(What’s Left of) Our Economy: America’s Productivity Blahs Continue

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bubble decade, Financial Crisis, Great Depression, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, {What's Left of) Our Economy

Although productivity is widely seen by informed students of the U.S. economy as the biggest key to ensuring the nation’s prosperity over the longest run, the release of the government’s new figures on these measures of efficiency rarely generates many headlines. Last week was no exception, but as always, they’re worth considering in detail.

In this case, last Thursday’s new report on labor productivity – the most current but narrower of the two measures  — were most notable not for the preliminary estimate of the results for the first quarter of this year (which we’ll summarize below), but for revisions going back to 2013. And unfortunately, these resulted in little change to the feeble performance already reported in creating a unit of output per each person hour worked. Indeed, for manufacturing, the revisions amounted to a not-negligible downgrade.

Here are the two sets of figures for annual percentage gains in labor productivity between 2013 and 2017 for the non-farm business sector – the government’s main proxy for the entire American economy.

  Previous results                                                              Revised results

2013 +0.3 percent                                                               +0.3 percent

2014 +1.0 percent                                                               +1.0 percent

2015 +1.3 percent                                                               +1.2 percent

2016  -0.1 percent                                                                          0

2017 +1.2 percent                                                                +1.3 percent

Like I said, no important differences here. In fact, on net, the revisions brighten the picture marginally. Not so for manufacturing:

  Previous results                                                                Revised results

2013 +0.9 percent                                                                 +0.9 percent

2014    0                                                                                        0

2015 +0.2 percent                                                                 +0.3 percent

2016 +0.4 percent                                                                 -0.4 percent

2017 +0.7 percent                                                                +0.4 percent 

Here we see a marked weakening, especially for the last two years. And the extent of manufacturing’s lousy record is even clearer from comparisons among the current economic recovery and its two predecessors.

non-farm business                                                                  manufacturing

90s expansion: (2Q 1991 to 1Q 2001) +23.25 percent          +45.86 percent

bubble expansion (4Q 2001 to 4Q 2007) +16.03 percent      +30.23 percent

current expansion: (2Q 2009 to present)  +9.70 percent          +9.69 percent

Not only has labor productivity growth slowed much more dramatically in manufacturing than in the rest of the economy between the expansion of the 2000s – which of course ended in the worst national and global financial crisis since the Great Depression — and the current expansion. Manufacturing labor productivity actually has been growing more slowly in absolute terms during this recovery than non-farm business labor productivity. And it’s not as if non-farm business labor productivity has been killing it.

Those preliminary results for the first quarter of this year extend this narrative. On a quarter-to-quarter basis, both non-farm business labor productivity and manufacturing labor productivity increased – by 0.7 percent and 0.5 percent at an annual rate, respectively. But the revisions revealed a major slowdown in manufacturing labor productivity growth on a quarterly basis (from a downwardly revised — and kind of fishy — 4.5 percent on an annual basis) and a slight pickup in non-farm business productivity growth (from no growth at all at the end of last year).

The latest results for the broader measure of productivity growth – multi-factor productivity, which includes a range of inputs broader than just worker hours – showed a small uptick, too. So even though they’re not as current as the labor numbers, maybe we’re seeing the beginnings of lasting improvement in productivity growth generally speaking. But as the recovery-to-recovery data still make clear, the United States still has a long way to go before it genuinely shakes off its productivity blahs.

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(What’s Left of) Our Economy: February’s Big New U.S. Trade Deficit Driven by Lots of Volatile Internals

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Canada, China, exports, Financial Crisis, Great Recession, high tech goods, imports, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, services, South Korea, Trade, Trade Deficits, Trump administration, {What's Left of) Our Economy

The U.S. monthly trade deficit rose for the sixth straight month in February, to its highest level ($57.79 billion) since some of the darkest days of the last financial crisis (October, 2008’s $60.19 billion). Combined U.S. goods and services exports set their third monthly record ($204.45 billion) in the last four months, but total imports (at $262.04 billion) hit their fifth straight monthly all-time high. New monthly records were also set for goods imports ($214.49 billion), services exports (for the tenth straight month, with a total of $67.27 billion) and services imports ($47.85 billion).

With U.S.-China trade tensions rising, the huge and chronic American trade shortfall with the PRC sank by 18.61 percent on month in February, but the drop was from an unusually high January figure ,and the new total ranked as the biggest February number ever ($29.26 billion). Similar volatility was on display with the U.S. deficits with other trade partners in the Trump administration’s crosshairs, including South Korea, Canada, and Mexico, as well as in manufacturing and high tech goods.

Here are selected highlights of the latest monthly (February) trade balance figures released Thursday morning by the Census Bureau:

>In the process of revealing several new all-time records and multi-year highs and lows, this morning’s U.S. trade balance report also made clear how volatile the nation’s monthly trade figures can be – including those describing the nation’s commerce with major foreign economies whose trade policies have evoked first criticism and now tariffs and threatened levees from the Trump administration.

>The combined U.S. goods and services trade deficit rose in February sequentially for the sixth straight month. The $57.59 billion total, a 1.63 percent increase from January’s upwardly adjusted $56.67 billion figure, was the biggest monthly trade shortfall since October, 2008’s $60.19 billion – when the Lehman Brothers bankruptcy pushed the global financial crisis into a dangerous new phase and ultimately helped usher in America’s worst downturn since the Great Depression of the 1930s.

> U.S. total exports in February set their third new record in the last four months. At $204.45 billion, they were 1.74 percent greater than January’s upwardly adjusted $200.95 billion and 0.41 percent higher than the previous best of $203.61 billion, set last December.

