-recession level of 78.81 percent.

For iron and steel products, the drop has been much steeper – capacity utilization is down 21.47 percent from its December, 2007 level of 92.11 percent. And although the latter level looks unusually high, it had been achieved regularly by these producers during previous decades.

The Fed doesn’t keep capacity utilization figures for aluminum. But statistics for the broader primary metals sector indicate that its fate has been nearly as bad. Capacity utilization since the end of 2007 has sunk from 83.52 percent to 68.24 percent – an 18.30 percent plunge.

As widely reported, this deterioration has coincided – at the very least – with an explosion in the production and export of subsidized steel and aluminum from China. As has been much less widely reported, U.S.-based producers have borne the brunt of the costs. Although comparable numbers are not available for aluminum, the American share of the global steel market has fallen by considerably more during the current economic recovery than the shares of other steel-production countries and regions. In addition, the United State runs by far the world’s biggest steel trade deficit.

It’s still unclear whether or not President Trump will decide to impose any national security-related tariffs on steel imports, which countries’ shipments will or won’t be hit, or what other measures he might approve if the tariff route is rejected. But it’s all too clear that without significant action from Washington, two more important American manufacturing sectors could needlessly fall victim to foreign trade and broader economic policies having nothing to do with either free trade or free markets.

(What’s Left of) Our Economy: New Ups & Downs for Manufacturing Production, but Recovery Still Incomplete

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automotive, durable goods, Federal Reserve, Great Recession, industrial production, inflation-adjusted output, manufacturing, non-durable goods, recovery, {What's Left of) Our Economy

Domestic manufacturing has entered a period of output volatility, today’s new Federal Reserve figures indicate. Inflation-adjusted production in May – the latest data – fell sequentially (by 0.39 percent) for the second time in three months, following a six-month streak of sequential improvements. But April’s big rise was upgraded from one percent to 1.16 percent – the strongest such showing since May, 2010’s 1.49 percent, early in the current recovery. At the same time, March’s already downgraded 0.41 percent real monthly output decrease was lowered again, to a 0.75 percent slide. That was the worst such retreat since winter-affected January, 2014’s 1.09 percent.

Automotive revisions figured prominently in these upgrades and downgrades, with April’s initially reported five percent constant dollar monthly production surge now judged to be 4.12 percent. In May, after-inflation output for the sector, which has led generally led manufacturing’s rebound from the Great Recession, tumbled 2.02 percent on month.  

Durable goods – manufacturing’s biggest super-sector – was most seriously affected by the auto volatility.  Its April monthly real output was boosted to an upwardly revised 1.20 percent – the fastest such pace since February, 2014’s winter-affected 1.80 percent.  But its May after-inflation on-month production was dragged down to a 0.84 percent fall – the worst since the 0.99 percent decrease resulting partly from January, 2014’s similarly cold weather.    

Non-durables’ production performance has been steadier, with May’s 0.10 percent on-month real gain its fourth such improvement in five months. Moreover, April’s sequential inflation-adjusted production growth was upgraded from an already strong 0.98 percent to 1.10 percent – it best such performance since October, 2008’s 2.15 percent. And non-durables’ annual real output increase of 1.53 percent was its best year-on-year rise since February, 2016’s 1.55 percent.

All the same, the new figures and volatility left domestic manufacturing’s price-adjusted output 3.99 percent less than at its pre-recession peak, more than nine years ago.

Here are the manufacturing highlights of the Federal Reserve’s new release on May industrial production:

>U.S. real manufacturing output fell in May sequentially for the second time in three months. But the 0.39 percent decline – which followed six straight months of sequential growth – was modest compared with many of the March and April revisions, which could be starting a period of new volatility.

>April’s strong initially reported inflation-adjusted output rise of one percent was revised up to 1.16 percent. That was the best such performance since May, 2010’s 1.49 percent, when the manufacturing recovery from the Great Recession was still gathering steam.

>But March’s already downgraded 0.41 percent monthly real production decline was cut further, to 0.75 percent. That was domestic manufacturing’s worst such growth showing since the 1.09 percent fall-off in January 2014, which was affected by harsh winter weather.

>February’s last (downwardly revised) 0.27 percent monthly after-inflation output increase was revised back up to 0.38 percent.

>Some these swings can be traced to the automotive sector, which has led manufacturing’s real growth for most of the current economic recovery.

