(What’s Left of) Our Economy: The China Trade Cheerleaders Make their Failures Painfully Clear

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Bill Clinton, Bob Davis, Charlene Barshefsky, China, Financial Crisis, Global Imbalances, Great Recession, The Wall Street Journal, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

This is how abysmal America’s pre-Trump China policies were: Wall Street Journal reporter Bob Davis recently gave supporters of China’s 2001 accession to the World Trade Organization (WTO) ample opportunity to defend their positions on this landmark decision. And what were the most convincing rejoinders they could muster to claims that the benefits of WTO membership (chiefly, legally sheltering China from unilateral U.S. responses to its wide array of predatory trade practices) enabled China’s rise as a dangerous economic and military power – and that American trade policy needs to respond vigorously? Observations that the biggest gains have indeed flowed to China.

According to Davis, WTO admission advocates “can point to real gains from integrating China into the global economy. According to the World Bank, some 400 million Chinese have been lifted from extreme poverty—that is, from living on less than $1.90 a day—since 1999.”

In addition, “After the deal, foreign investment in Beijing mushroomed from $47 billion in 2001 to $124 billion a decade later. The lower investment and import restrictions required of China as part of its WTO entry also encouraged multinationals to rush in, as did the prospect of serving the vast Chinese market. China became the world’s manufacturing floor, and Chinese imports [sic] to the U.S. soared.”

Evidently, the WTO admission supporters tried to identify benefits for the United States, too. For example, “Today, technology companies tap the Chinese market to boost profits and defray research costs.” And “The low inflation associated with cheap imports, together with Chinese purchases of U.S. government bonds, has also helped to hold down interest rates, making it cheaper for Americans to buy not only clothes and electronics but also homes and cars.”

But apparently none could point to evidence of U.S. companies’ China earnings trickling down to the American domestic economy and its workers. Indeed, the reference to “defraying research costs” looks like a euphemistic way of describing how these businesses often moved white collar and professional as well as blue-collar manufacturing jobs to China.

Similarly, the low inflation and interest rate points amount to gushing that China’s WTO membership helped enable Americans to live way beyond their means. On that score, the only sane U.S. response should be “thanks but no thanks” – since the result was a decade of bubbles whose inevitable bursting triggered the terrifying global financial crisis and ensuing Great Recession.

The unprecedented bubble decade global trade imbalances fostered by the WTO’s enabling of China’s mercantilism, and their nearly cataclysmic results, also provide vital context to claims (chiefly by former U.S. Trade Representative Charlene Barshefsky) that China “became the world’s second-largest importer, giving a boost to rich and poor nations alike.” For these imports and their growth were clearly dwarfed by China’s export surge. And although China’s post-2009 spending spree did help “the global economy from tumbling even more deeply into recession,” it’s unquestionable that the “kitchen sink” stimulus from the Federal Reserve and other major central banks played a far more important role.

But perhaps the most compelling evidence offered in Davis’ article for the abject failure of the China WTO decision came from former President Bill Clinton – who led the campaign to support Chinese membership by promising both an economic boom for U.S. exporters and irresistible pressure for a democratization of China that would bring more global peace and freedom. As Davis reports, the normally loquacious Clinton “declined to comment for this article.”

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(What’s Left of) Our Economy: The Real Trade Messages of the New GDP Report

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exports, GDP, Great Recession, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real imports, real trade deficit, recovery, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

Friday’s government report on U.S. economic growth in the second quarter of this year was a treasure trove of newsworthy information. It not only provided the first peak at how President Trump’s imposed and threatened tariffs have affected the nation’s economic performance. It also incorporated literally decades’ worth of revisions that contained some important surprises about the economy’s strengths and weaknesses – in particular over the last five years. These new findings entail considerably more than trade, but let’s focus on that subject for today, since it’s been making so many headlines.

As widely expected, these new figures on the gross domestic product (GDP) and how it changed in inflation-adjusted terms showed that the threatened tariffs and retaliatory levies boosted American exports significantly. The reason? Many foreign customers for U.S. goods decided to “front-load” their purchases to avoid the paying the new charges for as long as possible.

On a sequential basis, this first of this year’s three estimates for the second quarter judged that U.S. merchandise exports jumped by 8.96 percent on an annualized basis. That’s the biggest such increase since the 11.72 percent surge in the fourth quarter of 2013. At the same time, the contribution to total quarterly growth made by goods exports was nothing special. In fact, at 1.12 percentage points out of the quarter’s 4.10 percent annualized rate of inflation-adjusted expansion, they fueled less real growth relatively speaking than they did in the fourth quarter of last year, when they were responsible for 0.79 percentage points of that period’s 2.30 percent annualized constant dollar growth.

Interestingly, the tariffs didn’t result in U.S. customers of overseas producers displaying the same interest in maximizing their imports to the greatest possible extent. Indeed, these purchases inched up sequentially by only 0.12 percent at an annual rate after inflation. Yet at $3.4241 trillion after inflation and annualized, they set a new record, nosing out the previous quarter’s $3.4201 trillion.