>But U.S. total imports in February set their fifth straight monthly record. The $262.04 billion total was 1.72 percent higher than the upwardly adjusted January level of $257.61 billion – the previous record.

>The $77.01 billion February U.S. trade deficit in goods was also the biggest such total since the last recession – specifically, the $77.63 billion figure for July, 2008. Sequentially, it grew 0.39 percent from January’s upwardly adjusted $76.71 billion.

>America’s services trade remained healthily in surplus in February. But the $19.42 billion excess of exports over imports was the smallest such total since December, 2012’s $18.63 billion. Month-on-month, the services surplus sank by 3.12 percent in February from January’s upwardly adjusted $20.04 billion – the biggest such drop since last April’s 4.88 percent plunge.

>U.S. goods imports set their third record in the last four months in February. At $214.19 billion, they exceeded the January total (the previous record, which has been upwardly adjusted) of $210.86 billion by 1.58 percent.

>Services exports in February set their tenth straight monthly record, rising sequentially by 0.70 percent from an upwardly adjusted $66.80 billion to $67.27 billion.

>Services imports in February set their fourth straight monthly record, rising sequentially by 2.34 percent from a downwardly adjusted $46.76 billion to $47.85 billion. The monthly increase, moreover, was the biggest since August 2016’s 3.67 percent.

>At the same time, reportedly, the February services imports total was fueled in part by payments made by American broadcasters for the rights to televise the Seoul Winter Olympics.

>With U.S.-China trade tensions escalating, the February figures showed that the massive, chronic goods trade surplus run by China with the United States plunged by 18.61 percent sequentially, from $35.95 billion (the second highest monthly total ever) to $29.26 billion.

>The February figure was the lowest since April, 2017’s $27.63 billion, and the monthly decrease was the biggest since last February’s 26.64 percent. Yet the February figure was an all-time February high.

>U.S. goods exports in February declined by 0.30 percent, from $9.84 billion to $9.81 billion – the lowest such total since last April’s $9.84 billion.

>The much larger amount of U.S. goods imports from China sank sequentially by 14.68 percent in February, from $45.79 billion to $39.07 billion.

>The goods import decline was the biggest since last February’s 20.82 percent, and the monthly total was the lowest since April’s $37.47 billion. Yet as with the goods deficit, the new February goods import total was a new monthly record for February.

>A similar story is told by the new statistics for U.S. merchandise trade with South Korea, whose bilateral trade deal with the United States was recently renegotiated.

>America’s goods trade deficit with South Korea also shrank dramatically on month in February – by 65.28 percent, from $1.97 billion to $0.68 billion.

>The February total was the lowest since the 0.56 billion figure recorded for March, 2012 – as the trade agreement went into effect. The month-on-month plummet, moreover, was the biggest since the 70.50 percent drop in February, 2012.

>Yet the January U.S.-South Korea merchandise trade deficit was the biggest since October’s $2.51 billion.

>Still, the composition of the monthly U.S.-South Korea goods trade deficit change differed dramatically from that of the U.S.-China deficit.

>Not only did U.S. merchandise imports from South Korea fall sequentially by 12.05 percent – to $4.97 billion, the lowest such total since last February’s $4.87 billion, and the greatest monthly percentage drop since that month. U.S. merchandise exports to South Korea also jumped on month by 16.36 percent, to $4.92 billion.

>That increase was the biggest percentage-wise since last March’s 22.04 percent.

>The U.S.’ merchandise shortfall with Canada nosedived in February, too – by 89.59 percent on month, from January’s $3.70 billion to $0.38 billion.

>The total was the lowest since last September’s $0.25 billion, and the sequential drop was the steepest since May, 2016’s 95.84 percent.

>But the January deficit was the biggest since December, 2014’s $4.07 billion.

>Most of the U.S.-Canada merchandise deficit’s February monthly decrease came on the American imports side, as these purchases declined by 8.95 percent to $23.92 billion – the largest such decrease since last July’s 11.49 percent, and the lowest such total since that month’s $22.89 billion.

>But U.S. goods exports to Canada also rose on month in February – by 4.28 percent, to $23.53 billion.

>A different kind of volatility was exhibited by U.S. merchandise trade with its other North American Free Trade Agreement (NAFTA) partner, Mexico.

>The American goods trade shortfall with Mexico soared by 46.62 percent sequentially in February, to $6.06 billion. That’s the biggest such increase since the 81.73 percent of March, 2001 – nearly 17 years ago.

>Yet the $4.14 billion January U.S. merchandise deficit with Mexico was the smallest since last January’s $3.95 billion.

>U.S. goods exports to Mexico sank by 7.24 percent on month in February, to a five-month low of $20.22 billion, while goods imports from Mexico climbed by 1.35 percent, to $26.29 billion.

>Volatility in these bilateral deficits was mirrored in February by volatility in the manufacturing trade deficit. This chronic and enormous shortfall plunged sequentially by 15.48 percent, to $73.21 billion. But the January total of $86.62 billion was the second highest of all time.

>Manufacturing exports improved by 2.89 percent sequentially in February, to $88.86 billion, while imports skidded by 6.31 percent, to $162.07 billion.

>High tech goods trade displayed major ups and downs, too. In February, the shortfall cratered 30.96 percent, to $7.93 billion. That was the smallest total since last April’s $6.04 billion.

>But the $11.49 billion January gap was 14.25 percent bigger than the December figure.

(What’s Left of) Our Economy: America’s Growth and Savings Dilemma in a Nutshell

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bubbles, Financial Crisis, GDP, gross domestic product, housing, Maurie Backman, personal consumption, real GDP, recovery, The Motley Fool, USAToday, {What's Left of) Our Economy

An intriguing op-ed in USAToday provides a great opportunity to return to an important subject RealityChek has neglected a bit in recent weeks – the quality of America’s economic growth.