>April on-month price-adjusted auto production was initially reported to have advanced by five percent – its best growth since July, 2015’s 7.84 percent. Leading the way was a reported 8.04 percent surge in real vehicle output, also the best since July, 2015 (12.38 percent).

>The new April numbers: 4.12 percent and 6.76 percent, respectively. And in May, constant-dollar production fell by 2.02 percent.

>Automotive’s ups and downs most profoundly affected production of durable goods – manufacturing’s largest super-sector.

>The poor May automotive performance contributed to the 0.84 percent sequential durable goods real production shrinkage that month – the worst such decline since winter-affected January, 2014’s 0.99 percent.

>But the initially reported 1.01 April monthly durables production advance is now estimated at 1.20 percent – the super-sector’s fastest growth since the winter-affected 1.80 percent in February, 2014. Combined with the lower automotive results, this development indicated some relative strength outside automotive.  

>And thanks to the strong and upwardly revised April monthly figures, durable goods year-on-year after-inflation production gain that month was upgraded from 2.03 percent to 2.22 percent – still the best such increase since January, 2015’s 3.15 percent, which was also affected by harsh winter weather.

>In April, however, the annual durable goods real output improvement sank to 1.66 percent.

>The new Fed figures show that real output in non-durable goods has been steadier than in durables, but April was a standout nonetheless. Their robust sequential output growth of 0.98 percent was revised up to 1.10 percent – which produced the best monthly result since the 2.15 percent recorded in October, 2008 – even before the Great Recession broke out.

>And non-durables followed up by eaking out 0.10 percent monthly inflation-adjusted production growth in May – their fourth such advance in the last five months.

>Further, the 1.53 percent May non-durables annual constant dollar output increase was its best yearly result since February, 2016’s 1.55 percent.

>Yet not even this recent volatility could turn domestic manufacturing into a recovery-era economic winner. The overall sector is still 3.99 percent smaller in real terms than at its pre-recession peak – more than nine years ago, in December, 2007.

>Durable goods real output is up – but by only 0.13 percent – during this time, while non-durables real output is down 9.08 percent from its pre-recession peak, hit in July, 2007.

(What’s Left of) Our Economy: Rising Fed Rates Amid Slowing Real Wages?

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Federal Open Market Committee, Federal Reserve, inflation-adjusted wages, interest rates, Labor Department, manufacturing, private sector, recovery, wages, {What's Left of) Our Economy

Although it’s usually hard to muster much sympathy for the governors of the Federal Reserve, today might be an exception.

On the one hand, this afternoon their Open Market Committee is scheduled to announce its latest decision on interest rates, and it’s given many indications that it’s going to again make the cost of borrowing a little more expensive. That probably means, all else equal, that economic activity in the United States (including growth and hiring) will slow down, at least in the short term.

On the other hand, the U.S. government reported a slew of economic data this morning indicating that the economy is getting weaker – which would make at least the timing of even a modest rate hike awkward. Among them were inflation-adjusted wage figures (for May) that once more reveal a significant slowdown in American workers’ real take-home pay.

For the private sector overall (the Labor Department, which calculates these figures, doesn’t report inflation-adjusted wages for public sector workers, because their government-set pay tells us little about the state of the economy), the news wasn’t bad at all on a month-to-month basis. Constant-dollar wages rose 0.28 percent from their April levels – after having gone exactly nowhere the month before.

But the year-on-year results – which smooth out inevitable random-ish monthly fluctuations – were again nothing less than discouraging. From last May until this May, this price-adjusted pay increased by just 0.56 percent. That was indeed their strongest annual improvement since last December’s 0.75 percent. But it was much less than half the after-inflation pay advance between the previous Mays (1.42 percent), much less that of May, 2014-May, 2015 (2.33 percent).

So largely as a result, during the current economic recovery – which is nearly eight years old – real private sector wages are up only 4.26 percent.

But according to the Labor Department, private workers overall have been enjoying salad days compared with manufacturing workers. The latter’s real wages fell on month in May by 0.28 percent. It’s true that this decline followed an upwardly revised 0.55 percent sequential April increase that was the sector’s best since August, 2015’s 0.66 percent. But the May monthly decline was the sector’s worst since last November’s 0.64 percent slide.