Thanks to exports’ performance, which brought their quarterly total to a new record ($2.5742 trillion annualized in real terms) as well, the inflation-adjusted trade deficit plummeted by 23.27 percent annualized to $849.9 billion. (The absolute numbers are different from those reported in previous RealityChek posts because the new GDP report is presenting the inflation-adjusted figures using 2012 dollars, not 2009 dollars.) That quarterly trade shortfall was the nation’s smallest since the $845.9 billion annualized recorded in the third quarter of last year. And the sequential decrease was the biggest since the 36.96 percent nosedive in the fourth quarter of 2013.

In addition, according to the revisions, America’s trade performance between the fourth quarter of 2012 and the second quarter of this year was considerably worse than previously estimated. Combined goods and services exports rose a bit faster (at a 2.6 percent rather than a 2.5 percent average annual pace in real terms). But total import growth was much stronger during this period – a 4.2 percent average annual increase in constant dollars rather than 3.7 percent growth.

Trade deficits have therefore been higher than previously judged. Again, the changeover from reporting the figures in 2009 dollars to using 2012 dollars makes comparing the old and new levels pointless. But the difference can become clear by examining these deficits as a share of the total economy. Here are the previously reported percentages:

2013: 2.59 percent

2014: 2.67 percent

2015: 3.31 percent

2016: 3.51 percent

2017: 3.64 percent

And here are the revised data:

2013: 3.23 percent

2014: 3.42 percent

2015: 4.17 percent

2016: 4.45 percent

2017: 4.76 percent

Last year’s level was the highest for any year since 2007’s 5.27 percent – just before the Great Recession struck. It’s still a far cry from the historic quarterly high of 6.10 percent, set in the fourth quarter of 2005. But the trend shows that the real trade deficit has been climbing steadily toward these heights.

In fact, during the first quarter of this year, the overall real trade deficit hit 4.92 percent of GDP, before falling back to 4.59 percent in the second.

The revised GDP figures also shed new light on trade’s drag on economic growth during this sluggish recovery. Before this revision, the increase in the constant dollar trade deficit since the expansion began, in the middle of 2009, had sliced $302.1 billion off of the economy’s cumulative inflation-adjusted growth through the second read on first quarter GDP. That amounted to a trade drag of 9.99 percent.

With the revision in place, the trade drag as of the first quarter’s final read was $457.2 billion – or 14.33 percent. The decline in the price-adjusted trade gap as of Friday’s first read on second quarter GDP pushed the drag down to twelve percent. But that figure still represented $404.7 billion in lost real growth.

The growth drag created by the increase in the Made in Washington trade deficit has been much bigger. Before the new GDP revision, the growth of this trade shortfall (which is comprised of constant-dollar trade flows heavily affected by trade policy and trade agreement, and therefore leaves out trade in oil and services) had cut cumulative recovery era growth by 17.37 percent in real terms, or $523.88 billion, as of the final first quarter figures.

It won’t be possible to calculate revised figures for the first quarter and new figures for the second quarter until this Friday, when we’ll get the next monthly trade report (for June).

(What’s Left of) Our Economy: The First Quarter Trade Deficit Kept Rising, & its Growth Rate Kept Falling

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exports, GDP, Great Recession, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real GDP, real growth, real imports, real trade deficit, recovery, trade deficit, {What's Left of) Our Economy

For the second straight time, a higher estimate of the inflation-adjusted trade deficit weakened the real U.S. growth figure for the first quarter. According to the final (for now) read for the first quarter, the constant dollar trade shortfall was $656.8 billion – higher than the $650.9 billion reported in the previous growth figure for the first quarter. And partly because this increase turned net trade into a minor (0.04 percentage point) drag on growth, the quarter’s real GDP increase was marked down from a 2.16 percent annualized improvement to 1.98 percent.

Moreover, the new after-inflation trade deficit remained the second highest such quarterly figure since the $703.2 billion recorded for the third quarter of 2007 – just before the Great Recession began. It was also slightly higher the final (for now) fourth quarter level of $653.9 billion.

As with the second GDP report for the first quarter, the quarterly records for total exports and goods exports remained intact, but declined from the levels previously reported. The after-inflation services export figure, however, came in higher (at $690.8 billion on an annual basis) – and represented a new record as well. All of the latest import figures were upgraded from their previously reported record levels – the same pattern as with the first quarter’s second GDP report. Similarly, the sequential slowdowns in the growth of total imports and goods imports were not quite as great as previously reported (76.49 percent as opposed to 79.17 percent, and 83.99 percent versus 86.21 percent, respectively). But they were still the greatest such slowdowns since the fourth quarter of 2010 and the first quarter of 2009, respectively. The latter date came at the depths of the Great Recession.

Trade’s substantial drag on cumulative growth during the current U.S. recovery became heavier, according to the new GDP figures – reducing real growth by 9.99 percent ($301.2 billion), not the 9.41 percent reported in the second read. This trade drag was also up from the fourth quarter’s 9.82 percent ($287.6 billion). But the much larger hit to growth from the recovery-era increase in the Made in Washington deficit (which consists of trade flows impacted greatly by U.S. trade policy) actually decreased sequentially – from 18.38 percent of that cumulative growth ($538.81 billion) to 17.37 percent ($523.88 billion).

