(What’s Left of) Our Economy: Is Growth’s Quality Again Turning for the Worse?

Tags

bubbles, Financial Crisis, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, real growth, toxic combination, Trump, {What's Left of) Our Economy

“The consumer will save us,” or some variation thereof, has become a rallying cry for those believing that the U.S. economy will avoid recession, at least for the foreseeable future. For RealityChek regulars, however, it’s a red flag, possibly revealing that too many economy watchers have forgotten, or never learned, the most important lesson of the global financial crisis of the previous decade and the Great Recession it triggered: The quality of American growth matters at least as much as the quantity – and more specifically, economic expansion that’s too heavily reliant on consuming rather than producing is too likely to end in tears.

That’s why last week’s latest official report on America’s economic growth has me somewhat worried. It’s true, as I reported, that it contained some good news on the trade front, showing a continuing Trump administration trend of decent growth rates no longer tightly linked with huge, soaring trade deficits. But the figures (the second look of three looks at the second quarter’s performance – at least for the time being) also confirm major backsliding when it comes to the domestic determinants of healthy and unhealthy growth – a big surge in the role of consumption and housing combined as growth engines. That’s exactly the toxic combination that inflated the last decade’s historic bubble. And it could become a reversal of a positive Trump-period trend.

According to those official data, consumption and housing in the second quarter fueled 150 percent of that period’s 2.02 percent annualized inflation-adjusted growth – the most closely followed measure of change in gross domestic product (GDP – economists’ term for the economy as a whole). A figure greater than 100 percent, by the way, is possible because other components of GDP can subtract from growth – and in the second quarter, obviously did..

That 150 percent figure is the biggest by far since the third and fourth quarters of 2015. The only saving grace for that figure is that back in 2015, much stronger performance in personal consumption and housing was producing only roughly comparable overall growth.

The second quarter numbers are somewhat better on a standstill basis, but point in the wrong direction as well. From March through June this year, the toxic combination represented 72.67 percent of the economy in constant dollar terms. That’s the highest level since the fourth quarter of 2017 (72.87 percent). Moreover, back then, the economy was growing a good deal faster (at a 3.50 versus a 2.02 percent annual rate).

None of this means that the U.S. economy is now firmly on an unhealthy growth track. In fact, the worrisome second quarter “growth contribution” figures followed an especially good first quarter. From January through March, personal consumption and housing together produced only 23.87 percent of that stretch’s solid 3.01 percent annualized real growth – the lowest such figure since the fourth quarter of 2011 (16.38 percent of 4.64 percent annualized growth).

On a standstill basis, the last time that the toxic combination represented a lower share of the total economy in real terms was the fourth quarter of 2015 (72.15 percent). And during that period, there was almost (0.13 percent) real annualized economic growth.

Further, the Trump healthy growth record so far is better than the record during President Obama’s two terms in office. During the latter’s administrations, the toxic combination generated 80.74 percent of its $2.2537 trillion in after-inflation growth. Under President Trump, personal consumption plus housing has been responsible for 72.64 percent of $1.002 trillion of such growth. (Both calculations begin the these two administrations in the second quarter of their first year in office, since Inauguration Day doesn’t take place until January 20.)

Real growth, moreover, has been somewhat faster so far. Over 32 quarters, the U.S. economy grew by 18.44 percent after inflation under Obama. Over nine Trump quarters, the economy has become 5.56 percent larger – which translates into 19.80 percent growth over a 32-quarter stretch. All in all, that’s a pretty good reflection on this President’s performance.

Economically, though, the big question is whether it will continue. And politically, it’s whether it will suffice, in tandem with any other perceived strengths, to bring a second Trump term.

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(What’s Left of) Our Economy: Healthier U.S. Growth is Continuing, at Least Trade-Wise

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exports, GDP, gross domestic product, imports, inflation-adjusted growth, Obama, real GDP, real growth, real trade deficit, trade deficit, Trump, {What's Left of) Our Economy

Since we’re clearly well into the 2020 presidential campaign, comparisons understandably have begun to be made by political and even economic types between President Trump’s economic record and that of his White House predecessor, Barack Obama.

In that vein, today’s new official U.S. figures on economic growth contain some good news for Mr. Trump, his supporters – and in fact for Americans collectively:  Even though they confirm that the nation’s growth this year is indeed slowing, and the trade deficit targeted for reduction by the President is going up, the latest numbers on the gross domestic product (GDP) also show that inflation-adjusted growth (the growth figure most closely followed) during the Trump years is still less closely associated with trade deficit increases than under Obama. In other words, by one important measure, the economy’s expansion is healthier – more of it is being generated by producing goods and services at home, instead of consuming imported goods and services.

The new numbers – which are the first of two sets of revisions for the second quarter of the year that will be released this year – don’t indicate progress at first glance. The real trade deficit, originally reported at $978.7 billion on an annualized basis, is now judged to have been $982.5 billion. That’s just a bit less than the record $983 billion figure that was hit in the fourth quarter of last year.

Moreover, total exports were revised down ($2.5205 trillion annualized to $2.5165 trillion annualized). Total imports were less than first reported as well, but only by a hair – $3.4990 trillion rather than $3.4992 trillion. And worse, quarter-to-quarter after-inflation total exports are now off by 1.48 percent, and after-inflation total imports are up 0.02 percent. Indeed, that real export fall-off was the biggest quarterly decrease since the depths of the last recession – when they cratered by 8.08 percent in the first quarter of 2009.