Manufacturing’s year-on-year real wage results are scarcely better. In May, they flat-lined — their worst such performance since September, 2014’s 0.29 percent annual dip. The two previous May annual real wage increases”? Between 2015 and 2016, 2.45 percent, and between 2014 and 2015, 1.53 percent.

And during the nearly eight years since the economy began growing once again, real manufacturing wages are up 1.31 percent.

These glum wage data notwithstanding, there still could be good reasons for the Fed to announce another rate hike today. As RealityChek readers know, it’s entirely possible that recent years of stimulus from the central bank has mainly stolen potential growth from the future by promoting artificial growth. Similarly, as the Fed itself has acknowledged lately, monetary policies that have made credit so cheap – and indeed, practically free for blue-chip borrowers – for so long can encourage the kind of crackpot investing and financial instability that could trigger another global crisis.

If the Fed emphasizes these concerns in its (usually brief) statement accompanying the interest rate announcement, or in the more detailed Open Market Committee meeting minutes it publishes later, it will deserve the nation’s gratitude for straight talk – however overdue it might be. If, however, the central bank insists that it’s raising rates mainly because the economy is looking encouraging, it will be increasingly deserve the label of mindless cheerleader.  

(What’s Left of) Our Economy: U.S. Manufacturing Growth Regained Momentum in April

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

Today’s new Federal Reserve figures showed that real U.S. manufacturing production rebounded in April after a March decline with its best monthly gain (one percent) since winter-affected February, 2014’s 1.11 percent. April’s annual increase (1.91 percent), moreover, was the strongest since January, 2015’s 2.58 percent – which was also impacted by harsh weather. Leading the April industrial comeback was the automotive sector, which saw its constant dollar output jump five percent – the biggest monthly improvement since July, 2015’s 7.84 percent. Vehicles were the standout within automotive, as after inflation production soared by 8.02 percent on-month in April, their best month since a 12.38 percent increase also registered in July, 2015.

Thanks largely to the automotive sector, price-adjusted output in the durable goods super-sector increased by 1.01 percent. That rise was its best since March, 2014 (1.03 percent). Largely as a result, the yearly inflation-adjusted durables output increase of 2.03 percent was its best such performance since January, 2015’s 3.15 percent – which was weather-related as well. But manufacturing’s solid April improvement was broad-based, as indicated by the 0.98 percent monthly gain in non-durable goods production – its best since November, 2014 (1.03 percent). Moreover, the annual inflation-adjusted non-durables production improvement of 1.73 percent was its best such improvement since October, 2015 (1.81 percent).

Revisions to March and February manufacturing output numbers were slightly negative, however, and the sector’s after-inflation output is still down by 3.58 percent since the onset of the last recession – more than nine years ago.

Here are the manufacturing highlights of the Federal Reserve’s new release on April industrial production:

>U.S. real manufacturing output regained its momentum in April following a March drop, with real output growing sequentially (by one percent) for the seventh time in the last eight months.

>The gain was industry’s best since the 1.11 percent on-month increase in February, 2014 – when the sector was recovering from a harsh winter.

>Largely as a result, after-inflation manufacturing production in April also recorded its best annual increase (1.91 percent) since January, 2015’s 2.58 percent – which also partly stemmed from a recovery from a slowdown due to unusually cold weather.

>Leading manufacturing’s April surge was the biggest (five percent) sequential increase in automotive production since July, 2015 (7.84 percent). And leading automotive was the vehicles sector, where constant dollar production jumped on-month by 8.02 percent – also the biggest such advance since July, 2015 (12.38 percent).

>Thanks largely to automotive’s performance, the durable goods super-sector saw its monthly price-adjusted production grow by 1.01 percent – the fastest pace registered since March, 2014’s 1.03 percent.

>In addition, durable goods’ annual April real advance of 2.03 percent was its best such performance since the weather-affected 3.15 percent improvement in January, 2015.

>But April’s sequential manufacturing advance extended far beyond the durables super-sector, as its non-durables counterpart boosted its monthly real production last month by 0.98 percent. That growth rate was its best since November, 2014’s 1.03 percent.

>Non-durables’ real annual output gain of 1.77 percent was its fastest since October, 2015’s 1.i1 percent.

>The only blemishes in these April Fed manufacturing data were the revisions. March’s previously reported 0.38 percent monthly real production decline was downgraded to a 0.41 percent falloff and February’s already downwardly revised 0.35 percent sequential growth is now reported as a 0.27 percent rise. The downwardly revised January on-month growth figure of 0.39 percent was upgraded to 0.40 percent.