Here are the trade highlights from Thursday morning’s final (for now) report on first quarter GDP growth from the Commerce Department:

>The Commerce Department’s final read on gross domestic product (GDP) in the first quarter of this year revealed that America’s trade performance depressed the initially reported inflation-growth figure for the period for the second straight time.

>Partly because this latest estimate judges that the quarter’s after-inflation annualized trade gap was actually $656.8 billion rather than $650.9 billion, the period’s annualized growth figure was reduced from 2.16 percent to 1.98 percent.

>The constant dollar trade shortfall estimate was also (0.44 percent) higher than the fourth quarter of 2017’s $653.9 billion – and replaced it as the second highest such figure since the $703.2 billion during the third quarter of 2007 – just before the Great Recession began.

>Moreover, whereas the previous estimates pegged net trade as a minor contributor to growth during the first quarter (according to the second read, fueling 0.08 percentage points of the 2.16 percent real annualized growth), this final read determined that trade subtracted 0.04 percentage points from the lower 1.98 percent real annualized growth.

>As with the previous report on first quarter growth, levels of inflation-adjusted total exports and goods exports remained at record levels in the latest GDP data, but came in slightly lower than initially reported. Yet real services trade broke this pattern, as a higher export estimate lifted their new quarterly record higher.

> Real total exports are now judged to have been $2.2496 billion annualized, not the $2.2529 trillion estimated in the second first quarter read. As a result, the sequential increase on an annualized basis was 0.89 percent, not 1.04 percent.

>The new real total export total nonetheless remained the category’s fifth straight quarterly record.

>Real goods exports are now judged to have been $1.5622 trillion on an annual basis, not the $1.5696 trillion previously reported. As a result, the annualized sequential increase was 0.85 percent, not the 1.32 percent previously reported.

>But this too was a fifth straight quarterly record.

>Real services exports – the exception to the pattern – are now judged to have been $690.8 billion annualized, not the$687.4 billion previously reported. As a result, the annualized sequential increase was 0.96 percent, not 0.60 percent, and this category’s record performance improved further.

>On the import side, the pattern displayed in the previous read – quarterly records remaining intact but at lower levels – was repeated for all major categories.

>The first quarter’s total real import figure has now been revised up from $2.9038 trillion on an annual basis to $2.9065 billion. As a result, the sequential increase is now 0.79 percent, not 0.70 percent. The new total is still a second straight quarterly record.

>The goods imports total is now estimated at $2.4015 trillion annualized, up from $2.3985 trillion figure previously reported. As a result, the sequential growth is 0.65 percent, not the 0.56 percent previously reported, but the level is still a second straight quarterly record, too.

>Real services imports for the first quarter are now estimated at $503.3 billion annualized, not the $502.9 billion previously reported. As a result, their sequential growth is now 1.43 percent, not the 1.35 percent previously reported. But this new total is a record, too.

>Also as with the previous GDP report, the new figures show that both the total imports and the goods imports constant dollar sequential growth rates have experienced their biggest sequential slowdowns in years – though these slowdowns are now judged to be slightly more modest.

>Total real imports grew at a 0.79 percent quarter-to-quarter rate in the first quarter – faster than the previously reported 0.70 percent. But compared with the fourth quarter’s 3.36 percent rate, its still 76.49 percent lower – and it’s still the biggest such change since the 81.87 percent reported for the fourth quarter of 2010.

>Inflation-adjusted goods imports grew sequentially in the first quarter by 0.65 percent, not the 0.56 percent rate previously reported. But that rate was still 83.99 percent lower than the fourth quarter’s 4.06 percent – and the biggest such change since the 87.63 percent drop in the first quarter of 2009 – near the low point of the Great Recession.

>The upwardly revised first quarter real trade deficit figure increased the growth drag created by the increase in this shortfall during the current economic recovery.

>As of the previous GDP read, the real trade deficit’s widening since mid-2009 – when the current recovery began – reduced cumulative growth by 9.41 percent, or $284.6 billion.

>As of the latest GDP report, these figures have risen to 9.99 percent, and $301.2 billion.

>The new first quarter figures are also higher than the fourth quarter figures: 9.82 percent and $287.6 billion, respectively.

>The growth drag of the increase in the Made in Washington trade deficit – which focuses on the non-oil goods trade flows most heavily influenced by trade agreements and other trade policies – has been much greater during the recovery.

>The previous first quarter read pegged this growth drag at $535.09 billion – which had cut the recovery’s cumulative constant dollar GDP increase by 18.26 percent.

>The new read actually reduced the growth drag to 17.37 percent – or $523.88 billion in lost growth.

>And the new figures are also smaller than those for the fourth quarter – 18.38 percent, and $538.81 billion.

