(What’s Left of) Our Economy: Tariffs-Led Inflation Remains a Manufactured Crisis

Tags

China, inflation, metals, metals tariffs, producer prices, tariffs, Trade, trade war, wholesale, {What's Left of) Our Economy

Economy followers who are fans of facts have ample reason to be grateful that the partial federal government shutdown has left the Labor Department open. As a result, the Bureau of Labor statistics can keep churning out data showing that the next valid claim of tariff-led damage to the U.S. economy that’s supported by authoritative statistics will also be the first. And today’s producer price numbers (for December) are the latest case in point.

The Department’s producer price index (PPI) measures price changes at the wholesale level, and neither the results for products heavily affected by President Trump’s metals tariffs or by his tariffs on goods from China show any evidence of contributing to inflation that will at some point be passed on to consumers.

Let’s start with metals-using products supposedly vulnerable to the U.S. levies on imports of steel and aluminum, which began to be imposed in late March. As with the situation as of last month, steel itself continues to demonstrate strong pricing power on an annual basis, starting with a 7.4 percent increase in April that’s since soared to 18.5 percent in December.

Even so, on a monthly basis, steel prices have actually fallen on net since August (by 0.36 percent), and dropped by 0.63 percent on month in December. So its price momentum seems to be cooling significantly – and possibly at an accelerating rate.

Further, much weaker pricing power – and therefore inflation – can be seen in various goods that use lots of steel. On the one hand, the December figures still showed robust price increases in products like pumps, compressors, and related equipment; and mining machinery and equipment. Wholesale inflation was 4.1 percent in the former on month in December, and 8.5 percent in the latter. By contrast, in the super-category in which both products are found (“final demand goods”), yearly wholesale inflation was only 2.5 percent in December.

Switch over to “intermediate demand” goods and you find big annual price hikes in sectors like metal containers (6.5 percent), fabricated wire products (16.4 percent), and certain kinds of valves (six percent). Yearly December inflation in that super-category was three percent.

But as in steel itself, the latest monthly figures are generally much lower – e.g., since August, 1.57 percent cumulatively for pumps, compressors, and related equipment; -0.55 percent for metal containers; 0.12 percent for fabricated wire products; and 2.32 percent for the valves.

Mining equipment is a conspicuous exception: Its prices were up 6.21 percent from August through December. But it was a strange exception, since all of the increase took place from October to November.

And the tariff alarmists still need to account for all the steel-using goods where wholesale inflation has been weak for the entire year and looks to be going nowhere: machine tools; oil and gas field machinery; agricultural machinery; motor vehicles; motor vehicle parts; ships; railroad equipment.

It’s true that the markets for all these producer goods vary tremendously, as does their dependence on steel. But that’s the point: Tariffs are only one of many trends and developments that influence their prices.

As for aluminum, its pricing momentum has slowed considerably – from 11.9 percent on an annual basis in April, to 6.3 percent in December. And since August, aluminum wholesale prices are off by fully 3.20 percent.

The first Trump China tariffs weren’t imposed until early July, so the sample size is smaller. But the case for tariff-led wholesale inflation on this front is just as weak as in the metals-related sectors.

Here are the PPI changes for some of the leading products found on the Trump administration’s initial China tariff list. They were imposed on July 6, so the numbers show the cumulative price changes since August. (Note: Because the administration’s Trump announcement used a different classification system than that used in the PPI reports, the below data don’t match up exactly with that tariff list. But the following goods are all at the least main parts of the items on the Trump list, or vice versa.)

aircraft engines and engine parts: 0.04 percent

industrial heating equipment: 1.15 percent

oil and gas drilling platform parts: 0.46 percent

farm machinery and equipment: 2.26 percent

paper-making machinery: -0.13 percent

ball bearings: 1.01 percent

electric generators: 1.85 percent

electricity transformers: 0.35 percent

medical, surgical, and personal aid devices: 0.33 percent

X-ray and electro-medical equipment: 0 percent

As with the metals-using products, some strong price increases are apparent. But so are some very weak increases, a flat-line, and a price drop. So it’s tough to argue that the tariffs have been make-or-break in the wholesale pricing sphere. I’ll keep tracking the China angle with unusual alacrity, though, since the number of tariff-ed imports expanded greatly later in 2018.

Lastly, there are the tariffs on large household laundry machines. Their retail prices keep increasing strongly, as shown in the latest (December) consumer price data – though not as strongly as in the immediate aftermath of the product-specific tariffs slapped on their imports in late January.

But at the wholesale level, inflation has been much weaker lately – a 0.84 percent monthly December increase for “household appliances” (the laundry equipment isn’t broken out), but only a 1.61 percent advance since August, and a comparatively meager 3.7 percent increase year-on-year. Call me a cynic, but it looks like consumers have been paying much more for these products this past year mainly because the retailers have been making a killing, not because of tariff hikes.

Advertisements

(What’s Left of) Our Economy: Can We (Finally) Start Deflating the Tariffs-Led Inflation Claims?