The article, by Maurie Backman of the Motley Fool investing website, does a fine job of scolding Americans for not saving enough – and of debunking many of the excuses heard for their lack of thrift. One of his especially interesting arguments: No matter how little one earns, it’s always possible to save something.

This is literally true, although economists widely agree on the seemingly commonsense proposition that (all else equal, of course!) the less you earn, the harder you’ll find saving, and in fact the less you’ll save. But what I immediately began thinking about is a major implication of this pattern. Namely, if Americans started saving even a little more, wouldn’t future economic growth be even slower than it’s been? At least unless the country found some other engine of growth – like investment or trade?

The light shed by the latest data on America’s growth shows just what an enormous transition this will entail. These numbers come from the government’s second read on the gross domestic product for the fourth quarter of last year and how its changed. (We’ll get one more fourth quarter figure next week and that will be the final result for that period – until a more comprehensive set of revisions is released a little further down the road.)

What they reveal is that the economy nowadays has never been more consumption-heavy. In fact, it’s even more consumption-heavy than at its peak during the mutually reinforcing credit and housing bubbles of the previous decade – which eventually collapsed into the worst financial crisis to hit the United States and the world since the 1930s.

During the fourth quarter, personal consumption as a share of the inflation-adjusted gross domestic product (GDP) hit 69.64 percent. That slightly eclipsed the former record of 69.60 percent – which dates only from the second quarter of last year.

So is it time to hit the economic panic button? Not (quite?) yet. Because housing – the second part of the toxic combination that helped trigger the crisis – still remains depressed compared with the previous decade’s levels. Housing’s share of real GDP peaked in the second quarter of 2005 at 6.17 percent. During the fourth quarter of last year, it was a relatively subdued 3.52 percent.

As a result, the toxic combination’s total share of the economy after adjusting for prices stood at 73.16 percent. That’s a bit lower than the old combined record of 73.27 percent (during the third quarter of 2005). But it’s only a bit lower.

And therein lies the biggest dilemma facing American policymakers – whether in the White House or the Congress or the Federal Reserve: Spending-based growth is unhealthy and unsustainable – and the story usually ends very badly. But reorienting the country’s national business model and turning it into “an economy built to last” looks to be disruptive enough to exact major short-term costs.

(What’s Left of) Our Economy: Why Investors Shouldn’t Blame U.S. Workers for Inflation

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bonds, budget deficits, Federal Reserve, Financial Crisis, inflation, interest rates, manufacturing, monetary policy, quantitative easing, recession, recovery, stock market, stocks, wage inflation, {What's Left of) Our Economy

Thanks to the U.S. government’s new inflation data, we can cross one often fingered culprit off the list of developments being blamed for the recent turbulence in American, and therefore global, financial markets – wage inflation. For by a crucial indicator, real hourly pay in the United States is not only failing to lead prices upward – it’s been trailing overall inflation recently and indeed has been in recession lately by one commonsense standard.

Of course, market turmoil (like most big developments) springs from several, overlapping reasons. The first is one I discussed last Friday, and which I consider the most important: Investors fear that the Federal Reserve and other world central banks will start tightening monetary policy faster than expected, in order to prevent (more of) the kinds of reckless investments that tend to mushroom when credit is super cheap, and that can often trigger financial crises like the near global meltdown roughly a decade ago. (Happy Anniversary!)

If credit becomes more expensive, then economic growth and corporate profits will struggle to maintain their current rates of increase, and stocks will become less attractive investments, all else equal. In addition, the very increase in interest rates almost certain to result from such central bank “tightening” heightens the appeal of bonds and dims that of equities.

To complicate matters further, another engine of higher rates might be a combination of the great increase in federal budget deficits likely from the new tax cuts proposed by the Trump administration and passed by Congress, and the big-spending budget deal reached by the lawmakers and the President. The consequent budget gap will boost federal borrowing needs (and all else equal, push up the rates Washington will need to pay lenders for all this new debt) at a time when the U.S. central bank has started selling the ginormous amount of government bonds it’s been purchasing and holding since late 2008 (a practice called “quantitative easing) in order to halt the Great Recession and speed up recovery . This version of tightening – which also stems from financial stability concerns – will raise the supply of bonds even further.

The second reason for the turmoil is investor concern that rising inflation will spur central banks to raise rates regardless of the above financial stability concerns – because excessive inflation can produce its own economic disaster. And in fact, the proximate cause of the current bout of market instability seems to be those very inflation fears, and in particular, the possibility of wage inflation.

Higher compensation costs could deal their own blow to stock prices by reducing corporate profits; or by sending upward price pressures rippling throughout the entire economy (as companies tried to pass higher costs on to their customers either elsewhere in the business world or in consumer ranks); or through some combination of the two. (Interestingly, the chances seem pretty low that companies could absorb higher wages through greater efficiency, as productivity improvement has been very slow at best recently.)

So that’s why today’s widely anticipated (to put it mildly) U.S. government inflation data is so important. The inflation figures were somewhat “hotter” than most investors were predicting. But it couldn’t be clearer that wage inflation has nothing to do with these higher prices.

The numbers that most observers – whether investors or not – are looking at are the year-on-year numbers, and they do seem to signal some wage inflation. From January, 2017 to last month, the Labor Department’s headline reading showed a 2.14 percent rise in prices nationwide, and a 1.85 percent increase in “core” prices (which stripped out from the headline food and energy prices because they’re considered so volatile in the short-term that they can generate readings regarded as somewhat misleading).

