Making News: New National Interest China Trade War Op-Ed Posted…& More!

Tags

aluminum, Brietbart.com, China, consumers, imports, inflation, John Carney, Making News, steel, tariffs, The National Interest, Trade, trade war, Trump, Yahoo News

I’m pleased to announce the publication of my latest op-ed article.  Posted by The National Interest today, it presents a trove of data – including from the latest U.S. monthly trade report – showing that even though the outcome of the current U.S.-China trade talks is anyone’s guess, economic disengagement between the two countries is already underway.  Moreover, the process has sped up lately under President Trump.  Here’s the link.

The article was also re-posted on Yahoo.com.

Also, it was great to see Breitbart.com‘s John Carney quote my views in his latest post debunking widespread claims that the Trump tariffs on steel and aluminum, and on products from China, have already stoked raging consumer price inflation.  Click here to read.

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

 

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(What’s Left of) Our Economy: The Latest Sign of Trump Success on Trade

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

It’s still not possible to say confidently that the impact of tariff-related distortions are over (at least for the foreseeable future), and that President Trump’s trade policies are once again enabling the U.S. economy to grow strongly faster than its debt-producing trade deficits (i.e., more healthily and sustainably). That moment won’t arrive until May 9, when the last of the monthly trade figures for the first quarter of this year will be reported (at least in a preliminary form).

But Friday’s initial first quarter results for the gross domestic product (GDP – the main measure of the economy’s size and its growth), bring the moment a good deal closer.

Just to recap the main issue: I’ve explained on RealityChek (e.g., here) and elsewhere (e.g., here) that the real measure of Mr. Trump’s trade policy success or failure isn’t the level of U.S. trade deficits presented in isolation. It’s whether the economy can grow at adequate rates without pulling in ever more imports – which are both bought by consumers and used by producers as parts, components, and materials for their final products. Either way, though, their increases on net plunge America deeper and deeper into debt.

With anything as big as the American economy, trends don’t reverse themselves quickly. So the best evidence of change would indicate that the relevant arc is starting to bend in the right direction. In this case, that means signs that growth becomes or remains adequate as the growth of the trade deficit slows. That’s exactly the story that could be told convincingly with some of the latest releases of trade-related numbers (see, e.g., here and here), and that the new first quarter GDP results strengthened further.

First, it’s important to note that the new advance data show that, after adjusting for inflation, as of the first quarter, the U.S. economy grew at its fastest pace over a four-quarter period (3.21 percent) since the second quarter, 2014-second quarter, 2015 period (3.37 percent).

But the first sign that the new growth has been healthier growth emerges when the change in the real trade deficit is examined. During that previous, somewhat faster, growth period, the price-adjusted trade gap widened by 21.55 percent. During the last growth period, which was only slightly slower, the trade deficit actually shrank slightly – by 0.34 percent.

As known by RealityChek regulars, though, changes in the overall real trade deficit have only limited utility for judging the usefulness of American trade policy because the total flows include oil and services trade. The first is rarely the subject of trade diplomacy or policy-making, and liberalization of the latter has made only embryonic progress so far.

The portion of the trade shortfall most heavily influenced by trade policy decisions is that in non-oil goods – what I’ve called the Made in Washington trade deficit. Unfortunately, exact comparisons between the 2014-15 and 2018-19 growth periods can’t yet be made because even the preliminary results for the first quarter of this year won’t be published until the March trade data are released on May 9.

But between the second quarter of 2014 and the second quarter of 2015, the Made in Washington trade deficit jumped by 18.83 percent. Between the first two months of 2018 and the first two months of 2019, it increased by only 3.17 percent. And because of the fading of the tariff front-running effect (described in this post), it’s highly unlikely that the March and full first quarter numbers will change this arc significantly.

The improving trade deficit and its contribution to healthier economic performance also can be seen by examining the contribution made by that better balance to quarterly growth. In the first quarter of 2019, the 5.90 percent sequential shrinkage of the trade gap was responsible for 1.03 percentage points of the 3.13 percent annualized sequential growth. That’s 32.91 percent of the total – and the highest such figure since the fourth quarter of 2013, when the trade deficit’s decrease fueled 1.23 percent points of the 3.19 percent annualized sequential growth (38.56 percent).

Some other trade-related highlights of the new GDP report:

>Combined goods and services exports in the first quarter hit a new record of $2.5765 trillion at an annual rate.

>Real goods exports were up, too, quarter-to-quarter. But their $1.7598 trillion annualized first quarter total was only the second all-time highest (after the $1.8092 trillion in the second quarter of 2018).

>After-inflation services exports represented a fifth straight quarterly record ($783.2 billion annualized).