Tags

aluminum, China, China tariffs, inflation, metals, metals tariffs, metals-using industries, steel, tariffs, Trade, Trump, {What's Left of) Our Economy

Good luck to you if you’re looking for signs of tariffs-led inflation in yesterday’s U.S consumer price data from the Labor Department.

It’s not that goods that used tariff-ed products (either steel and aluminum, or inputs from China) or that are tariff-ed themselves (final products from China) haven’t become more expensive since the relevant levies were imposed. It’s that the prices of many goods completely unaffected by the tariffs have gone up as well – and in many cases, faster than those that have been affected by the trade curbs. So there’s no evidence that the tariffs themselves have had any notable impact.

In fact, these latest figures (bringing the story up through December) underscore how many forces and developments influence price changes.

A great example is provided by canned fruits and vegetables – presented below in the table showing price changes over various key periods of time (including for the post-March tariff period) for metals-using products. Their costs of course include the cost of either the aluminum or the type of steel used in their cans. When you look at the numbers for most of these time frames, it’s clear that the prices of these foods have risen faster than the overall rate of what’s called “core inflation” – the inflation rate minus the costs of food and energy, which are considered too volatile price-wise to yield an accurate understanding of what economists regard as the nation’s underlying, most fundamental, inflationary performance.

Interestingly, the prices for canned fruits and vegetables have increased much faster during these periods than the prices of food overall. So what’s driving the big price increases in these canned foods must be the cans, right – and presumably what they’re made of? Not if you look closely.

For the real problem is clearly vegetables. Both month-to-month and clearly for the entire year, fresh vegetable prices have soared. Largely as a result, the prices of canned vegetables have jumped unusually strongly, and significantly boosted the numbers for the overall canned fruits and vegetables category.  

The special role being played by vegetable prices is also clear from looking at the trends in food prices – which aren’t included in the core inflation number. Except for December, these prices have risen considerably more slowly than those prices in the core grouping, or in the economy as a whole. 

If you’re still skeptical, look at the price trends for several other food products that often come in cans – like beverages of all kinds, and soup. There’s simply no consistent pattern of their increasing faster than core inflation over any time period. 

Similarly, although the prices of metals-using auto parts have risen more robustly than core inflation, the prices of metals-using vehicles have risen much more weakly. In fact, from December, 2017 to December, 2018, they’ve fallen in absolute terms. So something, or somethings, other than metals prices and tariffs count for much more in the total prices of these goods.

                                     Nov.-Dec.       Since April        y/y April           y/y Dec.

core inflation:            0.21 percent   +1.39 percent   +2.12 percent   +2.22 percent

overall inflation:       -0.06 percent  +1.09 percent   +2.43 percent   +1.95 percent

food:                         +0.37 percent  +0.98 percent  +1.39 percent    +1.58 percent

fresh fruits & vegs:  +1.94 percent  +1.82 percent   -0.45 percent    +1.75 percent

fresh fruits:              +1.33 percent    -1.73 percent  +1.35 percent     -0.73 percent

fresh vegetables:      +2.63 percent   +6.05 percent   -2.53 percent    +4.63 percent

processed fruits        +0.67 percent    -0.64 percent   -0.59 percent    +0.87 percent

& vegs:

canned fruits            +1.48 percent    +0.99 percent   -0.07 percent    +3.12 percent

& vegs

canned fruits:           +1.44 percent    +1.39 percent   -1.50 percent    +2.29 percent

canned vegs:            +1.30 percent    +1.12 percent   +1.04 percent   +4.18 percent

soups:                      +2.49 percent    +2.28 percent     -0.54 percent   -1.43 percent

malt beverages         -0.04 percent    +1.82 percent    +0.84 percent   +1.87 percent

consumed at home

alcoholic bevs          -0.04 percent     +1.34 percent    +2.17 percent   +2.25 percent

consumed away

juices & non-         + 0.13 percent     +1.77 percent     -0.25 percent  +2.51 percent

alcoholic drinks

carbonated drinks:  +0.41 percent     +3.01 percent     +0.03 percent  +4.07 percent

non-frozen, non-     +0.18 percent    +1.37 percent       -0.53 percent  +1.46 percent

carbonated non-

alcoholic drinks

new cars & trucks:        0 percent     +0.78 percent      -1.62 percent    -0.24 percent

auto parts:              +0.42 percent     +1.58 percent      -0.74 percent   +2.20 percent

Tariffs on goods from China have been in effect for fewer months than the metals tariffs. And since July, they’ve been imposed in phases, which were followed by a decision by President Trump to delay increases in a big tranche as part of the latest cease-fire in the trade conflict with China. So the data is less definitive. But thus far, at least, the prices of the goods below – which represent some of the main imports from China subjected to tariffs by the first rounds of these levies, which were imposed in July – have mainly rising more slowly than the rest of core inflation sectors. (The sportswear numbers are dicey, since such apparel is not broken out from the rest of the category as such. So the figures below represent results from a women’s apparel category that includes sportswear.)