>Despite April’s strong monthly results, American domestic manufacturing is still 3.58 percent smaller in real terms than at the beginning of the last recession – more than nine years ago, at the end of 2007.

(What’s Left of) Our Economy: New Evidence of a Crossroads for the U.S. Jobs Market

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benefits, compensation, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor market, labor unions, private sector, recovery, salaries, wages, {What's Left of) Our Economy

If you’re one of the American workers who’s been happy with the current economic recovery, you might have already seen peak pay gains. If you haven’t been satisfied, get ready for greater disappointment. And whatever category you fall into, you’d better hope that new U.S. government data on overall compensation paid by American employers is just a blip. Ditto that for the Federal Reserve, which is set to announce its latest decision on interest rates later today, and which seems convinced that the American labor market is healthy enough to withstand a series of hikes back toward historically normal levels.

Last week, the Labor Department issued its latest quarterly report on how much business shells out in terms of both wages, salaries, and benefits. The results in the main release looked pretty good, but they’re not adjusted for inflation – which means that they don’t tell the full story about whether or not compensation is keeping up with the cost of living. Luckily, Labor released the inflation-adjusted figures, too, and they make clear that whatever real compensation progress workers might have been recently been making could be in danger.

According to these constant-dollar Employment Cost Index (ECI) figures, real pay for all private sector workers was flat year-on-year for the quarter ending in March. (I don’t usually examine pay data that include government workers because their compensation is set overwhelmingly by political decisions, not market forces, and therefore don’t say much about the underlying strength of the labor market or the broader economy.)

That annual result was the worst since the quarter ending in June, 2014 – when after-inflation compensation also flatlined on an annual basis. By comparison, the real ECI between that first quarter of 2015 and the first quarter of 2016 rose by 0.97 percent.

Looked at quarter-to-quarter, the real ECI for private sector workers fell by 0.10 percent. The previous sequential change was a 0.29 percent improvement. Indeed, the latest numbers broke a two-quarter string of gains.

From a longer-range perspective, however, the current recovery still stacks up pretty well for private sector workers (although the data only go back to mid-2001). Since it began, in mid-2009, their total compensation is up by 3.60 percent. During the previous (shorter) expansion – which ran from late 2001 through late 2007, total inflation-adjusted compensation rose by only 2.36 percent.

The new real ECI results reveal similar trends for American manufacturing workers. The first quarter’s year-on-year 0.20 percent drop was the worst such result since an identical decrease in the final quarter of 2012. And the previous first quarter annual change was a 1.49 percent rise.

Sequentially, real manufacturing compensation also fell during the first quarter – by 0.29 percent. And as with overall private sector compensation, that was the first such decline in three quarters.

Interestingly, in terms of real total compensation, the current recovery has been a winner for manufacturing workers to an even greater extent than for all private sector workers. Combined constant dollar employer costs for wages, salaries, and benefits have risen by 4.72 percent – compared with a 1.99 percent advance during the previous recovery. (RealityChek regulars will note that these results contrast strikingly with those for wages alone, where manufacturing has been a major laggard. One reason is surely manufacturing’s relatively high unionization rate – which typically results in better benefits won and kept.)

If the Federal Reserve decides today to raise the federal funds rate it controls directly, or even if it simply stays determined to remains on a tightening path, it would signal its confidence that the American labor market remains on the mend following devastating losses during the last recession. Any doubts the central bank voices about its current strategy might indicate that it’s genuinely worried about the new ECI statistics – and that U.S. workers should be, too.

(What’s Left of) Our Economy: Laughable NAFTA Defenses from the New York Fed

Tags

Canada, competitiveness, Federal Reserve, intermediate goods, intra-industry trade, Mexico, NAFTA, New York Fed, North America, North American Free Trade Agreement, rules of origin, supply chains, tariffs, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

Although the Federal Reserve Bank of New York says that posts on its Liberty Street Economics blog “do not necessarily reflect the position” of either this branch of the federal reserve system or the system itself, it’s hard to avoid the conclusion that the bank has gone to war against President Trump’s announced plans to renegotiate NAFTA (the North American Free Trade Agreement). Why else would it have run items critical of these plans on consecutive days last week?