>Constant dollar total imports in the first quarter fell on-quarter but they still represented the third highest total on record – $3.4758 trillion at an annual rate.

>After-inflation goods imports also fell sequentially to their third highest all-time level – $2.9131 trillion.

>Real services imports dropped quarter-to-quarter to their second highest all-time level – $563.3 billion.

(What’s Left of) Our Economy: New Trade Figures Indicate Trump Progress Back on Track

Tags

Census Bureau, China, exports, imports, manufacturing, real trade deficit, tariffs, Trade, trade deficit, trade war, Trump, {What's Left of) Our Economy

Of course it’s a coincidence – but what a coincidence! The same week that the Special Counsel and the Attorney General have issued highly favorable reports about President Trump’s alleged campaign collusion with Russia and related obstruction of justice charges, the Census Bureau has issued a monthly U.S. trade figures report full of evidence that the President’s tariff-centric policies have resumed making progress toward one of his major promises to voters: bringing America’s chronic, gargantuan, and growth- and jobs-killing trade deficits under control.

Even better, this trade deficit progress has come as the economy continues to grow – once again contradicting the economic conventional wisdom that trade deficits only shrink when the economy weakens and even falls into recession.

Today’s trade figures (for January) revealed monthly improvements in the combined goods and services and China trade flows big enough to establish numerous multi-year bests and even a new all-time record. Moreover, they cleaned up some (but not all) of the short-term statistical noise created by Mr. Trump’s recent levies on imports from China. This conclusion is clear from the large number of trade flows in which much better results in trade balances, and in exports and imports, followed comparably dismal results in December.

Let’s start with the overall figures. In January, the nation’s total trade gap narrowed month-to-month by the greatest extent (14.61 percent) since last March (14.84 percent). This drop-off came right after the biggest such increase in the trade shortfall (18.55 percent) since March, 2015’s 35.63 percent nosedive.

The deficit in goods – which represent the vast majority of U.S. two-way trade, and which has attracted special attention from President Trump – experienced its biggest sequential decrease in January (10.10 percent) since March, 2016’s 11.82 percent decline. And this plunge again followed an unusually big monthly increase in December – 12.30 percent, the largest since March, 2015’s 21.35 percent.

At least as interesting, given the seasonality of much U.S. trade: The combined goods and services trade gap narrowed on a January-January basis for the first time (3.66 percent) since 2014 (5.27 percent). As for the goods deficit, its drop between the last two Januarys was only the first since 2016. But the magnitude was much bigger (2.77 percent versus 0.83 percent).

Also important: The January trade deficit progress came partly from stronger exports, not simply falling imports.

The January on-month export rise (0.95 percent) was the strongest since September’s 1.52 percent. The increase in merchandise exports (1.31 percent) was also the biggest since September (when they advanced by 2.02 percent sequentially).

Yet the same kind of possible mean reversion was visible in these accounts as well. For the new export gains came right after the biggest goods and services export decline (1.88 percent) since January, 2016’s 1.98 percent. And the merchandise exports increase also followed their biggest decrease (2.87 percent) since January, 2016 (4.11 percent).

As for imports, in January, the overall total sank sequentially by its greatest extent (2.56 percent) since November’s 2.76 percent. And the goods imports monthly fall-off (2.97 percent) was the biggest since February’s 2.38 percent.

Here, too, however, the January results amounted to sharp reversals of the December figures. For overall trade, December saw the biggest monthly import rise (2.36 percent) since February’s 2.49 percent. For goods trade alone, the comparable drop was bigger (2.97 percent), but that result in turn directly followed a 3.45 percent sequential decline November.

The impact of Mr. Trump’s trade policies is even more apparent from examining trade flows minus oil and services. Since the former is rarely the subject of trade diplomacy or policymaking, and liberalization in the latter is still in early stages, the remaining trade in non-oil goods represents the U.S. foreign commerce most directly influenced by trade policy decisions.

In January, the non-oil goods deficit (which RealityChek regulars know can be called the Made in Washington trade deficit) recorded its biggest month-to-month decrease (10.01 percent) since March, 2016’s 10.93 percent. And revealingly, the improvement followed the biggest sequential widening of the non-oil goods trade gap (12.03 percent) since March, 2015 (27.52 percent).

Adjusting non-oil goods trade flows for inflation matters greatly, because these so-called real results are used to calculate the most widely followed statistics tracking the growth (or shrinkage) of the entire economy – the after-inflation gross domestic product (GDP). But the adjustment doesn’t change the story significantly.

As with the non-price-adjusted data, the January drop in the real non-oil goods deficit (also 10.01 percent) was the biggest sequential decrease since March, 2016 (10.85 percent). But December’s 12.40 percent monthly increase was the biggest since March, 2015’s 29.55 percent.