(What’s Left of) Our Economy: May US Manufacturing Output Figures Could Feed Optimism or Pessimism

Tags

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

May’s Federal Reserve domestic U.S. manufacturing production figures presented a puzzling glass-half-empty-half-full picture. Overall sequential real output levels were down 0.63 percent – their worst such performance since July, 2013’s 1.06 percent decrease. Clearly playing a big role was a fire at a factory producing parts for especially popular pickup truck models, which helped depress after-inflation automotive production by 6.45 percent – its worst such performance since April, 2011’s 7.91 percent plummet.

Yet stripped of automotive’s woes, inflation-adjusted manufacturing output was still down 0.18 percent on month in May, and the month’s decline represented the third such fall-off in the last five months. Largely as a result, industry’s annual constant dollar production increase improved in May by just 1.85 percent – the slowest such rate since January’s 1.10 percent. The automotive decline helped drag down monthly production in the durable goods super-sector by 1.16 percent in price-adjusted terms – the biggest such decrease since July, 2013’s 1.42 percent. Real output in the smaller non-durable goods super-sector was off only 0.08 percent in May.

After-inflation manufacturing output is still down 3.85 percent since the start of the last recession – more than eleven years ago.

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

>May’s Federal Reserve industrial production figures contained evidence for both optimism and pessimism about the U.S. economy and its domestic manufacturing sector.

>Optimists could reasonably blame much of the 0.63 percent sequential drop in real manufacturing output – the worst monthly decrease since July, 2013’s 1.06 percent decline – on a fire at a factory providing parts for popular U.S. pickup truck models.

>And indeed, the May overall manufacturing production swoon was led by a 6.45 percent on-month plunge in motor vehicle and parts output – the worst such performance since April, 2011’s 7.91 percent.

>But pessimists could note that even counting the automotive effect, the rest of domestic manufacturing posted a 0.18 percent dip in monthly inflation-adjusted output – the third such shrinkage in five months.

>Largely as a result, manufacturing’s annual growth rate in May was down to 1.85 percent – its weakest since January’s 1.10 percent. Between the previous Mays, real manufacturing production expanded by 1.87 percent.

>Automotive’s troubles also showed up in the results for the durable goods super-sector in which it’s found. Durable goods’ after-inflation production sank by 1.16 percent sequentially in May – its worst such performance since July, 2013’s 1.42 percent plummet.

>In addition, its 1.97 percent constant dollar May annual growth rate was durable goods’ slowest since January’s 0.94 percent. Between the previous Mays, price-adjusted durable goods production advanced by 2.18 percent.

>Inflation-adjusted output held up better in the smaller non-durables super-sector in May. Its monthly production slipped by just 0.08 percent.

>On-year in May, non-durables’ real production rose by 1.73 percent. As with durable goods, this growth rate is the slowest since January (1.28 percent), but the deceleration has been smaller. Moreover, this year’s May annual production rate for non-durables was better than that for the previous Mays (1.57 percent).

>Revisions for overall real manufacturing production were slightly negative. April’s previously 0.47 percent monthly increase was upgraded to 0.57 percent. March’s already downgraded 0.02 percent rise was downgraded to a 0.11 percent decline. And February’s downwardly revised 1.40 percent increase was bumped down again to 1.39 percent.

>Largely as a result, in price-adjusted terms, domestic manufacturing’s production is now 3.85 percent lower than at the onset of the Great Recession – more than eleven years ago, at the end of 2007.

>After-inflation durable goods output is now 0.10 percent below the levels it hit in December, 2007, and 0.13 percent less than in January, 2008 (its last actual peak).

>Despite their recent out-performance, the non-durables sector has fared much worse since the last recession hit. Its constant dollar output is down fully 8.35 percent from its previous peak, which came in July, 2007.

(What’s Left of) Our Economy: The Rules-Based Global Order – & Other Fairy Tales

Tags

alliances, America First, burden sharing, China, currency, Federal Reserve, Financial Crisis, globalists, Great Recession, hegemony, NAFTA, North American Free Trade Agreement, offshoring, public goods, recovery, Robert Triffin, tariffs, Trade, Trade Deficits, Triffin dilemma, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Can the foreign and domestic critics of President Trump’s latest trade policy moves finally get real – and start talking and acting like adults? I’m not referring to politicians and analysts who have pointed out problems with individual aspects of the President’s recent announcements of tariffs on various trade competitors. I’ve been one of these myself.

Instead, I’m talking about those who keep whining that Mr. Trump’s tariffs and his overall – inconsistently to be sure – emerging “transactional” approach to alliances and other international arrangements are endangering a rules- and institutions-based global order that has served both America and the rest of the world unmistakably well. No description of the post-World War II world could be less accurate and indeed more childish – not to mention more self-serving for the supposed U.S. allies and multinational business interests (and their Washington, D.C. hired guns) that have pushed this canards so insistently.

For the institutions and rules so touted by President Trump’s globalist critics were simply window-dressing created to obscure a much less aesthetically pleasing reality: The postwar (non-communist) world’s success has been based fundamentally on America’s power and wealth, and the  consequent U.S. ability to provide what political scientists call “public goods” for those aligned with it. Specifically, it almost single-handedly created the conditions on which success decisively depended: the military protection that countries recovering from war-time devastation could not provide for themselves, and the credit and export markets that were similarly beyond the capacities of their crippled economies. Just as important, during the early post-war decades, the United States could play this role for the most part without excessive security risks and economic costs.