                             Nov.-Dec.          Since Aug.        Aug. y/y           Dec. y/y

core inflation:   +0.21 percent   +0.73 percent    +2.19 percent   +2.22 percent

furniture:          +0.55 percent   +0.90 percent     -0.66 percent   +1.68 percent

auto parts:        +0.42 percent   +0.82 percent    +0.39 percent    +2.20 percent

tires:                 +0.98 percent  +1.50 percent      -1.64 percent    +1.29 percent

appliances:       -0.33 percent   +1.25 percent     +2.31 percent    +4.74 percent

sportswear:       -0.89 percent   -2.14 percent       -0.86 percent    -1.33 percent

As for appliances, their out-performance is due largely to a separate set of tariffs imposed on large household laundry equipment starting in February. As shown below, however, even in this case, price increases are starting to moderate. That’s clear from the decline in the year-on-year figure between February and December, and from very slow price increase recorded between November and December.

                                 Nov.-Dec.        Since Feb.          Feb. y/y           Dec. y/y

core inflation:       +0.21 percent   +1.67 percent   +1.86 percent   +2.22 percent

appliances:            -0.33 percent   +3.41 percent   +0.25 percent   +4.74 percent

major appliances: +0.19 percent  +11.59 percent   -4.22 percent   +9.02 percent

I know that I may be starting to sound like a broken record on the (negligible) impact of tariffs on the American economy so far. But until globalization cheerleaders in politics and business, and their mouthpieces in the Mainstream Media, start telling the story accurately, I’ll keep correcting the record.

(What’s Left of) Our Economy: Yes, We (Still) Have No Tariffs-Led Inflation

Tags

China, consumer price index, consumer prices, inflation, metals tariffs, tariffs, Trade, Trump, washing machines, {What's Left of) Our Economy

As with yesterday’s producer price data, good luck to anyone trying to find significant tariff-led inflation in the U.S. economy in today’s consumer price numbers (for November), whether on the metals front or the China front. Because it’s still not showing up. There’s one clear exception (household laundry machines), which has been hit with its own product-specific levy since early February, but where doubts still persist about whether the resulting pricing power can stick. Some inflation is also apparent in motor vehicle parts.

Here’s the raw data, first for metals-using consumer goods where – bizarrely – powerful inflationary pressure are already being reported. For comparison’s sake, I’ve also included the statistics for overall “core” inflation (“core CPIU” in government lingo), which strips out volatile food, energy, and housing prices. And for fruits and vegetables, I’ve presented the numbers for these products in their canned and un-canned processed forms, to reveal whether the prices for the steel and aluminum cans in which the former come are driving price trends, or whether other factors have been more important.

                                Oct.-Nov.       Since April        y/y April           y/y Nov

core CPIU             0.14 percent   +0.77 percent  +1.19 percent   +1.51 percent

processed fruits    -0.31 percent   -1.30 percent   -0.36 percent    -0.22 percent

& vegs

canned fruits         -0.42 percent   -0.48 percent   -0.07 percent   +0.69 percent

 & vegs

canned fruits         -0.07 percent   -0.05 percent   -1.52 percent   +0.67 percent

malt beverages     +0.30 percent  +1.78 percent  +0.84 percent   +1.61 percent  

 at home 

alcoholic               +0.25 percent  +1.38 percent  +2.17 percent   +2.60 percent

  beverages away

juices & non-         0.45 percent   +1.64 percent    -0.25 percent   +1.73 percent

-alcoholic drinks

non-frozen, non-    -0.27 percent  +1.19 percent    -0.53 percent   +0.79 percent

  carbonated non-

  alcoholic drinks

non-alcoholic         -0.02 percent  +2.72 percent   +0.03 percent   +3.04 percent

  carbonated drinks

new cars & trucks -0.01 percent   +0.77 percent    -1.62 percent    -0.29 percent

motor vehicle       +0.35 percent   +1.15 percent    -0.74 percent    +2.13 percent

  parts 

The main conclusions emerging from this first table? Between October and November, prices have been weaker than the overall core inflation rate for some products (canned fruits and vegetables, new motor vehicles, and three non-alcoholic drinks categories) and stronger in fewer products (beer and other malt drinks consumed at home, alcoholic beverages consumed in bars and restaurants, and motor vehicle parts). That development alone strongly indicates that metals prices are only one influence on the prices of metals-using products, and likely not the main influence.

Further evidence for the relatively low importance of metals prices, and therefore tariffs? Over the latest data month, prices for canned fruits and vegetables have fallen slightly faster than those for all processed fruits and vegetables, but prices for canned fruits have fallen more slowly. So it’s hard justify foisting lots of blame on the cans.

In addition, care is needed in interpreting all the drink statistics. In the first place, as noted in previous RealityChek posts on consumer prices, the beer and non-alcoholic drinks figures don’t distinguish between products sold in bottles from products sold in cans. And the alcoholic beverages numbers don’t even distinguish among beer, wine, and spirits, on top of combining canned products numbers with the results for products sold in bottles and other kinds of containers (although not much wine and spirits seems to come in cans).