America’s bilateral goods trade deficit with China – its largest bilateral merchandise shortfall by far – in January hit its lowest monthly level ($34.47 billion) since June ($33.48 billion). In addition, on a January-January basis, this trade gap recorded its first decline (4.13 percent) since 2016’s 0.64 percent. In addition, the January-January decrease in strongly seasonal U.S.-China goods trade was only the second since 2010.

This China deficit improvement came despite the lowest monthly level of American goods exports to China ($7.13 billion) since September, 2010’s $7.11 billion. In addition, the scale of the January sequential export decrease (22.31 percent) was the biggest since last January’s 27.92 percent.

Nonetheless, blaming the trade war and China’s retaliatory tariffs on U.S. goods probably doesn’t tell the entire story. After all, between the previous two Januarys – well before Mr. Trump’s initial tariffs – U.S. goods sales to the PRC plummeted by 32.70 percent on month.

The China goods import figures do seem strongly trade war-related. American merchandise purchases from China in January ($41.60 billion) were the lowest since April ($38.23 billion). Much more revealing: The January-January shrinkage in goods imports from China (9.14 percent) was the biggest reported since 1985, when this data series began. Moreover, it was only the second such decrease since recessionary 2009 – when the fall-off was only 5.53 percent. (Between January, 2015 and January, 2016, such imports also fell – but by a much smaller 3.74 percent.)

Oddly, since manufacturing dominates U.S.-China trade, the huge global American manufacturing trade deficit actually rose on month in January – from $87.35 billion to $89.13 billion, or 2.04 percent. U.S. manufactures exports were down 5.10 percent sequentially in January, while imports were off by only 1.59 percent.

(What’s Left of) Our Economy: Evidence that Tariffs Front-Running has Stalled Trump Trade Progress

Tags

aluminum, China, Commerce Department, imports, manufacturing, manufacturing output, manufacturing trade deficit, steel, tariffs, Trade, trade war, Trump, value added, {What's Left of) Our Economy

Yesterday’s post on the morning’s slew of manufacturing data released by the federal government could have included one more report: the Commerce Department’s latest sounding on gross domestic product by industry. And although this read on how different major sectors of the economy have been growing (or not) isn’t a market mover, it’s useful for analyzing the trade policy debate – for it enables calculations on how changes in the U.S. manufacturing trade deficit (a major concern of President Trump’s) compare with changes in manufacturing output.

Because this perspective provides the kind of context lacking when trade deficit increases or decreases are examined in isolation, it represents a much better way to judge whether the president’s trade policies are succeeding or failing according to one of his own main yardsticks.

And the verdict stemming from this new Commerce report? Progress that had been taking place during Mr. Trump’s tenure in boosting domestic manufacturers’ trade-related fortunes has come to a halt – probably because of what’s been called tariff front-running. That is, the President’s actual trade curbs and, doubtless much more important, his threats of additional curbs, have led overseas producers and their U.S. customers to boost greatly shipments to the American market in order to avoid paying as many of the levies as possible.

Consequently, as of the third quarter of last year (the latest data made available by Commerce), the U.S. manufacturing trade deficit resumed its long-term pattern of growing faster than domestic manufacturing production.

Specifically, between the third quarter of 2017 and the third quarter of 2018, U.S.-based industry increased its output by 7.23 percent according to a measure of growth called value-added (before inflation). During the same period, however, the manufacturing trade deficit jumped by 12.45 percent.

As made clear by my previous post on the subject, these results both contrast with the second quarter findings – when manufacturing production grew by 8.02 percent while the trade deficit widened by just 7.23 percent – and reversed a trend that began pretty much when the Trump administration did.

Just as clear – the first major Trump tariffs (on steel and aluminum imports) were slapped on in late March. So their arrival, along with China levies that began in early July and the much more sweeping duties imposed in late September and strongly hinted at in June, surely super-charged America’s import system.

Even with this step backward, it’s still evident that, so far during the the Trump years, domestic manufacturing is much less dependent on imports than before.  During the last year of former President Obama’s administration, for example, American manufacturing imports rose by 7.31 percent, while output expanded by only 4.53 percent – a pattern in place for most of the last twenty years.

But the real test of the Trump tariffs – at least concerning the manufacturing trade deficit – will come if and when U.S. trade flows settle into a new, post-tariff, normal, or one that follows the conclusion of the new, improved trade deals the President has promised. In that vein, the next chance to check these data will be April 19, when Commerce is scheduled to publish its fourth quarter and full-year, 2018 figures. Stay tuned!