Unfortunately, even the biggest, best-run public goods-providing country will find these arrangements unsustainable, especially on the economic front, and especially if its government is substantially accountable to its people. The essential dilemma was first identified by the Yale University economist Robert Triffin back in 1960, when American power was at or near its zenith.

Triffin’s warning was narrowly economic. He argued that the very free lending and especially spending by which such a country (which political scientists call a “hegemon”) fueled growth around the world would eventually massive international deficits and a global glut of its currency – which was serving as the world’s money – and erode global confidence that currency’s value. Either the hegemon could tighten up – and likely throw the entire world economy into a major downturn. Or it could keep over-lending and especially spending. In this case, its currency would lose enough of its perceived value to end its world-money role, and the world economy would degenerate into chaos. Or the rest of the world could keep stockpiling these excess dollars – which as the French in particular noted would result in the inflation caused by the greenback’s declining value being exported around the world.

Yet in America’s case, the ultimate engines of the paradox – at least in post-World War II America’s case – were foreign policy and domestic politics-related. The over-spending, and consequent deficits stemmed from the United States’ determination simultaneously to incur the expenses of maintaining huge military forces at home and abroad (along with dispensing considerable foreign aid), and of satisfying the American public’s growing demand for social services, without increasing taxes enough to finance these programs responsibly. At the same time, the dilemma was greatly intensified by the refusal of the foreign beneficiaries of these U.S.-provided public goods to pay many more of the costs of their own defense, or to open their markets wider to American exports.

The breakdown of these arrangements in 1971 bore out Triffin’s warnings, but although major adjustments were made globally, the rest of the world continued relying heavily on American security guarantees and markets. And in fairness, a bipartisan American foreign policy establishment addicted to intangibles like “global leadership” and genuinely worried that its European and East Asian allies could not manage their own security affairs in particular responsibly, staunchly resisted any fundamental changes to the status quo.

Fast forward to the mid-2000s, and the exact same fundamental problem reemerged. Further, a Triffin-like situation was greatly worsened by two new developments. First, the Federal Reserve decided to enable reckless over-spending by American consumers by keeping interest rates at peacetime lows not seen for many decades.

Second, American trade policy swelled the international deficits by taking a new, offshoring-focused turn starting with the North American Free Trade Agreement (NAFTA) in the early 1990s, and culminating with multinational companies’ decisions to focus tightly on supplying more and more American business and consumer demand from China, not from the United States.

Not so coincidentally, this trade policy shift was accompanied by the creation of an international organization – the World Trade Organization (WTO) – that was the first such body ever authorized to create both binding rules for any international policy sphere, and to utilize enforcement mechanisms in which the United States enjoys no special standing (as opposed, for example, to the United Nations Security Council, where the United States and other permanent members possess an individual veto over decisions).

A better recipe could not be created for empowering China (and the rest of the world’s major export-dependent economies) to view the United States as an even more attractive dumping ground for surplus production; for undermining America’s internationally recognized right to respond unilaterally; and for consequently enabling footloose multinational companies to supercharge the trade deficits by sending an astonishing amount of the nation’s production capacity to China and other super-low cost countries that could not or would not import remotely as much as they could or would export.

The end result: Rather than the United States winding up exporting inflation and (along with free-riding allies and trade competitors) bringing down a global monetary order, America exported financial instability, triggering the worst worldwide financial crisis, the deepest international economic downturn since the Great Recession, and the weakest U.S. economic recovery on record. And revealingly, to the cheers of the bipartisan American foreign policy and economic policy establishments, the first post-financial crisis president, Barack Obama, kept America’s grand strategy firmly on course.

Although it’s still unclear whether Mr. Trump is choosing an effective combination of trade and alliance policy tactics, his initiatives so far raise even more important questions. Chiefly, is he simply trying to achieve greater security and economic burden-sharing? And even if his aims at present are restricted to securing better deals, is he prepared to scrap American participation in current alliances and other international institutions altogether if U.S. tariffs and other America First-type threats don’t seem to be working?

Nonetheless, the President has opened the door to elevating America’s thinking about its global environment toward the adult levels that ultimately will be needed to prevent today’s lopsided unsustainable international arrangements from disastrous crackups. If his critics want to increase the odds that the best choices will be made, they’ll need to grow up, too.

(What’s Left of) Our Economy: First Quarter U.S. Growth was Encouraging Quality-Wise, Too

Tags

business spending, GDP, Great Recession, gross domestic product, housing, non-residential fixed investment, personal consumption, real GDP, recovery, {What's Left of) Our Economy

Last Friday’s report from the government on America’s economic growth generally was hailed by the conventional wisdom both for beating most economists’ expectations, and for breaking a two-year string of absolutely dismal advances in the price-adjusted gross domestic product (GDP) during the first quarter of the year. (Actually, three of the previous four first quarters saw lousy GDP reads, including 2014’s dip in the country’s real production of goods and services).

I see an additional reason for liking the 2.30 percent annualized figure: This first estimate showed that first quarter growth was considerably healthier than the American pattern during the current economic recovery.