A major spread also emerges from the numbers since April – the first full month when any metals tariffs had been imposed. The price increase for automotive parts is relatively strong, and the hikes for all drink categories are especially robust. These indicate that demand for drinks of all kinds has been up significantly during this period, but the data are complicated again by the failure to distinguish drinks sold in cans and in other packages. And most of these trends are clear and complications are clear from the two year-on-year statistics.

Less information about the impact of China tariffs can be gleaned from the new consumer price report, because the first of these levies was only imposed in early July, and most of these were slapped on producer, not consumer goods. But some of these products contain a great deal of producer goods like steel or electronic components, and the figures for two of them are presented below – including the latest monthly results, the price changes since July, and the July and latest year-on-year data. And tariff-led inflation of any kind…just isn’t.

                              Oct.-Nov          Since July          July y/y            Nov y/y

core CPIU         +0.14 percent    +0.34 percent  +1.48 percent    +1.51 percent

tools, hardware  -0.24 percent     -0.31 percent   -0.07 percent     -0.12 percent

  et al

video/audio       +0.14 percent    +1.06 percent   -0.79 percent     -0.38 percent           equipment

But there is one product for which tariff-induced price hikes are clear, and that’s those separately tariff-ed household laundry machines. Here are the data for October-November, since February (shortly after they began, and year-on-year for February and November.

                                    Oct.-Nov.       Since Feb            Feb y/y            Nov y/y

core CPIU               +0.14 percent  +0.74 percent   +0.91 percent   +1.51 percent

laundry equipment +2.97 percent +18.25 percent    -7.61 percent  +15.52 percent

Of course, the steel levies have no doubt contributed to the elevated prices, too. Even here, though, it’s interesting that despite a big October-November price jump, the year-on-year increase in November prices is somewhat lower than that for February. Also, even with the big new monthly surge, washing machine prices remain at four-and-a-half-year lows. In other words, as with steel and aluminum, these goods were flooding the U.S. market and sold at prices having little to do with any free market forces, much less free trade.

(What’s Left of) Our Economy: Still Desperately Seeking Tariff-Induced Inflation

Tags

aluminum, China, consumer prices, inflation, metals tariffs, producer prices, steel, tariffs, Trump, washing machines, {What's Left of) Our Economy

There’s especially bad news for trade war alarmists contained in this morning’s government report on producer prices. Not only does it contain yet more evidence that any inflation from President Trump’s metals tariffs keeps fading, but it’s now possible to show that his China tariffs aren’t fueling price hikes that are noteworthy, either – let alone increases likely to last.

Regarding the levies on steel and aluminum, which began to be imposed in late March, the weakest pricing trends have been apparent in aluminum. In April, its year-on-year price increases at the wholesale level stood at 11.9 percent, peaked at twenty percent in June, and as of November (the latest data reported this morning), the rate was down to 5.9 percent. That’s largely because wholesale aluminum prices have dropped on a monthly basis for five straight months, including by 1.5 percent from October to November.

More pricing power has been demonstrated in steel. Year-on-year wholesale prices for this metal advanced by 7.4 percent in April and have continued upward since, though at a much slower pace since August’s 18.6 percent. In November, the annual increase was 19.8 percent.

On a monthly basis since August, steel prices have dipped on net, even though between October and November, they increased by 0.5 percent.

Importantly, these higher metals prices don’t seem to be transferring uniformly into higher prices for metals-heavy products, including parts and components. For example, some mounting price pressure is apparent in pumps, compressors, and equipment; and mining machinery and equipment. But these sectors were greatly outnumbered by those in which price momentum seemed weak at best and going nowhere – such as construction machinery; machine tools; oil field and gas field machinery; aircraft; and motor vehicles and parts.

And if the price increases aren’t at least roughly comparable, then it’s hard to justify singling out tariffs as a major problem to this point.

The Trump China tariffs began in early July, but evidence that they’re igniting much inflation is even more elusive. On the one hand, it’s true that China’s currency is down versus the U.S. dollar since July – by a little over four percent – which all else equal will depress the prices of Chinese-made goods and services versus their American competitors all over the world. On the other, that’s a sign that, when it comes to China, many special variables influence prices (like a wide range of subsidies), along with the usual supply and demand forces.

Most important, here are the wholesale price changes for some leading products on the Trump administration’s list of the first 818 imports from China slapped with tariffs on July 6. So they represent the changes from July through November.

aircraft engines and engine parts:                                  0.35 percent

industrial heating equipment:                                       0.89 percent

oil and gas drilling platform parts:                               0.46 percent

farm machinery and equipment:                                   2.08 percent

paper-making machinery:                                            0.54 percent

ball bearings:                                                                1.12 percent

electric generators:                                                      1.71 percent

electricity transformers:                                              0.35 percent

medical equipment incl X-rays, pacemakers:                  0 percent

Three arguably major price spikes are apparent, but the big question remains whether these increases will stick. We’ll be watching.