(What’s Left of) Our Economy: The New Manufacturing Output Data Belie Tariff Fear-Mongering Yet Again

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

Tariff fear-mongers must have felt a shiver of excitement when today’s new industrial production report came out from the Federal Reserve. For the results showed the inflation-adjusted manufacturing output shrank in January by 0.90 percent – the third sequential decline since the first Trump administration metals tariffs went into effect, and the second since the first round of its China tariffs went into effect. Surely these figures made clear that their claims of the levies hurting American manufacturing were finally coming true! Even better, from their standpoint, revisions were slightly negative.

What a shame to report then that an examination of those always crucial internals demonstrates beyond a reasonable doubt that the trade curbs have had nothing to do with any trouble industry may (or may not) be running into. The evidence? The continuing excellent results registered by metals-using industries, and mixed figures for the much smaller number of sectors where the impact of the first China tariffs (whose first full month was only last August) can reliably be measured.

Here are the changes in real production for the major metals-using industries starting with April – the first full month during which these sectors had to deal with the levies. The table shows the previously reported data for December, the new December data, and the January figures. (All these statistics, it should be noted, are still preliminary.) And they would challenge even the cleverest D.C.-based spin-meister to construct a narrative supporting the popular Twitter hashtag #TariffsHurt:

                                                         old thru Dec.      new thru Dec.       thru Jan.

overall manufacturing:                   +2.02 percent      +2.11 percent   +1.20 percent

durables manufacturing:                +3.31 percent      +3.45 percent   +1.65 percent

fabricated metals products:            +2.05 percent      +2.82 percent   +3.19 percent

machinery:                                     +4.93 percent      +4.38 percent   +3.87 percent

automotive:                                    +3.36 percent      +3.93 percent    -5.18 percent

major appliances:                           +0.08 percent      +3.13 percent    -2.87 percent

aircraft and parts:                           +6.80 percent      +6.14 percent   +6.35 percent

As has been the case almost consistently since the trade curbs on steel and aluminum went into effect, most of the industries relying especially heavily on these metals have actually out-performed the rest of manufacturing. And the struggles indicated here of sectors like automotive and major appliances sure spring from developments distinctive to those sectors – in automotive, major recent volatility (which has also led to major recent revisions) and in appliances, a separate set of levies on large household laundry machines that went into effect in February. The above figures, moreover, even point to volatility in appliance production.

It’s more difficult to gauge the impact of the China tariffs because the first (relatively minor) tranche has been in effect for a much shorter period, and because the levies were based on a system for classifying manufacturing that’s different from the system used in the Fed’s industrial production reports (as well as most major federal government data). So matching up industries is a daunting task, and the more I think about it, the more I’m convinced that even the short list of sectors I presented last month for the December industrial production report contained too many industries where the match-up simply wasn’t close enough to be useful.

Below, therefore, are the only the sectors for which I think it’s possible to draw any firm conclusions, along with the total manufacturing results as a control figure. This highly limited sample shows the latest after-inflation growth rates from August (again, the first full months the first China tariffs were in effect) through December, and through January. And the only consistent trend visible here is volatility.

                                                                       Aug.-Dec.                    Aug.-Jan.

overall manufacturing:                              +1.26 percent              +0.36 percent

ball bearings:                                             +0.02 percent               -0.09 percent

industrial heating equipment:                    +5.19 percent              -3.86 percent

farm machinery and equipment:                +2.50 percent              +9.12 percent

As the next few months pass, it will be possible to examine usefully the China tariffs’ impact on more and more manufacturing sectors. To date, however, the grade is “incomplete” (at best). As for the effects of the steel tariffs, though, isn’t it time to consider putting that #TariffsHurt hashtag way out to pasture?

(What’s Left of) Our Economy: New U.S. Trade Figures Start Creating a Trump China Scorecard

Tags

China, exports, goods trade, imports, manufacturing, merchandise trade, tariffs, Trade, Trade Deficits, {What's Left of) Our Economy

After a roughly month-long shutdown-related delay, the latest U.S. monthly trade figures were finally released this morning – bringing the story up only through November. But although they’re clearly somewhat dated (especially considering how fast China trade-related events are moving), they reveal some noteworthy China-related developments and point to some equally noteworthy potential China-related trends.

The new trade report makes clear that, at least through November, President Trump’s tariffs, and possibly the threat of more, are influencing trade flows. And there’s even some evidence that, although the U.S. bilateral goods deficit that so bothers Mr. Trump is moving in the wrong direction, the underlying trends are much more favorable. Here’s what I mean.

It’s true that, on a year-to-date basis, the American goods deficit with China is up considerably. In fact, the 10.90 percent widening of this gap during this period is the biggest since the same period between 2010 and 2011 – when the U.S. economy was conclusively moving out of recession, and the deficit jumped by 22.38 percent.