As known by RealityChek regulars, this expansion, which began in the middle of 2009, is one of the longest on record. But in addition to growth being notably weak, it’s been largely driven by the same dangerous engines that inflated the credit bubble of the previous decade – whose bursting of course led to a frightening global financial crisis and the worst U.S. economic slump since the Great Depression of the 1930s. More specifically, growth has relied heavily on personal consumption and housing, which I’ve called the “toxic combination.”

On a standstill basis, the new figures show that the economy’s make-up is only slightly less dominated by these two components of the GDP than it was at the height of the bubble decade. As of the first quarter, personal consumption and housing combined accounted for 72.89 percent of real GDP, not too far short of the record of 73.27 percent that was hit in the third quarter of 2005.

At the same time, this share was lower than the 73.12 percent of the fourth quarter of last year, and is the second lowest since the third quarter of 2016 (72.71 percent).

Especially encouraging in this regard were the personal consumption results. Quarter-to-quarter, it fell from 69.62 percent of the inflation-adjusted economy (an all-time high) to 69.41 percent – the very lowest since that third quarter of 2016 (69.25 percent).

As for personal consumption’s growth role, the new numbers reveal that it made its smallest relative contribution to real GDP expansion in the first quarter (0.73 percentage points – or 31.74 percent – of 2.30 percent annualized growth) since the second quarter of 2012 (0.45 percentage points – or 2406 percent – of 1.87 percent annualized growth).

And partly as a result, a much better guarantor of healthy growth – business spending – made its best contribution to the real GDP’s advance in the first quarter in more than a year. Non-residential fixed investment fueled 0.76 percentage points (33.04 percent) of that 2.30 percent annual first quarter growth. In the first quarter of 2017, such business spending’s contribution was much bigger (71.66 percent). But annualized growth was only 1.23 percent.

What about housing? Its share of real GDP has fluctuated in a pretty narrow range over the last year or so – between 3.42 percent and 3.58 percent. But this share is so much smaller than that of personal consumption, and has stayed so much lower than during the bubble decade (when it peaked at 6.17 percent in the second quarter of 2005), that it’s just not moving the growth quality needle much.

There’s no guarantee that this mildly encouraging trend will continue. In fact, many prominent observers argue that personal consumption in the first quarter was simply taking a breather after a torrid fourth quarter of 2017, and expect a rebound to show up in the second quarter figures. But more consumer spending wouldn’t necessarily be bad for the American economy – provided that the healthy growth engines, like business spending (and better trade performances) aren’t once again completely lost in the shuffle.

(What’s Left of) Our Economy: Record U.S. Exports and Imports Mark New U.S. Growth Report – Mainly as the Latter Stagnate

Tags

exports, GDP, Great Recession, gross domestic product, growth, imports, inflation-adjusted growth, Made in Washington trade deficit, real GDP, real trade deficit, recovery, Trade, trade deficit, {What's Left of) Our Economy

According to the advance gross domestic product figures for the first quarter of 2018, all categories of U.S. exports and imports hit new all-time quarterly highs in inflation-adjusted terms and the real quarterly trade shortfall declined sequentially.

The real trade gap, though, was still the second highest annualized quarterly total ($645.9 billion) since the third quarter of 2007 ($703.2 billion) – just before the Great Recession began. Moreover, the constant dollar trade deficit’s 1.22 percent sequential drop-off resulted almost entirely from the greatest sequential slowdowns in the growth of total imports (80.95 percent) and goods imports (87.19 percent) since the fourth quarter of 2010 and the first quarter of 2009, respectively.

Trade continued in the first quarter of 2018 to subtract from cumulative real growth during the current economic recovery, the the drag diminished from the 9.82 percent figure for the fourth quarter of 2017 to 9.23 percent.

Here are the trade highlights from the Commerce Department’s report today on first quarter GDP growth:

>All categories of America’s exports and imports hit all-time highs in the first quarter of 2018 after inflation, according to the Commerce Department’s initial report on the new gross domestic product’s (GDP) growth for that period.

> Real exports totaled $2.2563 trillion on an annualized basis – 1.19 percent higher than the final (for now) level for the fourth quarter of last year, and American overseas sales’ fifth straight quarterly record.

>Real goods exports of $1.5722 trillion annualized topped the fourth quarter total by 1.49 percent – their fifth straight quarterly record as well.

>The first quarter constant dollar services export total of $688.3 billion was a 0.60 percent sequential improvement and a new record itself, but represented a rebound from the fourth quarter’s 0.35 percent sequential dip.

>On the import side, the United States’ total purchases from abroad came to $2.9022 trillion on an annualized basis – up 0.64 percent sequentially and their second straight quarterly record.

>But that growth rate contrasted dramatically with the 3.36 percent sequential increase in last year’s fourth quarter, and indeed was 80.95 percent slower.

>The goods imports total of $2.3985 trillion annualized represented this category’s second straight all-time quarterly high. Yet the 0.52 percent quarterly increase was 87.19 percent slower than the 4.06 percent quarterly rise in last year’s fourth quarter.