Even more important, it’s hard to avoid the conclusion that these posts aren’t vetted seriously for basic knowledge of America’s international trade situation, or even common sense. Key examples from each of these posts should suffice to establish the New York Fed’s combination of bias and ineptitude here.

The first post, by a New York Fed official and an economist from the offshoring interests-funded Institute for International Economics, purported to show that “An underappreciated benefit of … (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico….Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement.”

But it quickly becomes clear that even the authors are skeptical about this outcome. Their main stated reason hints at one main reason: “”Given the large and well-documented benefits from low trade barriers, particularly those stemming from access to a wider variety of imported intermediate inputs and lower prices of intermediate inputs, it would not be in Mexico’s interest to raise all of its MFN tariffs to their bound rates.”

This argument is only a hint, however, because it jaw-droppingly softpedals some of the main characteristics of U.S.-Mexico trade – specifically, the hugely outsized role played in this commerce by intra-industry trade. As I first described at length in The Race to the Bottom, a large share of U.S.-Mexico trade has little to do with the exchange of finished goods that dominates the textbook models. Instead, it consists of parts and components and other inputs of finished goods that travel through international production chains until they’re turned into final products.

And because there’s so little consumer purchasing power in Mexico, and so much in the United States, the lion’s share of this bilateral intra-industry trade in turn consists of intermediates being sent from U.S. factories to Mexican facilities, where they’re assembled into final products for export back to America.

Sure, in principle, a U.S. scrapping of NAFTA (which of course is not the Trump administration’s stated intention) could enable Mexico to substitute non-U.S. parts and components etc for the American-made intermediates that current make up so many of its exports. But without NAFTA, Mexico would also lose much and probably most of its current, unconditional access to the U.S. market. And since that market currently buys nearly 80 percent of Mexico’s exports, and since Mexico’s economy relies so heavily on those exports, it should quickly becomes obvious how self-defeating such a Mexican effort at hardball playing would be.

How bizarre that neither the article’s authors, nor anyone else involved in producing Liberty Street Economics, recognized these longstanding realities. Even weirder: The importance of this intra-industry trade in U.S.-Mexico trade was the major theme of another post from the same authors (plus a third) on this same blog that appeared the very next day.

Yet the NAFTA-related follies of the authors and of Liberty Street Economics hardly end there. In that second post, readers are warned that stricter rules of origin (ROO) for NAFTA could “disrupt supply chains” and in particular backfire on U.S.-based businesses by increasing the costs of their imported inputs and undermining the competitiveness of their exports outside North America.

To which someone who actually knows something current U.S. NAFTA renegotiating plans can only reply, “Seriously?”

For what the authors and the rest of the Liberty Street crowd seem to miss is that the only ROO revamping that would make any sense from a U.S. standpoint is also precisely the kind of revamping that the Trump administration seems to be considering: not only tightening the ROO (to confine duty-free treatment for goods traded inside the NAFTA zone to goods with higher levels of content produced inside the zone), but increasing the tariff penalties imposed on goods with relatively low levels of non-North American content.

In other words, the North American supply chains created by NAFTA wouldn’t be weakened. They’d be strengthened and greatly expanded.

Now the authors could still be right in arguing that such measures would raise the prices of goods made inside North America and thereby undermine their competitiveness outside North America. But they completely neglect two counter-arguments.

First, because the (U.S.-dominated) North American market is already so vast, and because intermediate goods industries in the three NAFTA countries are already so enormous, external tariffs that encourage North American businesses to use even more North American content could well bring gains inside the NAFTA zone that exceed whatever non-NAFTA losses are incurred.

Second, NAFTA as it currently exists was touted as a major boost to U.S. and North American global competitiveness, but there’s no evidence that this goal was achieved. Quite the contrary, at least according to World Trade Organization data.

They show that in 1993, the year before NAFTA went into effect, North America’s share of global goods exports was 17.9 percent. By 2015, it had shrunk to 14.4 percent. The U.S. share during this period fell from 12.6 percent to 9.4 percent, and the Canadian share decreased even faster – from 3.9 percent to 2.6 percent (no doubt, however, largely due to falling prices for the oil it exports so abundantly).

Mexico’s share of global exports did increase – from 1.4 percent to 2.4 percent. But surely that improvement stemmed mainly from selling to the United States, not to any non-North American customers.