But the November monthly figures point to a more complicated picture, especially keeping in mind that two big sets of U.S. tariffs have been imposed on goods imports from China since last July.

For example, despite widespread reports of tariff “front-running” late last year aiming at avoiding future levies, the U.S. merchandise trade deficit fell on a monthly basis by 12.16 percent – from $43.01 billion in October to $37.86 billion. Yes, the October trade gap represented the fourth straight monthly record high. But the November drop was the biggest overall since last February’s 18.61 percent. And the November total was the lowest since August’s $38.57 billion.

Moreover, because U.S.-China trade is so seasonal (think, in large measure, “Christmas”), it’s instructive to compare last November’s results with its most recent predecessors. And this exercise reveals that the sequential deficit decline was the biggest November monthly decrease since recessionary 2008’s 17.41 percent.

A similar pattern emerges for exports. America’s goods sales to China in November fell sequentially by 5.10 percent, from $9.13 billion to $8.66 billion. That’s the lowest such level since May, 2016 ($8.54 billion) and the lowest November level since recessionary, 2009 ($7.37 billion). And the monthly November merchandise deficit decrease was the biggest since recessionary 2008’s 14.83 percent. Interestingly, though, last November’s monthly export drop was smaller than October’s (6.73 percent).

Goods imports from China were off markedly as well – by 10.93 percent sequentially in November, from October’s all-time high of $52.23 billion. The $46.53 billion November total was the lowest since last July’s $47.10 billion.

In addition, the monthly decrease was the biggest since last February’s 14.68 percent, and the biggest November fall-off since 2008 (16.95 percent).

But U.S. policy’s effectiveness can’t accurately be evaluated unless the China trade flows are examined in the context of broader American economic trends and in particular manufacturing trends – since bilateral trade flows are so manufacturing-heavy. And what the key numbers suggest is that, even though the merchandise deficit with China has grown rapidly and indeed is heading for an all-time annual record, American industry is starting to reduce its dependence on Chinese parts, components, and other inputs.

The main evidence is the relationship between the growth of U.S. manufacturing production on the one hand, and the growth of U.S. goods imports from China on the other. If the resulting ratio is rising, then so is that U.S. dependence. If it’s falling, the reverse would seem to be true. So here are those figures for the first eleven months of each year going back to 2010-11, when the current U.S. economic recovery finally showed some real legs. (Incidentally, RealityChek regular may recall a similar exercise last November regarding American manufacturing’s growth and the global manufacturing trade deficit.)

2017-18: 4.64:1

2016-17: 3.41:1

2015-16: the deficit fell by 5.94 percent while manufacturing grew an inflation-adjusted 0.03 percent.

2014-15: the deficit fell by 7.21 percent while manufacturing shrank an inflation-adjusted 2.02 percent

2013-14: 4.18:1

2012-13: 4.66:1

2011-12: 3.18:1

2010-11: 7.80:1

According to the above table, U.S. manufacturing’s dependence on Chinese inputs has grown faster between the first eleven months of 2016-17 and the first eleven months of 2017-18. But the latest year-to-date results are much lower than those for 2010-11. And this year’s numbers are probably also inflated by that tariff front-running. We’ll know more as the figures for the next few months come in, but with the possibilities live both of tariffs going up and coming off, definitive conclusions still look pretty far off.

(What’s Left of) Our Economy: The Wrong Kinds of Records Revealed in October’s U.S. Trade Figures

Tags

China, exports, goods, imports, manufacturing, services, Trade, Trade Deficits, trade war, {What's Left of) Our Economy

October was a month of records, this morning’s U.S. trade figures revealed – and the most noteworthy weren’t the good kind.

All-time highs in two intertwined trade gaps in the news lately stand out: in U.S. goods trade with China, and in manufacturing trade.

October’s U.S. merchandise trade deficit with China hit its fourth straight monthly high – $43.10 billion. And the 7.11 percent sequential increase seemed largely to reflect continued evidence of importers striving to keep ahead of looming tariff increases promised by President Trump (and only partly and temporarily headed off by this past weekend’s announcement of a bilateral trade truce). American purchases of goods hit their second straight monthly record – $52.23 billion.

The story on the goods exports side reflected trade war-related developments as well, as U.S. merchandise sales to China slumped 6.73 percent sequentially, to $9.13 billion – their lowest level since August, 2016 ($9.37 billion).

On a year-to-date basis, American goods imports to China are up 8.26 percent, while exports have dipped by 0.96 percent. As a result, the merchandise trade deficit is running 11.38 percent of last year’s record pace, and with two data months left in this year, a new all-time high seems certain.