>In fact, both these slowdowns were the greatest since the fourth quarter of 2010 and the first quarter of 2009 – the latter a time when the Great Recession was bottoming. In the fourth quarter of 2010, the growth rate of total imports sank by 81.87 percent; in the first quarter of 2009, goods imports plunged sequentially at nearly double (87.63 percent) the rate that they fell in the third quarter.

>Real services imports reached $688.3 billion annualized in real terms in the first quarter, a 0.60 percent advance from the fourth quarter amount and a new record as well.

>The new GDP report revealed that trade remained a considerable drag on the U.S. economy’s after inflation expansion since the current recovery began. But the drag fell from the 9.82 percent of real growth cut by the trade deficit’s increase since the recovery began (in mid-2009), to 9.23 percent.

>In real absolute terms, this means that the trade deficit’s rise sliced cumulative recovery-era inflation-adjusted growth by $287.6 billion as of the fourth quarter of 2017, and by $279.6 billion as of the first quarter of 2018.

>The growth drag of the increase in the Made in Washington trade deficit – which focuses on the non-oil goods trade flows most heavily influenced by trade agreements and other trade policies – has been much greater during the recovery. But the exact numbers for the first quarter won’t be known until the March monthly trade data come out early next month.

>As of the fourth quarter of 2017, though, the increase in this trade deficit in real terms had reduced recovery growth by a 18.38 percent, or $538.81 billion

(What’s Left of) Our Economy: New Fed Figures Show Manufacturing’s Solid Growth Continuing – but Revisions Depress the Baseline

Tags

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

Incorporating revisions going back to 2015, the Federal Reserve’s new March industrial production figures showed that inflation-adjusted U.S. manufacturing output growth has been even weaker recently than previously reported slowed substantially.

Annual constant dollar production for 2015, 2016, and 2017 were downgraded by 1.1 percentage points, 0.4 percentage points, and 0.3 percentage points, respectively. Leading industry down was the durable goods super-sector, where annual price-adjusted production was judged worse during these years by 1.3 percentage points, 1.2 percentage points, and 0.5 percentage points, respectively.

One silver lining: Manufacturing’s overall poor recent performance has helped produce strong year-on-year after-inflation growth figures for 2018, including a 3.25 percent March read that was the best annual gain since June, 2012’s 3.73 percent.

The new figures dragged inflation-adjusted manufacturing output down to 3.27 percent below its pre-recession peak – achieved more than eleven years ago, at the end of 2007. This March’s constant-dollar sequential production gain was a meager 0.07 percent. Recent monthly revisions were positive for February but negative for January.

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

>The big story in today’s new Federal Reserve industrial production figures were the annual revisions, which revealed that U.S. domestic manufacturing’s growth in recent years has been even slower than reported.

>According to the Fed, after-inflation manufacturing output for 2015, 2016, and 2017 was lower by 1.1 percent points, 0.4 percentage points, and 0.3 percentage points than previously reported.

>The revisions were even worse for the manufacturing’s durable goods super-sector – which accounts for more than half of industry’s production. It’s real annual output was judged to be 1.3 percentage points, 1.2 percentage points, and 0.5 percentage points lower than previously reported during this period.

>The reduced 2017 constant dollar output figures in particular, however, have helped produce strong yearly production growth in manufacturing so far this year, as March’s 3.25 percent annual inflation-adjusted output growth the sector’s best such performance since June, 2012’s 3.73 percent.

>Between the previous Marches, constant-dollar manufacturing output rose by just 0.64 percent.

>Nonetheless, the negative revisions mean that price-adjusted U.S. manufacturing production is now 3.27 percent below the level it hit just before the last recession hit – more than eleven years ago, at the end of 2007. As of the Fed’s last pre-annual revision monthly production report (for February), industry was only 1.49 percent smaller in price-adjusted terms than at the recession’s onset.

>Despite this annual performance, after-inflation manufacturing output edged up by only 0.07 percent sequentially in March.

>February’s robust monthly real growth was revised up from 1.27 percent to 1.51 percent – its best such performance since July, 2009’s 1.61 percent – at the very beginning of the current recovery.

>Although its 2015-2017 was unimpressive, the durable goods sector has fared well this year, too.

>Its March monthly growth was a solid 0.39 percent, and February’s blistering 1.78 percent figure was revised up to 1.84 percent – the biggest such increase since May, 2010’s two percent.

>One recent blot on the durable goods’ 2018: January’s monthly output change was revised down for a second time – from a 0.18 percent decline to a 0.25 percent drop-off.

>Durable goods production has shone this year on an annual basis, too. The March 3.82 percent upsurge in price-adjusted terms was the strongest such performance since July, 2014’s 5.79 percent.

>Between the previous Marches, real durable goods production improved by only 1.23 percent.

>After inflation, durable goods production is now 1.20 percent above its December, 2007 pre-recession peak.

>Real production in the non-durable goods sector for the 2015-17 period as a whole was revised down, too, but not as significantly as in durables or manufacturing as a whole. Annual production for 2015 and 2017 by 0.8 percentage points and 0.1 percentage points, respectively. But real output was revised up by 0.4 percentage points for 2016. 