But despite this seeming backsliding, the Trump record has been much more impressive when examined in the context of economic growth. This conclusion emerges by examining how fast the economy has increased in constant dollar terms versus how fast the trade deficit has widened under the two administrations. Here are the calendar year annual rates of change for each, followed by the ratio between the two:

Obama years

                        real GDP       real trade deficit      deficit growth to GDP growth

09-10:          2.56 percent       16.73 percent                        6.54:1

10-11:          1.55 percent         0.39 percent                        0.25:1

11-12:          2.25 percent        -0.09 percent                      -0.04:1

12-13:          1.84 percent        -6.30 percent                      -3.42:1

13-14:         2.53 percent          8.33 percent                        3.29:1

14-15:         2.91 percent        25.02 percent                        8.60:1

15-16:         1.69 percent          8.61 percent                        5:09:1

Trump years

16-17:        2.37 percent          8.43 percent                        3.56:1

17-18:        2.93 percent          8.37 percent                        2.86:1

These tables show that only once during the Obama years (2013-14) did the economy grow at Trump-like rates while keeping real trade deficit growth within modest Trump-like ranges.  And although the that real trade deficit did shrink in absolute terms in two of the Obama years (2011-12 and 2012-13), economic growth during those two years were subpar. 

Moreover, the 2017-18 Trump results were distorted by major tariff front-running – the rush by importers to get their goods into the United States before announced tariffs raised their prices.

In addition, although 2019 isn’t yet finished, the Trump ratios so far look relatively good as well – especially for the first quarter.

                           real GDP     real trade deficit      deficit growth to GDP growth

4Q18-1Q19:    3.06 percent    -3.97 percent                        -1.30:1

1Q19-2Q19:    2.02 percent     4.07 percent                          2.01:1

The Trump record looks better still when presented on a rolling four quarters basis. This time the frame of reference will be a little different. We’ll focus on the high growth Obama period through the end of that administration, and compare it with the high growth Trump period through the present.

Obama years

                          real GDP        real trade deficit      deficit growth to GDP growth

1Q14-1Q15:   3.98 percent       26.68 percent                       6.70:1

2Q14-2Q15:   3.35 percent       21.34 percent                       6.37:1

3Q14-3Q15    2.44 percent       30.60 percent                     12.54:1

4Q14-4Q15:   1.90 percent       21.83 percent                     11.49:1

1Q15-1Q16:   1.62 percent       11.72 percent                       7.23:1

2Q15-2Q16:   1.34 percent         9.59 percent                      7.16:1

3Q15-3Q16:   1.56 percent         2.42 percent                      1.55:1

4Q15-4Q16:   2.03 percent       10.87 percent                      5.35:1

1Q16-1Q17:   2.10 percent         6.92 percent                      3.30:1

Trump years

4Q16-4Q17:   2.80 percent         5.90 percent                      2.11:1

1Q17-1Q18:   2.86 percent         6.34 percent                      2.22:1

2Q17-2Q18:   3.20 percent         0.06 percent                      0.19:1

3Q17-3Q18:   3.13 percent       15.44 percent                      4.93:1

4Q17-4Q18    2.52 percent       11.22 percent                      4.45:1

1Q18-1Q19:   2.65 percent         6.76 percent                     2.55:1

2Q18-2Q19:   2.28 percent       15.52 percent                     6.81:1

Again, under the Trump administration, the economy has managed to expand healthily in real terms while keeping the trade deficit’s increase under control much more often than under the Obama administration. Although the third and fourth quarter figures look like they undermine this case, in fact, they clearly demonstrate the impact of tariff front-running.  The only genuine fly in the Trump ointment so far: that final set of figures, when the price-adjusted trade deficit rose 6.81 times faster than the economy grew in those terms, while the rate of overall growth declined. And unfortunately, when it comes to analyzing these trends going forward, because of Mr. Trump’s new tariff announcements, front-running is likely to continue for the time being.

Even with this tariff front-running – and especially if the front-running doesn’t throw off the figures excessively – an economy growing faster relative to its trade deficit isn’t the sexiest economic achievement to brag about. But is it completely unreasonable to think that a supposed master-brander and pitchman like President Trump can’t rise to the challenge?

(What’s Left of) Our Economy: Those New GDP Numbers Keep Showing Healthier Trade-Related Growth Progress Under Trump

Tags

debt, GDP, gross domestic product, inflation-adjusted growth, real GDP, real trade deficit, recession, recovery, Trade, trade deficit, {What's Left of) Our Economy

So much data were released yesterday morning on the U.S. economy’s growth rate – not only the initial read on the second quarter of this year, but revisions going back to 2014 – that it’s impossible to explore all the results and their implications in one post. As a result, I’ll focus today on the main messages being sent by how the tariff-centric Trump trade policies are affecting growth.

In a nutshell, the big takeaway for me was that, despite the sizable increase in the inflation-adjusted trade deficit in the second quarter of this year (to an annualized total of $978.70 billion – the second biggest ever, after the $983 billion mark hit in the fourth quarter of last year), the economy kept indicating that it can grow – and pretty strongly – without racking up big increases in trade gap. In other words, the United States is regaining the ability to expand at acceptable rates without getting deeper into hock. 