U.S. manufacturing trade, which is strongly influenced by U.S.-China trade, in October recorded its first monthly trade deficit topping $100 billion. The $102.11 billion gap represented a strong 18.95 percent increase from September’s $85.84 billion total, and exceeded the previous record of $92.51 billion (set in August) by 10.38 percent.

On a monthly basis, manufactures exports rose by 3.37 percent, from $97.18 billion to $100.44 billion. But imports surged by 10.67 percent, from $183.02 billion to $202.54 billion.

Year-to-date, the manufacturing trade shortfall is up 11.93 percent, from $761.44 billion to $852.31, and as a result, seems sure to hit the $1 trillion mark this year for the first time.

Manufacturing exports so far have increased by 6.65 percent between the first ten months of last year and the first ten months of this year. But the much greater amount of manufacturing imports has swelled by 9.06 percent.

The combined U.S. goods and services October trade deficit of $55.49 billion represented only a 1.71 percent increase from September’s upwardly revised figure of $54.56 billion. But the October total was the highest yet during the current economic recovery – eclipsing the $54.96 billion level of this past February.

The goods deficit, meanwhile, hit its all-time high in October ($78.11 billion), topping the previous record of $77.63 billion set in July, 2008 – shortly after the start of the last recession.

Overall October U.S. imports of $266.53 billion were a new record, too. Oddly, they came in below September’s previously reported $266.58 billion, but that number was revised down this morning.

Also at all-time records in October were U.S. goods imports ($219.59 billion) and services imports ($46.95 billion).

Year-to-date, the combined goods and services trade deficit is up 11.36 percent over last year’s January-October total. Total exports are up 7.68 percent but total imports have climbed by 8.38 percent.

(What’s Left of) Our Economy: Tariff-Spurred Front-Running Still Clear from New U.S. GDP Figures

Tags

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

This morning came the government’s second read on U.S. economic growth in the third quarter of this year, and the trade results were virtually identical with those of the first report – including on the short-term noise created by President Trump’s tariff-centric policies and foreign retaliation. (The final set of three – for now – third quarter figures will come out toward the end of next month.)

In other words, the new statistics confirmed that, earlier this year, both American exporters and importers had been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. The biggest new wrinkle is that the resulting boost to the inflation-adjusted U.S. trade deficit, and the resulting trade bite from real growth taken by the trade shortfall’s quarterly increase, was a bit larger than previously estimated.

According to the new release, the price-adjusted U.S. trade deficit hit $945.8 billion on an annual basis the third quarter – 0.72 percent greater than the $939.0 billion reported in the first read on the quarter’s real gross domestic product (GDP). That means that record level reached by the deficit in the third quarter has climbed higher. The previous all-time annualized high for a quarterly constant dollar trade deficit was $932.5 billion, attained in the third quarter of 2006 – shortly before the financial crisis broke out.

Consequently, a conspicuous sign of trade-related front-running – the increase in the real trade deficit between the second and third quarters – grew as well. Pegged last month at 11.65 percent, this sequential rise now stands at 12.46 percent. Nonetheless, it remains only the second biggest such increase on record (behind the 13.18 percent trade deficit widening during the second quarter of 2010, during the current economic recovery’s early stages).

Another sign of front-running (re)appeared in the goods exports numbers. During the second quarter, these exports jumped sequentially by 3.21 percent sequentially on an annual basis – the biggest such increase since the fourth quarter of 2013’s 3.93 percent annualized surge.

In the initial read on third quarter GDP, after-inflation goods exports were judged to have dropped by 1.79 percent – the worst such performance since the 2.44 percent decrease in the first quarter of 2015. Largely as a result, the real third quarter trade deficit ballooned. This morning, this decrease was upgraded – to 2.09 percent. Hence the even larger constant dollar trade deficit number.

The pattern for merchandise imports was similar, though not identical. During the second quarter, they were essentially unchanged sequentially, but as of the third quarter’s initial read, they increased by 2.48 percent – the biggest such increase since the 3.37 percent of the fourth quarter, 2017.

This morning, that increase was revised up slightly, to 2.49 percent.

Because the third quarter price-adjusted trade deficit was revised slightly higher in this latest third quarter GDP report while the growth rate remained at 3.46 percent annualized, the trade bite from growth was revised higher, too. Estimated last month as a 1.78 percentage point subtraction from the overall real economic growth rate, it’s now judged to be 1.91 percentage points. The last time the trade bite was that size in absolute terms was the third quarter of 1985.