The North American share of world merchandise imports did decrease during this period as well. But the decline was much smaller, and one quick look at the U.S. trend makes clear that the lion’s share of this improvement has resulted from the recent, dramatic turnaround in American energy trade patterns – which have nothing to do with NAFTA or any other supply chains.

The Federal Reserve system, and especially its crucially important New York branch, have long been renowned for employing premier economists and sponsoring first-rate economic analysis. But these Liberty Street Economics posts indicate that, at least when it comes to NAFTA, the New York Fed is better described as the Gang that Can’t Shoot Straight.

(What’s Left of) Our Economy: So U.S. Manufacturing’s Never Produced More, Huh?

Tags

Commerce Department, Federal Reserve, gross output, industrial production, inflation-adjusted output, manufacturing, real gross output, real value-added, recession, recovery, value added, {What's Left of) Our Economy

Even though (thankfully) few claims have been heard lately that American domestic manufacturing is either enjoying a renaissance or on the verge of one, it’s still commonplace to insist that the sector’s output is at an all-time high. Invariably, the purpose is to argue that U.S. industry is in perfectly acceptable shape, and that anyone believing the contrary is mistakenly obsessing about the industry’s long years of job losses – which are attributed to its ever faster adoption of labor-saving technologies that are encouragingly boosting productivity.

Let’s (charitably) leave aside the reality that manufacturing’s productivity performance lately has been historically feeble. Instead, let’s express thanks to the Commerce Department, which has just published its latest reminder of how complicated – and uninspiring – manufacturing output has been lately.

As known by RealityChek regulars, the Federal Reserve’s monthly industrial production numbers have made sadly clear that, when adjusted for inflation, American manufacturing output is anything but at an all-time high. Indeed, its peak came at the very end of 2007, just as the Great Recession was beginning according to the quasi-official scorekeepers at the National Bureau of Economic Research. Since then, real manufacturing production has shrunk by 4.43 percent.

But as the Commerce Department’s new quarterly report on gross domestic product (GDP) by industry once again describe in detail, the U.S. government measures manufacturing output in several different ways. Unfortunately, however, none of them tell a story especially flattering to the sector.

Commerce gives pride of place to a gauge called real value-added – which tries to eliminate the double-counting that often marks the simpler production numbers mentioned above. In other words, real value-added (along with value-added that’s not adjusted for inflation) tries to ensure that the government isn’t counting an auto part once when it comes out of a parts factory and again when it comes out of a vehicle factory as one piece of a finished good.

The real value-added data certainly make manufacturing’s recent production growth look better than the real output figures. But that’s not to say they make this performance look good, for they show that from its 2007 peak through the end of last year, domestic manufacturing has shrunk by 0.81 percent.

It’s only when you don’t adjust for inflation that you start getting genuinely encouraging manufacturing output numbers. According to the pre-inflation value-added data, American manufacturing production was indeed at an all-time high as of the end of 2016. In fact, it’s 17.31 percent higher than the 2007 level.

Don’t get too excited by this number, however. If we switch time-frames and just look at the current economic recovery, we see that from the time the economy resumed growing in 2009 (and unfortunately, this data set doesn’t contain quarterly figures, so we have to use full years) through the end of 2016, current dollar manufacturing value-added advanced by 25.97 percent. That’s only a little faster than manufacturing’s 25.42 percent value-added growth during the previous (2001-2007) expansion – which was a year shorter. Moreover, no one ever considered those years a manufacturing golden age – or even close.

Yet another version of the manufacturing story is told by the gross output numbers compiled by the Commerce Department. They show that manufacturing production rose after the last recession began – by 12.94 percent. But that growth ended in 2014. Over the next two years, it dropped back – by 4.41 percent. So record manufacturing output came – and then went.

Adjusting gross output for inflation serves up a less volatile picture of manufacturing production, but it’s not much of an improvement. According to this measure, output peaked in 2007, and since then has dipped by 0.27 percent. That’s not much. But it doesn’t mark 2016 as an all-time high, either.

To me, a reasonable bottom line is this: The U.S. government uses five different measures of manufacturing output. Both its timeliest (the Fed industrial production figures) and arguably the one it likes best (real value-added) show that real manufacturing production is off its recent records. So do two other measures. The only data set that tells a reasonably good story is one that’s doesn’t take inflation into account. That’s a pretty flimsy reed on which to base claims that domestic manufacturing output has never been stronger.