Still, there’s a major uncertainty hovering over these results: Signs continue that they’re being distorted by what’s called tariff front-running (accelerating purchases of imports in order to avoid announced or threatened duties), and the consequent effects on building and reducing business inventories. And since tariff threats hang over not only hundreds of billions of dollars of goods imports from China, but rhetorically anyway over automotive imports from all over the world, import and inventory levels could well remain volatile. Moreover, don’t forget the potential effect on exports: If President Trump carries through with tariff threats, foreign economies are likely to impose retaliatory levies on American goods, and curb these sales.

So far, though, so good.

As in recent reports on trade and the gross domestic product (or GDP – what economists define as “the economy”), this post will compare the economy’s growth rate with the growth rate of the trade deficit during two recent similar periods of time – the statistical year (e.g., four straight quarters) during which growth was fastest when former President Barack Obama was in office, and the statistical year during which growth has been fastest so far during President Trump’s administration.

Even with the latest revisions, the fastest statistical Obama growth year was between the second quarter of 2014 and the second quarter of 2015. Adjusted for inflation (the most closely followed GDP measure), the economy grew by 3.35 percent over those four quarters – just a little less than the 3.37 percent previously estimated. And during that period, the real trade deficit rose by 21.34 percent (a little more slowly than the 21.55 percent previously estimated).

Before today’s revisions, the fastest Trump era growth stretch took place between the first quarter of 2017 and the first quarter of 2018. But that 3.18 percent after inflation growth has now been downgraded all the way down to 2.65 percent. But growth between the second quarters of 2017 and 2018 has been revised up – to 3.20 percent. So there’s a new Trump growth champ.

But even though the Trump growth spurt has been only a little slower than its Obama counterpart, the story with the trade deficit was strikingly different. For during the Trump spurt, the gap widened by only 6.34 percent. That’s less than a third as fast as under Obama.

In other words, constant dollar growth under President Trump has taken place while piling up much less debt than similar growth during the Obama years. And growth that’s less reliant on debt is growth that’s a lot healthier and more sustainable.

Trump-era growth looks all the more sustainable upon realizing that during Mr. Trump’s administration so far, robust growth (at least by recent standards) has been much more self-reliant than during the Obama administration – at least until very recently. The table below shows the annual (calendar year, from fourth quarter to fourth quarter) real growth rates during the Obama and Trump presidencies starting in 2010 (the first full calendar yer of the current economic recovery); the growth rate of the after-inflation trade deficits, and the ratios between these two figures for each year:

Obama yrs          real GDP       real trade deficit      deficit growth to GDP growth

10-11:              1.61 percent       0.85 percent                         0.53:1

11-12:              1.47 percent      -0.92 percent                       -0.63:1

12-13:              2.61 percent     -8.89 percent                       -3.41:1

13-14:              2.88 percent    23.36 percent                        8.11:1

14-15:              1.90 percent    21.83 percent                      13.07:1

15-16:              2.03 percent    10.87 percent                       5:35:1

Trump years

16-17:             2.80 percent      5.90 percent                       2.11:1

17-18:             2.52 percent    11.22 percent                       4.45:1

The table shows that only once (between 2012 and 2013) did the Obama-era economy display any ability to grow faster than the humdrum rate of two percent with the trade deficit’s growth restrained. (In fact, it shrunk significantly.) Once growth accelerated (the following year), the trade shortfall exploded, and its rate of increase, along with those ratios, stayed high even as growth itself cooled notably.

Moreover, without pronounced tariff front-running, the 2017-18 Trump trade deficit figure and the resulting ratio both would likely have been much lower. And economic growth looks even more self-reliant, and therefore healthier, so far this year, as the follo  wing table shows:

                               real GDP      real trade deficit     deficit growth to GDP growth

4Q 18-1Q 19:       3.06 percent    -3.97 percent                       -1.30:1

1Q 19-2Q 19:       2.04 percent     3.68 percent                         1.80:1

The Trump record looks even better when presented on a rolling four quarters basis, starting with that peak Obama growth period between the second quarter of 2014 and the second quarter of 2015, and ending with the last such period – between the second quarter of 2018 and the second quarter of 2019:

                              real GDP      real trade deficit      deficit growth to GDP growth

2Q 14-2Q 15:    3.35 percent      21.34 percent                       6.37:1

3Q 14-3Q 15:    2.44 percent      30.60 percent                     12.54:1

4Q 14-4Q 15:    1.90 percent      21.83 percent                     11.49:1

1Q 15-1Q 16:    1.62 percent      11.72 percent                       7.23:1

2Q 15-2Q 16:    1.34 percent        9.59 percent                       7.16:1

3Q 15-3Q 16:    1.56 percent        2.42 percent                       1.55:1

4Q 15-4Q16:     2.03 percent     10.87 percent                        5.35:1

1Q 16-1Q 17:    2.10 percent       6.92 percent                        3.30:1

Trump

2Q 16-2Q 17:    2.16 percent    11.71 percent                        5.42:1

3Q 16-3Q 17:    2.42 percent      9.50 percent                       3.93:1

4Q 16-4Q 17:    2.80 percent     5.90 percent                        2.11:1

1Q 17-1Q 18:    2.86 percent     6.34 percent                       2.22:1

2Q 17-2Q 18:    3.20 percent     0.06 percent                       0.19:1

3Q 17-3Q 18:    3.13 percent   15.44 percent                      4.93:1

4Q 17-4Q 18:    2.52 percent   11.22 percent                      4.45:1

1Q 18-1Q 19:    2.65 percent     6.76 percent                      2.55:1

2Q 18-2Q 19:    2.29 percent   15.07 percent                      6.58:1

Though the figures fluctuate significantly, the difference under two different presidents at roughly the same phase of the same economic expansion is at least as significant. To start, the only time that annual real growth under Obama topped three percent during this stretch, the inflation-adjusted trade deficit soared 6.37 times faster. Under Trump, the economy has enjoyed two such periods. During the first, the real trade deficit barely budged. During the second, it rose 4.93 times faster than the economy.