During that same year, wages adjusted for inflation for the overall private sector were up 0.75 percent – which means they rose faster than overall prices. Moreover, between previous Januarys, real wages actually declined fractionally (by 0.09 percent). So in principle, investors (and other economy watchers) have reasons to be nervous about wage inflation.

But a more recent time frame tells a very different story. For since last May, private sector wages have been down on net. Although the cumulative decline is only 0.19 percent, this means that on a technical basis, real wages are in recession. (I feel justified in using this term because when economists talk about growth, a decline for two consecutive quarters is defined as a recession. So a six-month cumulative downturn seems close enough.) Indeed, more accurately, real wages are still in recession, since this development was apparent last month, too.

And the latest month-to-month figures indicate that real wage pressure is weakening, not strengthening. From December to January alone, they dropped by 0.19 percent, after rising by that amount from November to December.

The picture looks even grimmer when you go back to the start of the current economic recovery – in mid-2009. Since then, real private sector wages have risen by only 4.07 percent. And that’s over more than eight years!

But private sector real wages are practically torrid when they’re compared with inflation-adjusted pay in manufacturing. Such compensation has been in technical recession for two full years, as it’s fallen by 0.09 percent since January, 2016. On a monthly basis, after-inflation manufacturing pay plummeted by 0.46 percent in January, its worst such performance since August’s 0.64 percent tumble. At least the December figure was revised up – though only from a 0.09 percent dip to a 0.09 percent increase.

Over the current economic recovery’s eight-plus years, real manufacturing wages have risen by a mere 0.37 percent – less than a tenth as fast as those of the private sector overall.

Yet although inflation – and especially wage inflation – doesn’t seem to warrant a quicker pace of Federal Reserve interest rate hikes (or even the current, “gradual” pace), a case can still be made for tightening on a financial stability basis. And those massive federal deficits, which will need to be funded by equally massive increases in bond supplies, seem here to stay for many years. So as has been the case for so long, assuming these moves do slow U.S. economic growth, American workers appear certain to pay many of the costs for disastrous policy mistakes they never made.

(What’s Left of) Our Economy: What’s with Those Financial Markets?

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bonds, bottom-line, budget deficits, central banks, correction, debt, Federal Reserve, Financial Crisis, financial markets, Great Recession, interest rates, leverage, monetary policy, profits, stocks, tax cuts, top-line, {What's Left of) Our Economy

Heckuva week on the world’s financial markets, eh? This post isn’t intended to provide any investment advice, but rather to shed some light on what strikes me as the most interesting question posed by the stock market correction and the related spike in bond yields: Why is it happening as evidence keeps emerging that the world economy (including America’s) is entering its best stretch of growth since the last (Great) recession ended in mid-2009?

Right off the bat, in the interests of full disclosure, the vast majority of my investments are in bonds (mainly munis) and bond proxies (high-dividend stocks whose share prices are relatively stable, so that their main value is spinning off income). This means that my main hope is that bonds keep doing well (notwithstanding their recent slump).

That said, it seems clear to me that the answer is that investors are worried that the stronger growth seen globally isn’t sustainable. Indeed they seem fearful that it’s about to come to an ugly end because the world’s central banks look more determined than in many years to at least limit the easy money conditions they created to fight the financial crisis (and ensuing recession), and to try to spark something of a recovery.

This kind of monetary policy tightening – or even a further slowdown in or halt to the loosening, which is what’s most likely in the near future – could create a pair of closely connected economic and financial dangers. First, slower growth could imperil the sales and profits of companies that issue stocks, which could depress their prices. And P.S.: Despite the record central bank stimulus, growth has been unimpressive enough. How much tightening is needed to tip the economy back into recession?

Of course, businesses all around the world have performed magnificently in boosting profits in a slow-growth environment, and this also goes for non-financial companies that haven’t been able to enjoy the full benefits of borrowing from central banks at super-cheap rates and lending at higher rates. But precisely because growth even during the recovery’s best periods so far has been sluggish despite the gargantuan stimulus, much of the profit improvement has come from improvements in the bottom line, keyed by cost-cutting (including keeping the lid on employee paychecks). Top-line growth – that is, stronger sales of products and services – has been more difficult to come by.

Since costs can’t be cut completely, and possibly not much further, a growth slowdown could greatly reduce these firms’ potential to increase profits going forward, and turn them into much less attractive buys for investors. And tighter monetary policy, including raising interest rates, historically has been pretty effective at slowing growth.

Just as important, low interest rates per se have super-charged stock prices. The reason? They greatly depress the total return on bonds, and thus greatly boost the appeal of stocks.

Of course, this raises the question of why central banks would take such actions, or even think (out loud) about them. The reasons are that they’re worried that all this easy money will ignite a new round of dangerous inflation, and that they’re concerned that, because money has been so cheap for so long, borrowing consequently so easy, and mistakes therefore so easy to withstand, too much capital has been poured into risky investments. Central bankers are rightly concerned that this “mal-investment” eventually could imperil the entire financial system and hence the real economy just as it did during the previous decade. So they’re hoping they can wean the world off this sugary diet.

The challenge they face is making sure “the patient survives,” or doesn’t become gravely ill again. After all, the previous decade’s financial crisis showed that when dubious investments reach a certain level, creditors can start doubting borrowers’ ability to repay or even service their debt even when the cost of money is very low. When they start to pull in their bets, panic can easily set in – and did.

These dangers become much greater when the cost of money starts to rise, which is exactly the situation the nation and world are in now. Just one indication of heavily indebted businesses are: According to Standard & Poor’s, one of the financial ratings agencies, in 2007 (just before the global bubble burst), 32 percent of the world’s non-financial companies were “highly leveraged” (i.e., up to their ears in debt). The latest figure? Thirty seven percent.