Finally, there are the washing machine tariffs. As previously noted, at the retail level, prices of these appliances shot up shortly after they were first imposed in late January – to the unmistakable glee of supporters of the pre-Trump trade policy status quo. But at the wholesale level, home appliance prices (washing machines aren’t broken out from this category) have climbed only 0.76 percent from February through November. And during the last two months, they’ve fallen by 0.7 percent and 0.6 percent sequentially. So good luck with claiming that levies at the border deserve blame for whatever higher prices were paid by American consumers who had the misfortune to buy washing machines earlier this year.

As for the November consumer price data (measuring changes at the retail level), the data don’t come out until tomorrow. But on a monthly basis, they fell by 0.2 percent from July to August and by 3.8 percent between August and September before recovering by 0.2 percent between September and October.

In other words, there’s been deflation in washing machine prices lately. As these and the wholesale price figures make clear, that continues to be a fate richly deserved to date by tariff-led inflation claims.

(What’s Left of) Our Economy: Productivity-Challenged U.S. Manufacturers Want Their Cheap Foreign Metals Crutch Back

Tags

aluminum, Canada, China, consumer prices, inflation, manufacturing, metals tariffs, Mexico, overcapacity, producer prices, productivity, quotas, steel, tariffs, total factor productivity, Trade, Trump, {What's Left of) Our Economy

Anyone genuinely concerned with the long-term health of the American economy and its manufacturing sector in particular should be thankful for the letter sent Monday to the Trump administration by 33 business organizations asking for removal of the tariffs imposed earlier this year on steel and aluminum imports from Mexico and Canada.

For the letter – signed by groups from many sectors of the economy but principally by manufacturing organizations – unwittingly reveals the extent to which American industry has become addicted to supplies of metals whose prices have been artificially cheapened mainly by a global glut still primarily fed by subsidized over-supply from China. As a result, the letter also suggests a reason why American manufacturing productivity growth has been so lousy lately – in the process undermining the economy’s ability to generate lasting, as opposed to bubbly, prosperity.

To begin with, however, the signers’ leading claim is demonstrably, and whoppingly, false. They contend that the metals tariffs have caused significant harm to American manufacturers, consumers and workers. They have raised costs significantly for a wide array of industries….” Yet as I have repeatedly shown, (most recently here) since the levies began to be imposed, at the end of March, nothing in the official data on domestic manufacturing’s performance points to any harm whatever. In fact, in most respects, recent months have actually seen out-performance by metals-using industries – which logically should be where the greatest problems stemming from metals tariffs are concentrated.

Especially false is the insistence that because “Many manufacturing industries rely on imported inputs to produce goods competitively in the United States,” the tariffs “raise the costs of manufacturing in the U.S. and place our manufacturers at a competitive disadvantage with respect to finished products which are made outside of the U.S. and imported without being affected by the tariffs.  Further, consumers are starting to feel the pinch of higher prices across the board, as evidenced by recent increases in the CPI [Consumer Price Index].”

Indeed, this contention has been borne out neither by the consumer price numbers nor the producer price statistics.

But an examination of steel import figures and productivity performance suggests the real motive of the manufacturing signers in particular: They hope to resume relying on cheap foreign government-subsidized foreign metals for their growth and profits, rather than the kinds of productivity improvements that will do the most to strengthen both their bottom lines and the entire economy’s foundations over any significant time span.

The evidence comes from comparing total U.S. steel imports on the one hand, and total factor productivity (the broadest of the two main measures of efficiency tracked by the Labor Department) for the main metals-using industries on the other, during the previous and current American economic recoveries (the best way to generate apples-to-apples results).

That previous recovery officially lasted from late 2001 to late 2007, and through 2006, measured by quantity, steel imports increased by nearly 28 percent – largely fueled by a purchases from China that jumped more than 260 percent. (As the impact of the housing bubble’s bursting spread throughout the economy, steel imports from China and the rest of the world fell sharply before the recession’s official onset in the fourth quarter of 2007.)

And here are the total factor productivity increases for that 2001-2006 period for the American private sector for a whole, manufacturing overall, the metals industries themselves, and the key metals-using sectors:

private sector:                                      +9.19 percent

manufacturing:                                  +13.55 percent

durable goods manufacturing:          +19.44 percent

primary metals:                                   +5.72 percent

fabricated metals products:                 +6.35 percent

non-electrical machinery:                  +11.01 percent

transportation equipment:                 +13.38 percent

The figures for the current recovery look markedly different. Let’s examine the results from its 2009 start through 2016 (the year for the latest available detailed total factor productivity statistics). During that period, total national steel imports soared by just under 104 percent by quantity. Purchases from China sank like a stone (by more than 63 percent) between 2015 and 2016, because of China-specific anti-dumping tariffs. But clearly many other countries and their subsidized steel sectors picked up the slack, because total U.S. imports dropped off by only 17.31 percent. And continuing Chinese over-production kept exerting downward pressures on prices worldwide.