During these Obama years, the after-inflation trade deficit’s annual growth rate slipped under ten percent three times. Real annual GDP growth never bested 2.10 percent during any of them. During the Trump years, sub-ten percent annual growth for the real trade deficit has occurred five times. Real annual GDP increased during those years at rates between 2.42 percent and 3.20 percent. The worst Obama ratio has been 12.54 percent. The worst Trump ratio has been 6.58 percent (coming during the most recent statistical year, and possibly indicating tariff front-running). 

Has President Trump managed to reduce the U.S. trade deficit as such, or made the U.S. economy, and especially strong growth, completely self-sufficient, and therefore free of debt dependence (in terms of parts of the economy where this is feasible, as opposed to, say, tropical fruit)? Of course not. The nearly $20 trillion American economy is obviously a supertanker that isn’t turned around easily or quickly. But it’s clear that whereas the United States was moving ever further from those goals before Mr. Trump was inaugurated, it’s now moving closer. Just as clear: If the President stays the course on tariffs (much less increase and/or broaden them), progress will likely continue.      

(What’s Left of) Our Economy: Just When Did U.S. Manufacturing’s Current Recession Begin?

Tags

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

U.S.-based manufacturing went into its latest recession in April, and I missed it. Or did I? Once I realized my apparent oversight, I went back to the figures and realized that, although the definition of a recession that I’ve long used (two consecutive quarters of cumulative output shrinkage) is clear enough, figuring out what start date to use has been anything but throughout the current economic recovery.

For example, between April, 2018 and April, 2019, inflation-adjusted manufacturing output (the measure I’m using here, and the measure used by the Federal Reserve when it puts out its industrial production statistics each month) dropped by 0.14 percent. So even though it wasn’t down much, it was down on net for a full year – or four straight quarters.

That recession came to an end in May of this year, when industry’s after-inflation production grew by 0.25 percent on-month. But manufacturing was still mired in another recession – one that began in July. How could that be? Because between May and July of last year, price-adjusted output climbed by 0.43 percent – enough to push it back to 0.39 percent higher than the May, 2019 level. Since that time period covers more than two consecutive quarters, it qualifies as a new technical recession.

Moreover, even though between May and June of this year, constant-dollar (i.e., inflation-adjusted) manufacturing production advanced by another 0.43 percent, that still wasn’t enough to push it out of technical recession territory. The reason? Between last June and July, such output improved – by 0.43 percent itself. So since last July, it’s still down by 0.36 percent on net.

And if real manufacturing production doesn’t pick up even faster over the next few months, its current recession could continue for several more months, because last year, it continued growing healthily through December.

Interestingly, even though the U.S. economy has been in recovery mode since June, 2009, this current technical manufacturing recession is far from the first. I’ve counted five alone between January, 2012 and November, 2016. Here they are:

Jan., 2012-Oct., 2012 (down 0.22 percent)

Dec., 2012-July, 2013 (down 0.75 percent)

Aug., 2013-Jan., 2014 (down 0.01 percent)

Feb., 2014-Sept., 2016 (down 0.11 percent)

Jan., 2016-Nov., 2016 (down 0.19 percent)

In addition, those last two entries show the type of rolling, overlapping character like that seen since April, 2018. And I’ve spotted at least one more such instance – the downturn that took place between February and August of 2013, when real manufacturing output dipped by 0.04 percent.

And one more – big! – complication: Although the U.S. economy began recovering from the recession that began at the end of 2007, American manufacturing still hasn’t. Sure, it’s grown since it hit bottom (also in June, 2009). But as I’ve been pointing out ever since, it’s never grown enough to better that December, 2007 peak and in fact at present remains 2.09 percent smaller in terms of after-inflation production that at the recession’s onset. That’s more than a decade. And at its current rate of growth, the slump could easily turn eleven at the end of this year.

So getting back to my original question, is it fair to say that I missed manufacturing’s most recent recession during the current economic expansion if its post-2007 downturn never ended? As always, let me know your answers.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Nudge Tariffmageddon a Bit Further Away

Tags

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

Today’s industrial production figures from the Federal Reserve showed not only that U.S. domestic manufacturing regained some strength in May following a string of poor monthly results. They also provided more evidence that President Trump’s tariffs have had little, if any, effect on the performance of either the metals-using industries impacted by levies on steel and aluminum imports, or of sectors supposedly affected by China-related duties.

Two more points come through pretty loud and clear from the new figures on domestic industry’s inflation-adjusted growth. First, the weakness displayed in April by manufacturing as a whole and by metals-using sectors could well have been confined to that month. Second, the safety problems revealed in the Boeing Company’s aircraft have begun to influence the picture and may distort the readings for several more months.