In relative terms, the trade bite from growth increased as well – from 51.44 percent of such growth to 55.20 percent. But that remained only its highest level since the fourth quarter of 2016. Then, a growing real trade deficit subtracted 1.32 percentage points from that period’s much slower 1.75 percent annualized inflation-adjusted growth rate (or 75.43 percent of such growth).

With a higher third quarter constant dollar trade deficit came a bigger trade drag on America’s real growth during the current, still far-from-robust economic recovery. As of the initial third quarter GDP report, the real trade deficit’s increase since the recovery began in mid-2009 subtracted $461.7 billion from cumulative economic growth. That was a 13.05 percent hit. This morning’s results, however, pushed up those figures to $468.5 billion – translating into a 13.24 percent hit. As of the final second quarter data, trade had sliced $363.7 billion from cumulative recovery growth, 10.77 percent of the total at that time.

Importantly, though, the growth lost due to the expansion of the price-adjusted Made in Washington trade deficit continues to be much greater. That’s the trade gap calculable from trade flows minus sectors not greatly affected by American trade policy or related decisions – that is, energy and services – and adjusted for inflation.

As of the second quarter, the widening of the Made in Washington deficit resulted in cumulative recovery-era growth being $502.92 percent less than it otherwise would have been had it not grown at all. That’s 14.89 percent less growth.

The latest third quarter figures? Foregone after-inflation growth worth $587.2 billion, or 16.60 percent less growth. Sobering numbers for an economy that’s pulled out most of the available conventional growth-promoting stops (years of super-easy monetary policy being followed by super-easy fiscal policy) with so-far mediocre and likely bubbly results

(What’s Left of) Our Economy: The New U.S. Trade Figures are (Nearly) All About China

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China, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, manufacturing, merchandise trade, recovery, Trade, trade deficit, {What's Left of) Our Economy

Today was one of those days when the U.S. government treated us with both the jobs numbers (for October) and the trade numbers (for September). But just because I posted on the former first doesn’t mean that the latter were humdrum – far from it. And the big story in so many ways was China – along with an important black mark revealed when trade flows are adjusted for inflation.

Specifically, the combined American goods and services trade deficit hit $54.02 billion – just 1.33 percent higher than August’s upwardly revised $53.31 billion, but the second highest monthly total during the current economic recovery. (The highest was February’s $54.96 billion.)

And the prime culprit was the 4.34 percent sequential increase in the immense, chronic U.S. merchandise trade gap with China – to a record $40.24 billion level that represented the third straight monthly all-time high.

This growth means that as of September, this trade shortfall is running 9.91 percent ahead of last year’s annual total – $375.58 billion, which so far has been the record. Also at all-time highs as of September: American goods imports from the People’s Republic. They topped the $50 billion monthly mark for the first time, and were up by 4.32 percent sequentially – possibly because many American companies were rushing their purchases from China ahead of tariffs.

U.S. merchandise exports to China were of course much lower – $9.79 billion in September. The figure was the year’s second lowest (after August’s $9.29 billion) and might have reflected some Chinese front-running of their own government’s retaliatory levies against the United States – although September’s 5.32 percent monthly increase followed a 9.43 percent sequential drop in August.

Contrasting with these China numbers were the September goods trade results with other U.S. trade partners. Specifically, the shortfalls with the European Union, the Eurozone, Germany, Japan, South Korea, Mexico, and Canada all narrowed, and by substantial percentages. Moreover, the China-heavy American manufacturing trade deficit declined as well – by 6.13 percent (albeit from a $92.51 billion August total that was a monthly record).

Moving up to the 30,000-foot level, combined U.S. goods and services exports rose by 1.49 percent, to $212.57 billion, from an August figure of $209.46 billion that was revised upward fractionally. That September total was the third highest ever – after the May and June levels of $214.67 billion and $213.20 billion, respectively.

The much greater amount of overall imports was up 1.46 percent on month in September, with the $266.58 billion figure marking a second straight all-time high. (The previous month’s record of $262.75 billion was revised fractionally higher as well.) So some pre-tariff front-running of purchases from abroad looks like it was at work here, too.  

Some other all-time monthly highs achieved in September: services exports ($70.71 billion – a second straight record as well) and services imports ($47.50 billion).

That black mark? The Made in Washington trade deficit. This is the trade shortfall comprised of flow heavily influenced by U.S. Trade agreements and related policy decisions. As such, it leaves out oil and services – since trade in those sectors is in only a very early stage of liberalization. And adjusting it for inflation enables calculating how much trade has been either contributing to or subtracting from after-inflation growth – the measure of the gross domestic product (GDP) that’s most widely followed.

From the start of the current economic recovery, in mid-2009, through the second quarter of this year, the increase in the price-adjusted Made in Washington trade deficit subtracted 14.89 percent from the period’s cumulative real economic growth of $3.3775 trillion. That’s a trade drag of $502.92 billion.