And how did total factor productivity fare during that big steel import run-up?

private sector:                                      +5.93 percent

manufacturing:                                     -4.48 percent

durable goods manufacturing:            +1.24 percent

primary metals:                                   +5.76 percent

fabricated metals products:                  -7.68 percent

non-electrical machinery:                     -7.08 percent

transportation equipment:                    +9.67 percent

That is, as artificially cheap foreign steel poured into the U.S economy, total factor productivity growth in most of the chief metals-using sectors shifted into reverse – and by startling extents. The only exceptions were transport equipment and durable goods as a whole, with the former clearly holding up the latter. And even in both these cases, total factor productivity growth slowed dramatically.

True, the letter’s signatories claim that they support continued tariffs on steel and aluminum imports from China – the main overcapacity and over-production culprit. They also say they back “negotiation of global arrangements to deal with overcapacity.”

But this position looks phony given their opposition to import quotas for steel from countries where tariffs have been lifted (South Korea, Brazil, and Argentina) because these measures allegedly have “placed severe supply constraints on U.S. manufacturers and created even more business uncertainly than tariffs regarding exports from these countries.” In other words, the signatories are opposed to the very policies that have helped ensure that all other metals-producing countries don’t simply keep transshipping China’s over-production into the U.S. market, or respond to China’s glutting their steel market by ramping up their own exports to the United States.

So the real message being sent by the manufacturers’ metals tariffs letter couldn’t be clearer: “We want to regain access to that artificially cheap foreign steel, regardless of its impact on the entire economy’s future.” Arguably, that’s an appropriate, or at least understandable, priority for companies viewing their prime obligation as maximizing shareholder value at any given moment. But just as understandably, it’s the type of priority that America’s political leaders should emphatically reject.

(What’s Left of) Our Economy: Unexpected Support for the Trump China Tariffs

Tags

Benedikt Zoller-Ryzdek, Bloomberg.com, capital equipment, capital goods, China, consumer goods, consumers, European Network for Economic and Fiscal Policy Research, Gabriel Felbermayr, inflation, producer goods, tariffs, Trade, trade wars, Trump, Xiaoqing Pi, {What's Left of) Our Economy

As I live and breathe! A pair of economists has just issued a report contending that China, not the United States, so far will be the big loser in the current trade confrontation between the two countries! In the process, they offer a badly needed explanation of why, in a real sense, exporters in China – not importers and therefore, presumably, consumers in the United States – will pay by far the highest price imposed by President Trump’s tariffs.

According to Benedikt Zoller-Ryzdek and Gabriel Felbermayr of the European Network for Economic and Fiscal Policy Research, Americans (whether households or business customers) certainly won’t get away scot free in the trade war as it’s been conducted so far. The authors calculate that the U.S. levies imposed so far by President Trump on imports of Chinese goods will boost the price of these products by an average of 4.5 percent.

The amount is pretty small, they contend, because American demand for these products is pretty elastic, as economists say. That is, it varies considerably depending on the price, and principally, if U.S. consumers find the post-tariff prices too expensive, they can switch fairly easily to alternatives – and even do without these products at all. Since these options are well known to Chinese producers and all the U.S. middlemen involved in making sure that Chinese-made goods reach their intended customers, they’ll know better than to practice much price-gouging.

Interestingly, the biggest hit to the nation is projected to come from consumer goods tariffs – the authors calculate that they’ll raise the prices of these products by 6.5 percent on average. In addition, they note that low-income Americans will bear the brunt of these higher prices, since they do buy more than their share of low-cost Chinese goods.

But the price increases for the Chinese capital equipment and various inputs used by American domestic companies (materials, parts, components, etc.) will be lower – only two percent for the former and 5.2 percent for the latter. So if the Zoller-Ryzdek and Felbermayr are right, the widely feared hit to U.S. industrial competitiveness resulting from the Trump tariffs should be eminently manageable for American domestic manufacturers – especially if they improve their chronically lagging productivity performances.

Chinese exporters, however, will far far worse, according to the study. The reason isn’t the one that President Trump has advanced – that they’ll need to pay ten and 25 percent tariffs they’re currently and might be charged all into the U.S. Treasury. Instead, these exporters will have to accept much lower prices for these exports if they want to keep selling to Americans – which will slash their profits, force them to withdraw from the U.S. market, and threaten their very viability if they do pull out, since alternatives in a slow-growing global economy won’t be abundant. The authors estimate the average price decline for Chinese exports at more than twenty percent, with makers of the most sophisticated such products (investment goods like capital equipment) suffering the steepest declines. Incidentally, those are the Chinese products and exports that the Trump trade team is most worried about.

And indeed, Zoller-Ryzdek and Felbermayr specify that this result was no accident: It stemmed from the administration’s “strategic choice of Chinese products.”