The overall readings for manufacturing were mildly encouraging, with the 0.22 percent sequential rise in real output representing domestic industry’s best reading since December’s 0.64 percent improvement. Revisions were ever so slightly positive.

Most of the leading metals-using industries – where the role played by tariffs is relatively easy to identify – fared better in May than in April, too, as the following table shows. The columns show the changes in after-inflation output for these sectors starting with April, 2018 (the first full month the metals levies went into effect) and each of the last three data months of this year. And as usual, the numbers for manufacturing overall are used as a control group.

                                             April thru March   April thru April   April thru May

overall manufacturing:          +0.45 percent        -0.07 percent      +0.89 percent

durables manufacturing:       +1.34 percent       +0.68 percent      +0.98 percent

fabricated metals products:   +2.76 percent      +1.88 percent       +1.73 percent

machinery:                            +2.31 percent       -0.12 percent       +0.11 percent

automotive:                            -3.10 percent       -3.86 percent        -1.55 percent

major appliances:                   -5.27 percent       -8.24 percent        -3.27 percent

aircraft and parts:                  +5.75 percent      +3.34 percent       +1.15 percent

durable mfg ex-automotive: +2.10 percent       +1.48 percent       +1.41 percent

In general, it’s clear that the metals-using industries are still losing growth momentum versus the rest of manufacturing. But do the duties deserve all or even much of the blame? If so, then why did so many of these sectors turn in better growth numbers in May than in April – especially automotive and major appliances? The latter’s relative comeback is especially striking, given that it’s been experiencing not only metals tariffs, but separate levies on large household laundry equipment and a weakness in U.S. housing. Ditto for automotive, where output has been highly volatile for many months.

The Boeing effect is apparent, too, from the falling output numbers since March, when safety problems started generating grounding decisions and airspace national airspace bans for its widely used 737 Max models. Further, both automotive and aerospace are major users of machinery and fabricated metals products.

The impact of the tariffs on products from China remains much more of a puzzle, and for the same reasons that have been apparent since their onset, in August, 2018. They have covered thousands of products, most of which so far have been intermediate goods, and their role as these kinds of inputs for manufacturing industries varies dramatically from final product to final product. In addition, Washington uses different manufacturing classification systems for designating the tariff-ed products and for measuring manufacturing production. The levies have been in place for a shorter period of time than the metals duties. And their scope has widened since the first batch went into effect in August, along with many rates having changed.

Nonetheless, here are some figures for the handful of industries for which I’m sure the numbers create a reasonably accurate picture, with each column measuring real output changes since last August.

                                        August thru March   August thru April   August thru May

overall manufacturing:       -0.45 percent           -0.96 percent         -0.75 percent

ball bearings:                     +0.22 percent          +0.11 percent        +0.01 percent

industrial heating equip:     -0.83 percent          -5.41 percent          -4.70 percent

farm machinery & equip: -11.65 percent         -10.27 percent         -7.51 percent

oil/gas drilling platform    +4.08 percent          +2.58 percent         +4.59 percent

   parts

Unfortunately, no consistent trend emerges. Two of the sectors’ improved between March and May (farm machinery and equipment, and oil and gas drilling platform parts), and two worsened (ball bearings and industrial heating equipment).

And although as long as the China tariffs continue , the future will provide results over a more statistically significant time frame, because the footprint of Chinese inputs in most of U.S. Manufacturing sectors will continue to be so broad and deep, their costs are likely to remain just as hard to discern.

(What’s Left of) Our Economy: The New GDP Report Confirmed the Good News Trump Trade Story

Tags

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

The U.S. government’s second look at the gross domestic product (GDP) for the first quarter of the year, which came out yesterday, didn’t significantly change the message sent by last month’s initial read on the economic impact of President Trump’s tariff-centric trade policies so far – and that’s good news for anyone who’s not afflicted with Trump Derangement Syndrome. (Actually, if extreme Never Trump-ers’ well-being is tied to the American economy’s, it’s good news for them, too, in real life.)

This newest look provides yet more evidence that Mr. Trump’s long overdue overhaul of the nation’s approach to trade – no doubt coupled with other measures like regulatory reform and possibly the tax cuts – is enabling the economy to grow in a healthy, sustainable way. Specifically, the economy’s overall inflation-adjusted growth (the measure that attracts the most attention) has not only been strong. It’s become stronger than the growth of America’s still oversized, debt-producing trade deficits.

The quarter-to-quarter results show this trend emphatically. According to the second GDP read, the economy grew at a price-adjusted annual rate of 3.03 percent in the first quarter of this year. That’s down only slightly from the 3.13 percent real growth previously reported, and considerably faster than the 2.15 percent results for the fourth quarter of last year.

But during that first quarter, the after-inflation overall trade deficit dropped by 5.45 percent. That’s a bit less than the 5.90 percent sequential drop found in the last month’s GDP report (because the trade shortfall was revised slightly higher), but still considerable given the rapid overall expansion. And it’s a major turnaround from the 0.63 constant dollar trade deficit increase between the third and fourth quarters of last year.

All the same, one quarter does not a trend make. That’s why it’s crucial to note that developments over longer time-frames also support optimism about the Trump trade policies’ results. And as previously shown, the most revealing comparison is between the last high growth period recorded by the economy during President Obama’s administration, and the current Trump surge.