As of the third quarter, the drag increased to 16.60 percent of cumulative recovery inflation-adjusted growth of $3.5374 trillion. That amounts to $587.23 billion worth of lost growth.

(What’s Left of) Our Economy: So How Loud was That Trade Noise in the U.S. Growth Figures?

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

With all the other news of the last few days, it’s been easy to overlook the release last Friday of the first read (of three soundings that will be released in the near term) the nation got on U.S. economic growth in the third quarter. That’s unfortunate because these data on the gross domestic product (GDP) continued to be distorted by sizable fluctuations generated by President Trump’s recent trade policy moves. As a result, the outlook for future growth looks especially cloudy, and that goes double for the odds that its recent acceleration from the crummy rates so far during the current economic recovery can continue. 

The impact of trade-generated short-term noise is clear from the change seen in the U.S. trade deficit between the second and third quarters. In inflation-adjusted terms (the GDP measure that’s most widely followed) during that period, the shortfall dropped by 6.80 percent, from $902.4 billion on an annualized basis to $841.0 billion. That was the biggest sequential decrease since the fourth quarter of 2013 (9.24 percent).

But in the third quarter, the real trade gap rebounded to $939.0 billion – its all-time highest (besting the previous record of $932.5 billion in the third quarter of 2006, during pre-financial crisis days). In addition, the quarterly increase of 11.65 percent was the biggest since the 13.18 percent during the second quarter of 2010 – during the early stages of the current economic recovery.

What’s been going on? As widely reported, both American exporters and importers have been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. During the second quarter, the biggest rush was made by U.S. exporters – their shipments overseas jumped by 3.21 percent quarter-to-quarter on an annualized basis. That was the biggest surge since the 3.93 percent annualized rise in the fourth quarter of 2013. That’s largely why the trade deficit narrowed.

During the third quarter, at least according to these preliminary figures, goods exports fell back by 1.79 percent – their worst performance since the 2.44 percent decline registered in the first quarter of 2015. Hence, in part, the rebound in the trade deficit. (Again, all these numbers and those in the next paragraph are annualized.)

On the merchandise import front, U.S. purchases of foreign goods in the second quarter stayed pretty flat sequentially – which also contributed to the trade shortfall’s improvement. But in the third quarter, goods imports advanced by 2.48 percent – the biggest such rise since the fourth quarter of 2017 (3.37 percent).

At the same time, as just indicated, these fluctuations have been multi-year highs, not multi-decade highs. So even though the data were noisy, they weren’t epic-ally noisy, or even close.

More epic was the bite from after-inflation growth taken by the higher trade deficit in the third quarter. It chopped fully 1.78 percent points off the 3.46 percent annualized increase. That’s the highest such toll in absolute terms since the 1.91 percentage points taken from growth in the third quarter of 1985! But the picture looks much less dramatic if you measure this growth loss as a share of the actual growth.

During the third quarter, the trade bite amounted to 51.44 percent of that growth. But that’s only the biggest such figure since the fourth quarter of 2016, when the sequential increase in the trade deficit subtracted 75.43 percent (1.32 percentage points) of that period’s 1.75 percent annualized constant dollar growth.

All the same, for the time being, the trade drag on cumulative after-inflation growth over the course of the entire economic recovery is up again. As of the second quarter, it had cost the economy 10.77 percent of its cumulative growth – or $363.7 billion. The third quarter numbers reveal the trade hit at 13.05 percent of cumulative growth – or $461.7 billion.

Moreover, the growth lost during the recovery because of the increase of the Made in Washington trade deficit remains much greater. This gauge measures inflation-adjusted trade flows minus sectors (services and oil) still generally unaffected by trade agreements and related policy decisions.

The latest data are from the second quarter, but they show a Made in Washington trade drag of 18.01 percent on cumulative real recovery growth – which translates into $608.12 billion worth of foregone expansion The next set of monthly U.S. trade data, slated to come out on Friday, will provide the first look on the third quarter statistics.

Some more perspective can be gleaned from the price-adjusted trade deficit’s share of the price-adjusted gross domestic product on a stand-still basis. It’s definitely on the upswing – reaching 5.03 percent as of the third quarter. That’s the highest level since just before the financial crisis-induced ensuing Great Recession struck – during the third quarter of 2007, when the share hit 5.23 percent.

The only consolations identifiable are that overall economic growth today is faster than it was eleven years ago, and that it’s still possible that the real trade deficit’s share of GDP, and the size of the trade drag, will settle down once the trade noise goes away. Not that hope will be the test of Mr. Trump’s trade policy success.