The European Network study doesn’t mean that the U.S. economy faces nothing but smooth sailing in the trade conflict. The authors note that the benefits of strategically picking and choosing Chinese products to tariff will fall significantly if the levies eventually extend to all U.S. imports from China. I also wonder if they’ve underestimated the resilience of Chinese exporters – because even a heavily indebted Chinese economy can employ so many means of subsidizing their losses. That’s also one big reason I’m skeptical that the current tariffs will decrease the mammoth bilateral merchandise trade deficit run by the United Stated with China by as much as the authors believe (nearly 17 percent).

Nonetheless, Zoller-Ryzdek and Felbermayr also anticipate a benefit from the Trump strategy that substantially undercuts the conventional wisdom among trade mavens in the United States. They observe that the increased tariff payments forced on Chinese exporters could, at least for a while, be used to compensate the low-income American consumers facing higher prices for Chinese-made garments and other everyday goods.

So although this study isn’t the last word on the U.S.-China trade wars, it provides important support for the Trump approach purely in economic terms. Coupled with America’s vital strategic stake in preventing China from stealing and subsidizing its way to greater global competitiveness in the high tech and advanced manufacturing industries crucial both to U.S. national security and prosperity, it’s a strong signal for the President to stay his current China course – and even to move more explicitly to disengage America from what clearly has been a losing and increasingly dangerous relationship.

Incidentally, I first got word of this report from Bloomberg.com reporter Xiaoqing Pi – who deserves credit for summarizing it in a brief item yesterday.   

(What’s Left of) Our Economy: Tariff-Led U.S. Inflation Remains Mythical

Tags

aluminum, appliances, beer, cans, Emily Rauhala, inflation, Labor Department, laundry equipment, metals, metals-using industries, Producer Price Index, steel, tariffs, Trade, Trump, Washington Post, wholesale prices, {What's Left of) Our Economy

Talk about bad timing! Yesterday, the Washington Post ran a piece by Emily Rauhala, who covers Canada and other foreign news for the paper, on how soaring tariff-juiced aluminum prices are already “bruising” the American beer industry. According to her report, “In a vivid example of how Trump’s trade tactics abroad can hurt business at home, the U.S. beer industry, which needs aluminum to make cans, is seeing costs rise.”

But this morning, the U.S. Labor Department came out with data showing that, although prices for aluminum (along with steel, another tariff-ed metal) have jumped from last October to this past October, they’re now actually starting to fall. And special bonus! The same trend seems to be holding for household laundry equipment.  Product-specific tariffs boosted prices for a time, and generated big headlines, but now the price are falling back to earth.

The new Producer Price Index (which measures price changes at the wholesale level) reports that “aluminum mill shapes” last month cost buyers 8.2 percent more than they did in October, 2017. But since July, they’ve dropped on a monthly basis by 2.1 percent, 0.3 percent, and 0.4 percent.

Further, it’s important to remember that, as with steel and the laundry machines, last year’s prices were artificially depressed by foreign dumping. In other words, these prices were set by foreign governments determined to grab market share for their producers at the expense of their American-based rivals. They had nothing whatever to do with market forces.

The statistics for “steel mill products”? Between October, 2017 and October, 2018, prices did indeed surge by 18.2 percent. But the monthly numbers since July reveal price changes of +2.6 percent, zero percent, and -0.8 percent.

Also significant: In lots of metals-using industries, there are no major year-on-year price increases at all. These include hardware, plumbing fixtures, turned products (like bolts and nuts and screws), metal valves, ball bearings, auto parts, aircraft parts, and aircraft engines and parts (which are tracked separately).

The price data for household appliances are found in a another of today’s Labor Department tables, and don’t separate out laundry equipment from other appliances where no special tariffs were applied. But they strongly indicate that any producers thinking they’d gain major pricing power from these levies were utterly delusional.

From October, 2017 through last month, prices in this category were up only 3.3 percent. And the last three months’ worth of sequential changes? Down 0.1 percent, up 1.3 percent, and down 0.7 percent. Think we’ll see this development  generate any headlines?

As with investing, past performance doesn’t always predict future results. But it’s not bupkis, either. At some point, President Trump’s tariffs may indeed supercharge U.S. inflation. To date, however, trade-related inflation reports at best deserve the warning, “Let the buyer beware.”

(What’s Left of) Our Economy: Why Tariff-Induced Gloom Looks Sillier than Ever

Tags

inflation, Institute for Supply Management, ISM, manufacturing, Markit.com, PMI, Purchasing Managers' Index, survivorship bias, tariffs, Trade, trade war, {What's Left of) Our Economy

Look – I’m hardly the world’s biggest fan of the monthly private sector national manufacturing surveys that purport to reveal the state of American industry. I’ve reported on their consistent failure to track the actual performance of domestic manufacturers compared with the results of the official (and much more comprehensive) data, and explained that a main reason is that the surveys suffer from “survivorship bias.”

Still, since they’re both so widely followed, it’s crucial to note that both the October report released by the Institute for Supply Management this morning, and its counterpart from Markit.com, show that the sector is doing just fine. More specifically, since these results track well with the latest government figures on manufacturing, they represent even more evidence that claims of tariff-induced manufacturing devastation are Fake News.