Despite the marginal reduction in the first quarter’s real growth figure, it still leaves after-inflation expansion over the last four data quarters at 3.18 percent. That’s the fastest such growth since the 3.37 percent recorded between the second quarter of 2014 and the second quarter of 2015.

But during that Obama-era growth spurt, the real U.S. trade deficit increased by 21.55 percent. During the current Trump high growth period, this trade gap is up only 0.13 percent so far.

Some other trade-related highlights of the new read on first quarter GDP:

>In absolute terms, the inflation-adjusted overall trade deficit for the first quarter was revised up from $899.3 billion to $903.6 billion. That’s the lowest level since the second quarter, 2018’s $841.0 billion.

>Consequently, the real trade deficit as a share of price-adjusted GDP stood at 4.78 percent, not the 4.76 percent reported in the advance GDP release. That’s still the lowest such number since the second quarter of 2018’s 4.54 percent.

>Trade’s contribution to economic growth in the first quarter remained at its best level in years. In the advance read, the sequential shrinkage of the constant-dollar trade deficit fueled 1.03 percentage points of 3.13 percent annualized growth. As of the new GDP report, these figures stood at 0.96 percentage points of 2.03 percent growth.

In other words, the trade deficit’s improvement accounted for 31.64 percent of the first quarter’s real growth. That’s down from the 32.91 percent figure from the initial read on first quarter GDP, but still the highest such figure since 38.56 percent of the fourth quarter of 2013 (when a reduction in the inflation-adjusted trade deficit fueled 1.23 percentage points of its 3.19 percent annualized growth.

>Because total goods and services exports were revised slightly higher (from $2.5765 trillion annualized to $2.5836 trillion), they remained at record levels.

>Real goods exports exports were estimated to be slightly higher, too – $1.8028 trillion annualized instead of $1.7598 trillion. But that’s still only the second best total on record (after the $1.8092 trillion in the second quarter of 2018).

>After-inflation services exports were also upgraded slightly – from $783.2 billion annualized to $783.6 billion. That still represents their fifth straight quarterly record.

>First quarter constant dollar total imports are still estimated to have fallen sequentially in the first quarter, but only to $3.4871 trillion annualized, not to $3.4758 trillion. That upward revision still left them as representing the third highest level on record.

>The same story unfolded for after-inflation goods imports. Their quarterly drop left them at $2.9229 trillion annualized, not $2.9131 trillion – also a third all-time highest level.

>Real services imports, however, came in higher than the $562.2 billion at annual rates previously reported. The new $563.8 billion total represented a new record.

(What’s Left of) Our Economy: More Evidence that U.S. Growth is Healthier Under Trump

Tags

Barack Obama, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, real growth, recovery, toxic combination, Trump, {What's Left of) Our Economy

The current U.S. economic recovery has lasted so long (at more than ten years old, it’s already tied with the 1990s expansion as the longest on record), that anxiety about how long it might last, and when a new recession might begin, is entirely understandable. Yet what most economy watchers keep missing is what RealityChek regulars have understood for years – the quality of America’s growth matters at least as much as the quantity.

As a result, the latest government report shedding light on this growth – the preliminary look at the gross domestic product (GDP) for the first quarter of this year – was important not only for revealing that the economy expanded at a healthy 3.21 percent at an annual rate. It was also important for showing that by several crucial measures, the growth recipe was by far the healthiest since at least the period during which United States enjoyed its last period of robust expansion – back in 2014 and 2015.

The definition of healthy growth used by RealityChek is growth that depends relatively little on increases in personal consumption and housing investment. Those segments of the GDP and their bloat were most responsible for inflating the previous decades’ bubbles that burst so disastrously in 2007 and 2008, nearly blew up the entire global economy, and triggered the worst national economic downturn since the Great Depression of the 1930s. Fortunately, the GDP data compiled by the Commerce Department make it easy to calculate how their current growth contribution compares with their past record. And, as with the latest trade figures, they show that progress towards improving growth’s health has been dramatic so far during President Trump’s administration.

In particular, during that previous high growth period (under President Obama), the economy’s quarterly expansion ranged from 2.60 percent at an annual rate to 3.81 percent after inflation. But the growth contributions made by personal consumption and housing (which I’ve called a “toxic combination”) generally ranged from 62.86 percent to 79.70 percent (with one outlier quarter – the fourth of 2014 – coming in at nearly 187 percent, meaning that other elements of the GDP worked to shrink the economy).

During the high growth period under President Trump, which began in the first quarter of 2018, inflation-adjusted quarterly GDP has actually risen by a somewhat slower pace: between 2.58 percent annualized and that 3.21 percent rate of the first quarter of this year. But the contributions made by the toxic combination have ranged only from ten percent to 67.27 percent. And the figure for that high-growth first quarter of this year was only 22.19 percent.

Also worth noting are the growth rates during the Obama years when the role of the toxic combination was within that Trump range. They were somewhat lower.

Principally, in the second and third quarters of 2014, the toxic combination’s combined real growth contribution was 65.69 percent and 62.86 percent, respectively. Annualized constant dollar growth during those quarters was 2.60 percent and 3.04 percent. Those are solid results, but not quite as good as those from the second, third, and fourth quarters of 2018. Then, the toxic combination’s growth contribution ranged between 60 percent and 67.27 percent, and growth ranged from 2.87 percent to three percent.