>In non-durables, a relatively poor 2017 has helped produce much better 2018 annual growth. March’s year-on-year output increased by 2.67 percent in real terms – its best such performance since June, 2010’s 2.98 percent. Between the previous Marches, inflation-adjusted non-durable goods production rose only fractionally.

>On a monthly basis, however, non-durable goods’ real output slipped by 0.27 percent. Yet February’s previously recorded 0.71 percent sequential improvement was upgraded to 1.16 percent – the best such performance since October’s 2.37 percent, which reflected a rebound from hurricane-related setbacks suffered by many key sectors highly concentrated near the Gulf of Mexico.

>Still, the non-durables super-sector continues to struggle to recover from the Great Recession. Its real output remains 8.45 percent below its pre-downturn peak, hit in July, 2007.

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

Tags

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: Jobs Still Surging and Wages Still Sputtering in Manufacturing

Tags

Great Recession, inflation-adjusted wages, Jobs, manufacturing, non-farm payrolls, recovery, wages, {What's Left of) Our Economy

Manufacturing’s payrolls kept growing strongly in March and industry’s wages kept growing weakly. Despite lackluster (103,000) job growth figures last month for the economy as a whole, factory employment increased by a healthy 22,000 on month and by 232,000 year-on-year – the best annual improvement since May, 1998 (262,000).

Moreover, over the past year, manufacturing’s share of total American employment rose from 8.49 percent last March to 8.52 percent last month, showing that industry’s employment growth has been exceeding that of the economy as a whole.

In sharp contrast, pre-inflation manufacturing wages improved sequentially by just 0.19 percent versus 0.30 percent for the private sector in toto. Industry’s wage lag was even worse year-on-year – 1.67 percent versus 2.72 percent for the entire private sector. And in real terms, manufacturing is even further behind the private sector eight ball, with its constant dollar hourly pay down on net since January, 2016 – meaning that it’s been in technical recession for more than two years.

Here’s my analysis of the latest monthly (March) manufacturing figures contained in yesterday morning’s employment report from the Bureau of Labor Statistics:

>In March, domestic U.S. manufacturers continued strongly boosting payrolls while keeping wages in check.

>Industry gained 22,000 jobs on month in March, and revisions to comparably robust January and February numbers were only slightly negative.

>On an annual basis, manufacturing employment rose by 232,000 – the best such performance since May, 1998’s 262,000. Between the previous Marches, U.S. domestic manufacturers added only 52,000 jobs on net.

>Manufacturing job growth has been so robust that it’s now outpacing overall U.S. job growth. Last March, manufacturing jobs accounted for 8.49 percent of all American non-farm employment (the Bureau of Labor Statistics’ U.S. Employment universe). This March, their share stood at 8.52 percent.

>Manufacturing has now regained 51.41 percent (1.179 million) of the 2.293 million jobs it lost since the late-2007 onset of the Great Recession through the sector’s employment bottom in February and March, 2010.

>Yet despite apparently robust demand for manufacturing workers, manufacturing employers apparently feel little pressure to compete for them by offering better pay.

>In March, once again, in pre-inflation terms, manufacturing’s sequential wage growth trailed that of the overall private sector – by 0.19 percent to 0.30 percent. Revisions, moreover, were slightly negative.

>On an annual basis, manufacturing wages performed just as poorly. They were up in March by just 1.67 percent, versus 2.72 percent for the overall private sector. Between the previous Marches, manufacturing wages advanced by 2.52 percent.

>As a result, since the start of the current economic recovery, in mid-2009, pre-inflation private sector wages have grown by 26.74 percent faster than manufacturing wages. A year ago, the gap was only 21.39 percent.

>Adjusting wages for inflation, moreover, continues to make manufacturing’s recent wage record even bleaker.

>The latest data go through February, but that month, inflation-adjusted pay in industry fell sequentially by 0.19 percent – a downgrade from the -0.09 percent figure initially reported. Real private sector pay’s monthly February performance was revised down a flat line to a 0.09 percent dip.

>Year-on-year, real wages are up only 0.28 percent in the private sector in toto, but even that meager number is far better than manufacturing’s 0.65 percent drop.

>And worse still, although both the private sector and manufacturing are still suffering real wage recessions, the former’s began only last April – with after-inflation hourly pay down 0.09 percent since then. For manufacturing, such pay is down 0.28 percent since January, 2016.

>Further, since the current recovery’s mid-2009 onset, overall real private sector wages have risen more than twenty times faster (3.88 percent) than manufacturing wages (0.19 percent).

>Over the longer term, moreover, manufacturing remains a significant jobs laggard, too. Although nearly nine years into the current economic recovery, industry has finally regained more than half the jobs it lost during the recession and its aftermath, the overall private sector has more than doubled its recessionary job losses. Since shedding 8.780 million positions on net from December, 2007 through February, 2010, it has created 18.654 million.

>From another perspective, manufacturing payrolls remain 8.10 percent below their immediate pre-recession level of 13.746 million jobs. But overall private sector employment has risen 8.50 percent during that period.