This corporate debt, of course, is relatively easy to service and manage when interest rates are very low. In a higher rate environment? Not so much. And don’t think creditors don’t know this. So that’s another reason that companies could start looking less appealing to investors, and if major debt servicing (much less repayment) problems emerge, credit channels could start seizing up just as they did ten years ago. On top of this prospect, all else equal, rising rates tend to be trouble for stock prices, as more and more investors decide to opt for (higher) guaranteed returns on bonds rather than riskier equities.

P.S. If you’re wondering whether higher rates could significantly increase the debt burden on the U.S. government, even without the immense new borrowing that will be needed thanks to the Trump administration’s tax cuts and the new big-spending Congressional budget compromise, the answer is, “You bet!”

Not that reasons for optimism about stocks in particular can’t be identified. Because the big ramp up in federal budget deficits that’s on the way will inject massive new resources into the economy, more growth will result. In principle, that new growth could convince the Federal Reserve to speed up its tightening – but perhaps not enough to offset the fiscal boost. Moreover, anyone who’s positive that the Fed will keep tightening in the face of either future stock market turbulence and/or weaker economic growth hasn’t been paying attention to its record in recent decades. The central bank has been, in the view of many, all too willing to keep the economic party going at all costs, and may well do so again.

One more bullish possibility for stocks – as they did during the previous decade, the leaders of stock-issuing companies decide to use most of their tax cut windfall to buy more shares of their own stock. The result would not only would prop up the share price, but in many cases boost their own compensation (which not so coincidentally is often based on that share price).

The most vexing aspect of both the investment and the economic situation is that, even though both may suffer in the short run, both urgently need to end their addiction to central bank stimulus and create the kind of foundation that will promote healthier, and thus longer-lasting (even if not faster) growth. Moreover, the longer the addiction lasts, the worse the cold turkey experience.

Because I doubt that either the Federal Reserve or the rest of the U.S. government has the spine to administer the needed policy medicine, I remain pretty bearish long-term on both the markets and the real economy, and will stay very conservatively invested. But the short term can be surprisingly long lasting; in fact, I’m surprised that the Fed’s high wire act has lasted this long. So I’m anything but an infallible guide to either. I’m just trying to be prepared for major trouble – whenever it decides to arrive.

 

(What’s Left of) Our Economy: Why the Trump-ers (So Far) Aren’t Wrong About the Dollar

Tags

bubbles, consumption, currency, debt, dollar, exchange rates, finance, Financial Crisis, growth, inflation, investment, protectionism, Steve Mnuchin, Trade, Treasury Department, Trump, {What's Left of) Our Economy

The economics, finance, and business worlds are kind of up in arms over U.S. Treasury Secretary Steve Mnuchin’s suggestion earlier this week that a weaker U.S. dollar would be good for the American economy.

I say “kind of up in arms” because Mnuchin’s remarks were more nuanced than generally reported; because financial markets in particular seem to be on steroids and have barely reacted; and because he took pains afterwards to profess his confidence that, despite its recent falling value, nothing fundamental had changed to undermine the greenback’s historic appeal to investors. Indeed, just a little while ago, President Trump stated that he “ultimately” wants to see a strong dollar. 

I say “up in arms” to some extent because, the President’s newest words notwithstanding, no American Treasury Secretary has ever said anything remotely like this in public for decades; because Mnuchin’s original words looked suspiciously consistent with what the establishments in these interconnected economic worlds abhor as the Trump administration’s protectionist instincts on trade policy (because all else equal, a weak dollar promotes U.S. exports and curbs U.S. imports); and because dollar strength (and the big U.S. trade deficits it’s encouraged) has long been a cornerstone of the global economy, and a major growth engine for the numerous countries that rely on selling to Americans to promote their own output and employment. (Hence many of them fiddle around with their own currencies’ values to make sure they can sustain these strategies.) Many strong dollar proponents also claim that a weaker American currency could dangerously stoke inflation (especially by boosting import prices) and deter investment inflows into the United States.

But two crucial points are Missing in Action in the tumult sparked by Mnuchin’s remarks. One should be obvious but can’t be repeated often enough, especially in these current overwrought times: You can have too much and too little of a good thing. An overly weak dollar would cause major problems for the U.S. economy. So would an overly strong dollar. Therefore, the key is not to assume either extreme (especially in the absence of any evidence that they’re around the corner) but to figure out a dollar level that achieves the best combination of benefits.

The second has been much less much widely recognized even in calmer periods, but it’s closely related to my longstanding point about the importance of the quality of American growth. As I’ve written frequently, growth based largely on production and the growing incomes it generates place the economy on the soundest foundation. This approach may not always produce the fastest growth, but it fosters the growth that tends to last longest, and that’s least likely to inflate bubbles that then collapse into economic and financial crises).

Such disasters, as we should have learned, stem from growth largely based on borrowing and consuming – i.e., on shopping sprees that eventually can’t be paid for responsibly, and can only continue by racking up enormous debts. And other than legitimate (though clearly overblown nowadays) concerns about inflation, that’s a main reason why folks in finance – and everyone on their payroll in the U.S. government and the rest of Washington – like the strongest possible dollar. Until the merry-go-round stops, they make tons of money by lending to those borrowers.

Here’s where the dollar’s value comes in. A strong-ish greenback tends to result in that borrowing and consuming brand of growth. A weak-ish dollar tends to result in the healthier kind of growth. And as indicated by this chart showing the change in the dollar’s value (also called the exchange rate) against other currencies, only looked at over the shortest possible period could the dollar nowadays be called weak or even weakening. Over a much longer period, it’s obviously still well in “strong territory.” 