As indicated above, these results can be pretty volatile from quarter to quarter. But smoothing them out by using annual figures tells a story even more favorable to the Trump record. Here are those annual figures starting with 2009-10, the first recovery year.

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

09-10:          1.20/2.60       -0.08/2.60         1.12/2.60         46.92%         2.56%

10-11:          1.29/1.60        0.00/1.60         1.29/1.60         80.63%         1.55%

11-12:          1.03/2.20        0.31/2.20         1.34/2.20         60.91%         2.25%

12-13:          0.99/1.80        0.34/1.80         1.33/1.80         73.89%         1.84%

13-14:          1.97/2.50        0.12/1.80         2.09/1.80       116.11%         2.45%

14-15:          2.50/2.90        0.33/2.90         2.83/2.90         97.59%        2.88%

15-16:          1.85/1.60        0.23/1.60         2.08/1.60      130.00%         1.57%

16-17:          1.73/2.20        0.13/2.20         1.86/2.20        84.55%         2.22%

17-18           1.80/2.90      -0.01/2.90         1.79/2.90        61.72%          2.86%

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

As with the quarterly figures, during the Obama years, when the growth contribution of the toxic combination was low, so was growth.  During the two full Trump data years, as growth itself sped up, the toxic combination’s contribution has plummeted to multi-year (at least) lows.

But a big question remains unanswered: When, under the Obama administration, the economy did manage to grow satisfactorily with a relatively small contribution by the toxic combination, this health growth recipe didn’t last. Indeed, by the third quarter of 2015, growth itself began slowing markedly, until it bottomed at 1.30 annualized in the second quarter of 2016. And it never broke two percent again. But the toxic combination’s contributions during that decelerating growth period ranged from 91.05 percent to a stunning 430 percent (in the fourth quarter of 2015).

The Trump years’ much better performance in this respect has lasted only two years. Only if this strengthening proves to have legs will it be legitimate to start considering the economy genuinely Great Again.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Show Industry is Still Nicely Withstanding the Metals Tariffs

Tags

aluminum, China, durable goods, Federal Reserve, growth, industrial production, inflation-adjusted growth, manufacturing, metals tariffs, metals-using industries, real growth, steel, tariffs, {What's Left of) Our Economy

This morning brought another poor result for U.S. domestic manufacturing – specifically, a 0.52 percent decrease in inflation-adjusted output that was its worst such performance since January’s 0.66 percent sequential decline. As a result, the temptation is to blame the Trump tariffs that have so dominated economic and business news headlines, but as usual, the data simply don’t support this claim.

Unquestionably, these new figures from the Federal Reserve point to a problem with American industry. Tariffs, however, look beside the point. Instead, the numbers reveal what looks like an April problem and an automotive problem, and especially where tariffs on metals are concerned – the major Trump-era levies that have been longest lasting, and where the affected manufacturing sectors are easiest to identify.

Here are the numbers for the economy’s chief metals-using industries. They start in April, 2018 (the first full months when the steel and aluminum levies went into effect). They show the growth rates between then and the last three data months. They include the statistics for overall manufacturing as a control group. And I’ve added two new pieces of information: the year-on-year real production changes for these sectors, and the data for durable goods manufacturing stripped of the automotive industry’s performance.

                                           Apr thru Feb   Apr thru March    Apr y/y prev  Apr y/y

overall manufacturing:          +0.48%             +0.52%              0.00%         +2.33%

durables manufacturing:       +1.31%            +1.35%             +0.40%         +2.49%

fabricated metals prods:       +2.87%            +2.72%             +2.14%         +4.44%

machinery:                           +1.49%            +1.92%              -0.69%         +4.05%

automotive:                          -1.71%             -1.93%              -4.43%          +3.07%

major appliances:                 -1.43%            -6.77%            -10.44%          +0.03%

aircraft & parts:                   +4.89%           +6.08%             +4.82%           -1.30%

durable mfg ex-automotive:  +1.82%        +1.91%              +1.21%          +2.41%

Comparing the automotive and the durables ex-automotive lines clearly shows both the automotive and April effects – with the latter suggesting the possibility of a production hiccup. Strengthening that interpretation: except for the major appliance category, nearly all the April, 2018-March, 2019 growth rates exceeded the April, 2018-February, 2019 growth rates. Moreover, the April automotive nosedive (which has taken place both on a month-on-month and year-on-year basis), is especially important because vehicle and parts production use so much in the way of machinery and fabricated metals products.

In addition, the safety issues encountered by Boeing may be responsible for the April aviation growth slowdown that may also have contributed to manufacturing’s broader woes that month.

The major appliances figures above continue to stick out like a sore thumb.  But of course, this sector has faced not only metals tariffs, but separate product-specific levies that went into effect in February, 2018.  In addition, America’s slumping housing sector has surely depressed sales and therefore production for reasons having nothing to do with tariffs.

As known by RealityChek regulars, gauging the impact of the tariffs on products from China is much more difficult for numerous reasons. Their role as inputs for manufacturing industries varies. The manufacturing classification system used by Washington for designating the tariff-ed products differs from that used for the Fed production statistics. The levies have been in place for a shorter period of time. And their scope has changed since the first batch went into effect in August.