And it’s no coincidence, as I’ve also written, that although the U.S. economy seems to be making some slight progress toward creating healthier growth, it still has way too long a way to go – especially given that the current recovery from the crises and the painful recession that followed is now more than eight years old.

The lessons, then, look clear. If you only care about the fastest growth possible regardless of its makeup or the longer-term consequences, and/or if you think finance should be the dominant part of the American economy, you’ll join the chorus of critics scolding Mnuchin for even hinting that some further dollar decline wouldn’t be a disaster for the nation. If you’d like the economy to steer clear of near-meltdowns like the one experienced just about a decade ago, you’ll be applauding what still looks like a subtle call from him for a somewhat weaker dollar.

(What’s Left of) Our Economy: A Stunning Downgrade for U.S. Manufacturing Labor Productivity Growth

Tags

BLS, bubbles, Bureau of Labor Statistics, David P. Goldman, Financial Crisis, Great Recession, labor productivity, manufacturing, multi-factor productivity, non-farm business, offshoring, productivity, recovery, total factor productivity, unit labor costs, {What's Left of) Our Economy

Wow! There were so many important results flowing from last week’s final (for now) government data on third quarter U.S. labor productivity, I hardly know where to begin. (I’m also feeling a little sheepish about waiting so long to report on these data, but it’s just another sign that we’re living in a target-rich commentary environment, as RealityChek‘s motto suggests.) But after finishing this post, I feel confident you’ll agree that the big downward historical revisions to manufacturing labor productivity growth deserve the most attention.

Not that the new figures on overall labor productivity (for the so-called non-farm business sector) were anything to sneeze at. These new numbers cover the narrowest measure of productivity (gauging only output per hour worked by an individual American employee) but as known by RealityChek regulars, they’re issued on a much more timely basis than the multi-factor or total factor data – which measure the output generated by a wide range of inputs.

And this update on third quarter labor productivity confirmed that it grew at its highest sequential annualized rate (2.95 percent) since the third quarter of 2014 (4.34 percent). The revised labor productivity gain was actually a touch smaller than the originally reported 2.97 percent rise, but not nearly enough to change the overall story. If this rate of improvement continues, that would be excellent news, since strong productivity growth is an economy’s best bet for a sustainable increase in economic growth and living standards.

At the same time, analyst David P. Goldman has noted that the new data add to compelling evidence that recent years have seen a reversal in the relationship most economists have long assumed (and that was borne out by by these same statistics) between unit labor costs (a main labor component of the productivity statistics) and the broadest measures of unemployment. As Goldman just observed, normally, they move in opposite directions – i.e., when joblessness is rising, the price of labor generally (and logically) falls, and vice versa. But since 2014, unemployment has kept tumbling, but labor costs have fallen as well. If this trend continues, that would be much worse news, since it would undermine the portrayal of productivity growth as a boon to the nation’s workers. (And a richly deserved hat-tip to a Twitter follower of mine, who goes by “Field Roamer” for calling my attention to this post.)

It’s been clear throughout this current U.S. economic recovery that wage growth has been unusually weak, but Goldman’s post paints the paycheck picture in a much grimmer light, and that’s definitely worth exploring further.

But to me, the manufacturing revisions deserve center stage, both because of their magnitude and the long time frame they cover – all the way back to 1987, when manufacturing labor productivity began to be tracked. I’ll let the Bureau of Labor Statistics (BLS), which calculates productivity for the U.S. government, summarize its dreary conclusions:

“A large upward revision to the change in the annual manufacturing productivity index from 2008 to 2009 was more than offset by downward revisions in adjacent years, and the average annual rate of growth from 2007 to 2012 was revised down from 2.9 percent to 1.2 percent. The average annual rate of manufacturing productivity growth during the current business cycle from 2007 to 2016 was revised down from 1.6 percent to 0.9 percent, and the long-term rate for the entire series from 1987 to 2016 is now 2.8 percent, compared to the previous estimate of 3.2 percent.”

In other words, over roughly the last thirty years, labor productivity in industry has risen 12.50 percent more slowly than previously reported. And manufacturing’s performance on this crucial front wasn’t great to start with.

Another way to look at the new numbers is to see how they affect what we know of America’s manufacturing labor productivity performance during the most recent economic expansions – a method that gives us the best apples-to-apples data. If your jaw doesn’t drop, it should.

The 1990s expansion still comes across as a period of robust manufacturing labor productivity growth. The cumulative increase was downgraded only from 46.81 percent to 45.94 percent.

But check out the new results for the previous decade’s recovery. Viewed through the lens of the old productivity data, its performance was excellent, and surprisingly so. After all, this expansion was fueled by the inflation of the credit and housing bubbles whose bursting led to the global financial crisis and the Great Recession. Yet the BLS had been saying that its cumulative productivity gain was 41.23 percent – just about as good as the 1990s advance factoring in this recovery’s shorter duration.

The new numbers – only 30.08 percent manufacturing labor productivity growth – are much more consistent with the idea that the previous economic recovery was marked largely by phony, unsustainable growth.

And as for the present recovery? The old data already made clear what a productivity disaster it’s been. Though it’s lasted nearly as long as the 1990s expansion, the previous BLS data pegged its total manufacturing labor productivity growth at only 20.93 percent – just about half the rate generated during the 2000s expansion.

The new rate? Only 9.41 percent, meaning its been cut nearly in half. Moreover, according to the new figures, the current recovery’s manufacturing labor productivity growth rate represents a much greater deterioration from the performance of the bubble recovery than had been reported. At least by this measure, American economic growth was already appearing even less healthy these days than it was leading up to the last meltdown produced by fake prosperity. Now this problem looks much worse. 

In addition, don’t forget:  Even these dreadful numbers probably overstate manufacturing labor productivity’s advances. Why? Because as the BLS acknowledges, its methodology for calculating this indicator include the effects of offshoring: simply substituting foreign workers for American workers. Since the total number of workers doesn’t change, the productivity figures for U.S. factories and related facilities are artificially inflated – and for reasons having nothing to do with greater efficiency. 

And these results raise all sorts of perplexing questions. For example, I’ve been arguing for quite some time that the overall slowdown in American labor productivity growth must surely stem from the trade- and offshoring-related losses of so much domestic industry – which has generally been the economy’s productivity growth leader. But the new BLS statistics indicates that there could be a bigger labor productivity growth problem within manufacturing itself. Alternatively, these losses could have been concentrated in especially high-productivity sectors of manufacturing – or trade and offshoring have had little or nothing to do with the problem to begin with.

More light could be shed on these questions by comparing America’s manufacturing labor productivity performance with that of other countries. Has it been better? Worse? Some short-range data I’ve seen indicate that the slowdown has been widespread across the globe, at least between 2015 and 2016. But I need to dive much deeper into these statistics to draw firmer conclusions.

Further, how significantly will these new labor productivity results affect the broader multi-factor productivity results? BLS hasn’t scheduled its next report on this indicator, so my oft-used advice to “stay tuned” applies to me, too, in this case.

(What’s Left of) Our Economy: U.S. Growth is Better. It’s Quality? Not so Much

Tags

business spending, consumption, Financial Crisis, GDP, gross domestic product, growth, housing, inflation-adjusted growth, real GDP, recession, recovery, {What's Left of) Our Economy

Since the crucial role played by low-quality (e.g., credit- and debt-fueled) growth in triggering the financial crisis and last recession keeps getting ignored even by most Americans who follow the economy professionally, I’ll keep posting on how well the nation has been faring in producing higher quality growth. Sadly, the new initial figures just in on gross domestic product (GDP) in the third quarter show that the answer remains “Not very well.”

The key measure I’ve been using is the share of the economy, adjusted for inflation, represented by personal consumption and housing combined. These two comprise the “toxic combination” that supercharged the debt boom during the last decade.

According to the first read on third quarter real GDP, the consumption share of the economy dipped – from an all-time record of 69.60 percent in the second quarter, to 69.49 percent. The housing figure shrank, too – from 3.49 percent to 3.41 percent.

As a result, the toxic combination total decreased slightly, from 73.09 percent to 72.90 percent. That’s below the all-time high for this pair – 73.27 percent, in the second quarter of 2005. But the difference is pretty modest.

And as suggested by the above, the big difference is in housing. It’s share of the economy after factoring out inflation peaked during the previous bubble decade at 6.17 percent.

Some good news might be emerging on the business investment front – though it’s far from conclusive and heavily dependent on the time frame examined. Corporate spending on plant and equipment and software and research and development is a much more durable foundation for growth (and prosperity) than personal consumption and home-buying. And there are signs that it’s becoming a more important growth engine once again. The best measure of this progress entails how much growth such spending is generating.

The results so far for this year? In the first quarter, business spending was responsible for a huge 71.67 percent of the economy’s modest (1.23 percent annualized) expansion in constant dollar terms. For the second quarter, the share was much lower – 26.45 percent of 3.03 percent total growth at an annual rate. And for the third quarter, 16.33 percent of 2.96 percent total annualized growth.

So the trend this year isn’t so encouraging. But compare it with last year. In 2016, business spending that fell in absolute terms subtracted 5.33 percent of the year’s 1.49 percent total growth. The previous year was better, but not as good as this year. In 2015, business spending only generated 10.34 percent of the year’s 2.86 percent real growth.

Earlier during the current recovery, most of the annual figures were much higher:

2010: 11.20 percent

2011: 53.15 percent

2012: 47.73 percent

2013: 25.29 percent

2014: 33.08 percent

The glass half-full interpretation? The previous two years were an aberration, and the growth role of business spending has resumed increasing. The glass half-empty view? During the last decade’s expansion, business spending’s spending’s contribution to growth was much higher in absolute terms, and accelerated impressively as the recovery continued. Here are those figures:

2001: subtracted 34.00 percent (the expansion officially began at year-end)

2002: subtracted 51.67 percent

2003: 8.21 percent

2004: 16.32 percent

2005: 25.15 percent

2006: 32.22 percent

2007: 42.22 percent

It’s surely too early to know which trend will prevail. Much more important is persuading American leaders to pay attention. For nothing will matter more in shaping the country’s economic future.

(What’s Left of) Our Economy: U.S. Growth’s Quality is Better, but Remains Far from Good

Tags

business spending, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, recession, recovery, {What's Left of) Our Economy

As indicated in yesterday’s post, the final (for now) returns are in on America’s economic growth for the second quarter, and as RealityChek regulars know, it’s a new occasion to look at the crucial and sorely neglected subject of the quality of American growth. What the figures show is that, despite some tiny signs of progress, nearly a decade after a terrifying financial crisis caused by bloated spending on personal consumption and housing, the U.S. economy is still heavily dependent on growing via bloated spending on personal consumption and housing.

First, let’s review the situation on a stand-still basis. For the second quarter, the share of inflation-adjusted gross domestic product (GDP) comprised by personal consumption came in at 69.60 percent. This figure – for the first full quarter of the year during which Donald Trump has been president – was slightly above the 69.56 percent for January-March quarter, and an all-time record.