Further, let’s not forget that the China tariff regime is due for some big changes starting in June, when President Trump has just decided that levies will rise on $200 billion worth of products from the People’s Republic. So the data below may tell us little about what to expect going forward. Here they are nevertheless for the handful of industries for which I’m sure the numbers create a reasonably accurate picture.

                                                      Aug thru Feb    Aug thu March    Aug thru April

overall manufacturing:                     -0.33%                -0.38%                -0.90%

ball bearings:                                  +0.32%                +0.25%               +0.14%

industrial heating equip:                 -2.60%                 -1.85%                -5.69%

farm machinery & equip:             -16.86%               -11.65%              -10.40%

oil/gas drilling platform pts:         +4.59%                +4.35%                +2.68%

Something of an April slump can be seen here, too (which in theory is hard to connect to the China tariffs), except for the farm machinery sector. 

The classic Wall Street sales pitch warns (eventually) that “Past performance is no guarantee of future results.” So especially considering the higher China tariffs on the way in two weeks, and the possibility that all goods imports from China will be hit by levies at some future date, predicting manufacturing’s growth performance for the rest of this year seems unusually chancy.

Yet the April figures unmistakably show (yet again) that domestic U.S. manufacturing continues to withstand the metals tariffs with ease.

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

Tags

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: Why Tariffs are Off the Hook for Manufacturing’s Slowdown

Tags

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

Here’s all you need to know to recognize that domestic U.S. manufacturing is experiencing some kind of slowdown: Today’s real output numbers from the Federal Reserve showed that production flat-lined on month in March. And that was a significant improvement from the comparable February figure – a 0.37 percent drop!

So do these dreary results mean that tariff fear-mongers are finally right to claim that President Trump’s levies on imports of steel and aluminum, and on a wide range of goods from China are backfiring on American industry? Not according to the internals.

As has been the case for months, the most convincing evidence comes from the metals-using industries. After all, the tariffs affecting their products have been in place longer. (April was the first full month in which they were in effect.) The most relevant industries are easy to identify. And because (with despite numerous exemptions) the tariffs have been virtually worldwide in scope, there’s no need to wonder whether how extensively the steel and aluminum in question are being supplied by an individual country or even group of countries.

The table below presents the inflation-adjusted output changes in major metals-using industries from April through each of the Fed’s last three data months. This format differs from that used in my previous industrial production-related posts because late last month the Fed released a set of revisions going back to 2015. So rather the old and new figures for the previous data month aren’t comparable anymore, and I simply decided to use the new figures going back three months.

                                            April thru Jan.      April thru Feb.     April thru March

overall manufacturing:      +1.20 percent        +0.83 percent         +0.82 percent

durables manufacturing:   +2.05 percent        +2.05 percent          +1.96 percent

fabricated metals prods:   +3.53 percent        +3.08 percent          +2.85 percent

machinery:                       +4.33 percent         +2.24 percent         +2.71 percent

automotive:                      – 2.84 percent         -0.58 percent          -3.06 percent

major appliances:             -1.83 percent          -1.30 percent         -5.62 percent

aircraft and parts:            +5.45 percent         +6.15 percent         +7.43 percent

An overall manufacturing slowdown is apparent from the February and March columns in the top line. And the second line shows that it’s impacted durable goods to a slightly greater extent – a possible signal of a tariff effect since that’s the super-category in which the main metals-using sectors are located.

But tariff-mageddon claims, as has been the case so far, falter upon looking at the details. First, they’re not very consistent with the volatility much of this data display. (E.g., automotive and appliances.) Second, over the past month, the big machinery sector (which provides equipment serving many different markets) has gained momentum. And aircraft and parts-making just keeps growing faster and faster. (Of course, its performance will likely become a drag on manufacturing output going forward because of Boeing’s 737 Max problems and the damage that will harm not only aircraft production, and possibly the industry’s entire supply chain.)

If tariffs are becoming a challenge for these industries, it’s clear that their impact is being swamped by other influences on their performance – especially the distinctive characteristics and status of their individual markets.

Unfortunately, all of the reasons for considering these metals tariffs-related conclusions compelling cut the opposite way when it comes to evaluating the China levies’ impact. The first full month when the earliest were in place was only August. And identifying industries most plausibly affected is difficult both because the tariff list and the industrial production data use different manufacturing classification schemes, and because of the challenge of figuring out where tariff-ed Chinese products play crucial roles in American industry (in the form of parts, components, materials, and other intermediate goods).

As a result, the bottom line remains that only a handful of manufacturing industries look like strong candidates for producing any kind of a China tariff effect, and most of these suffer from one of the above complications. Sharp-eyed RealityChek regulars will notice that I’ve added oil and gas drilling platform parts to the list:

                                            Aug. thru Jan.       Aug. thru Feb.      Aug. thru March

overall manufacturing:      +0.29 percent         -0.08 percent          -0.09 percent

ball bearings:                     +0.27 percent        +0.19 percent         +0.11 percent

industrial heating equip:     -3.61 percent         -3.39 percent         -5.27 percent

farm machinery & equip:  +2.22 percent       -17.14 percent        -11.65 percent

oil/gas drilling platfm pts: +4.74 percent        +4.59 percent         +4.36 percent

The overall manufacturing slowdown is apparent from these statistics, too. But so is a bewildering range of results, along with a small sample size. Whatever problems American industry might now be facing, the case that tariffs bear much, if any, blame has yet to be supported by these or any other data.