The second component of what I’ve called the “toxic combination” is housing spending, which stood at 3.49 percent of real GDP. That’s lower than the 3.58 percent share for the first quarter, and (thankfully) well below the record of 6.17 percent set at the height of the previous decade’s housing bubble, in the third quarter of 2005.

Nonetheless, because personal spending has become so strong, the total toxic combination in the second quarter came to 73.09 percent of after-inflation GDP. That’s a bit below the 73.14 percent share for the first quarter but, more important, it’s just slightly less than the record 73.29 percent of real GDP set by the toxic combination set in the second quarter of 2005. So it’s difficult to argue that one of the biggest lessons of the financial crisis and ensuing recession has been learned.

The picture looks somewhat better lately when the economy’s main growth engines are examined – that is, when we analyze the economy on a dynamic, not a stand-still basis. During the second quarter of 2017, the toxic combination of personal and housing spending generated 64.03 percent of after-inflation growth. That’s less than half their share during the first quarter (140.65 percent – these numbers can be more than 100 percent because of the GDP components that subtract from growth).

It’s also a considerably smaller growth role than such spending has generally played since very early in the economic recovery. In fact, here’s how much constant dollar growth the toxic combination spurred, by year, from 2011 (when the economy was returning to normal following a deep slump and strong but largely incomplete initial snapback) to 2016: 97.50 percent, 60.36 percent, 79.17 percent, 80.16 percent, 98.25 percent, and 138.26 percent.

Even better, the growth role played by business spending – which creates productive assets like factories and labs, and also includes spending on research and development – could be on the upswing. The figures for the first two quarters of this year have been volatile, and in the wrong direction: 69.62 percent and 27.06 percent respectively.

But these numbers together so far have reversed the trend from 2011 to 2016 – when the share of growth accounted for by business spending plummeted from 53.75 percent to turning into a small growth drag.

The stand-still numbers, however, show that the U.S. economy remains so heavily skewed toward personal and real estate spending that only a major – and doubtless unprecedented – surge of business spending can start turning matters around. And the economy will remain far too fragile and crisis-prone till it does.

(What’s Left of) Our Economy: America’s Now Struggling to Sustain Even Unhealthy Growth

Tags

consumption, economic growth, Financial Crisis, personal savings, recession, recovery, savings rate, {What's Left of) Our Economy

Don’t blink! As revealed by government data released yesterday, the U.S. personal savings rate has been vanishing so quickly lately that, before too long, you might miss it entirely. And here’s the kicker to this latest evidence: Although, as I reported on Monday, the American economy is just about as consumption-heavy as during the run-up to the financial crisis, all the resulting spending is now generating growth that’s not only subpar by historical standards, but shockingly weak.

According to the Commerce Department, the savings rate for the last three quarters of national economic activity (through the second quarter of this year) has sunk below four percent of disposable personal income for the first time since the first quarter of 2008. The latest nadir of 3.6 percent was hit in the fourth quarter of last year, and represents the lowest such level since the fourth quarter of 2007 (2.8 percent). If those dates sound familiar, they should. That’s when the last recession officially broke out. As of the second quarter of this year, the rate bounced back a bit to 3.8 percent.

These are a pretty far cry from the worst savings rates in U.S. history. During the previous (bubble) decade, this figure bottomed out at 2.2 percent (in the third quarter of 2005). But the latest numbers are a much further cry from the double-digit levels that were common from the early 1950s through the early 1980s.

After the last recession began, there was some evidence that Americans were learning the lessons of over-spending and socking away more of their incomes. By the second quarter of 2008, the savings rate jumped from 3.7 percent in the first quarter of that year to 5.7 percent. It rose steadily even after the recovery began in the middle of 2009, and actually hit 9.2 percent in the fourth quarter of 2012. Savings didn’t stay nearly that high, but still generally remained well above five percent through the early part of last year. Since then, however, they’ve slid pretty rapidly downhill.

Throughout the recovery, shortsighted economists and other observers actually have bemoaned these signs of consumer caution as unnecessary restraints on economic growth that were preventing the expansion from achieving a satisfactory pace. I disagree, because as I wrote on Monday, the nation needs a sustainable basis for growth, to improve its long-term economic health, even more urgently than it needs faster growth. But what’s especially troubling about the recent drop in the savings rate is that it’s shown no ability to generate what’s seen as respectable growth at all.

In fact, over these last three quarters of weak personal savings rates, the economy grew in real terms by just 1.8 percent, 1.2 percent, and 2.6 percent (the preliminary figure for the second quarter of this year). Those results aren’t even impressive by the low bar set by the current expansion. And they’re positively abysmal when compared with the performance registered between the early 1950s and 1980s, when double-digit savings rates were no obstacle at all to real growth rates of between five and ten percent!

Of course, America’s growth rises and falls for many reasons part from savings and consumption rates. Moreover, the economy of that 1950s-1980s period was very different structurally from today. One example: Military spending played a much bigger economic role during those Cold War decades, and generated abundant production, as well as employment. At the same time, for most of that era, women had not entered the labor market in great numbers, meaning that households generally speaking were living off a single paycheck and benefits package. And still both growth and family incomes were by and large stellar.

The current situation, though, is unmistakably sobering. In recent decades, America has substituted borrowing and spending for saving and producing as its main engines of growth. Now even the unhealthy growth recipe has not only helped trigger a terrifying financial crisis and deep recession. But seven or eight year after those crises were overcome, the spendthrift approach seems close to exhaustion. In sports, those playing a losing game are usually encouraged to change it. How much longer before Americans and their leaders take the hint?