The headline number for the October ISM (57.7) was indeed lower than its September edition (59.8). It’s also lower than the average for the last twelve months (59.2). But it’s not much lower. Even more important – any reading above 50 signals expansion. And although the comments from various industries contained were full of tariff-related concerns, according to Timothy R. Fiore, who oversees the reports, they “reflect continued expanding business strength.”

Many of the internals also showed American manufacturing remains firmly in growth mode. In particular, new orders and employment both continued increasing. Yes, they were increasing at slower paces than in September. But businesses believing that big trouble lies ahead usually don’t keep ordering more stuff (and manufacturers’ customers generally include other manufacturers as well as companies in other parts of the economy) and adding more workers. They start pulling back.

The Markit.com October U.S. manufacturing Purchasing Managers’ Index (PMI) revealed even stronger reasons for optimism about domestic manufacturing’s foreseeable future, and for its ability to thrive despite any near-term hits delivered by Trump-ian trade policies.

Markit.com also uses 50 as its dividing line between expansion and contraction, and it emphasized that is 55.7 score for October was a five-month high. In addition, it “signalled a further pick up in growth momentum and a strong improvement in the health of the manufacturing sector.”

And the internals? If anything, they were even better. Markit.com did describe the price pressures faced by American manufacturers as “intense” and blamed them “largely” on “higher raw material and metal prices stemming from the ongoing effects of tariffs.”

Nonetheless, the October survey also reported that “Driving the latest development in the health of the sector was a sharp increase in new business. The upturn in total new work reached a five-month high….” Additionally, “Greater production requirements and efforts to clear backlogs meanwhile led to a quicker monthly rise in hiring, the fastest for ten months.”

Pessimists can point to Markit’s observation that “firms registered a strong rise in buying activity amid reports of greater efforts to stockpile….” That’s evidence that manufacturers were drawing purchases forward in hopes of escaping the costs of future tariffs. At the same time, companies rarely build inventories unless they’re confident they can sell the stockpiled stuff further down the line. And indeed, according to Markit, “output expectations towards the coming 12 months improved, with firms suggesting that anticipations of further new order growth drove optimism.”

The only significant fly in this ointment concerned inflation. Markit.com’s Chris Williamson wrote that “In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”

So far, these price increases haven’t shown up in the official data (see here and here), but certainly they could. In fact, the entire sunny picture painted by these surveys, and the government figures, could darken all of a sudden, and tariffs might be to blame. But for the time being, nothing of the kind has happened. So when you see news reports or other statement to the contrary, predicting a future of trade war-produced future of gloom and doom, you can be surer than ever that the sources don’t believe that Facts Matter.

(What’s Left of) Our Economy: No Signs of Tariff-Led Consumer Price Inflation, Either

Tags

automotive, beer, canned goods, consumer price index, CPI, inflation, Labor Department, Producer Price Index, tariffs, Trade, Trump, washing machines, wholesale prices, {What's Left of) Our Economy

Honestly, I hate to bombard everyone with official U.S. government data showing that President Trump’s tariffs so far have done exactly zero damage to the U.S. economy, contrary to upteen claims. Except official U.S. government data keeps showing that President Trump’s tariffs so far have done exactly zero damage to the U.S. economy, contrary to upteen claims.

Two days ago, this conclusion was borne out by the Labor Department’s latest report on price changes faced by businesses (measured by the Producer Price Index). Yesterday, the same message was sent loud and clear by the Department’s latest report on price changes faced by consumers (measured by the Consumer Price Index), which take the story up to September.

Since Mr. Trump’s first tariffs on imports from China didn’t go into effect until late August, not enough time has passed to assess their impact. But new American levies on steel and aluminum began to be collected in late-March. In addition, separate tariffs have been imposed on imports of large home washing machines since February. So this post focuses on price changes in sectors that use lots of steel and aluminum – the very sectors of course that have complained loudest about the tariffs. And it will present some seasonally adjusted and non-adjusted figures, because the only year-on-year data provided are unadjusted.

First, the main overall results for the Consumer Price Index for All Urban Consumers (not the only U.S. government measure of inflation at the retail level, but one that’s widely cited and that the Labor Department emphasizes). Between August and September, the overall CPI was up 0.1 percent on both adjusted and unadjusted bases. Year-on-year on year, these September prices rose by 2.3 percent (again, on an unadjusted basis).

Most students of the economy more closely follow the so-called “core CPI,” which strips out food and energy prices because of their volatility. But they weren’t much different from the overall CPI results. Between August and September, the core CPI increased by 0.2 percent on an unadjusted basis, by 0.1 percent on an adjusted basis, and on year by 2.2 percent (adjusted).

So these numbers don’t exactly scream “Raging inflation!” But what about products with lots of steel and/or aluminum? In most cases, prices went up considerably less than overall prices and core prices, and especially year-on-year – which provides the best indicator of trends over time.

Take new motor vehicles. Their September year-on-year price increase has been just 0.5 percent – less than a quarter the rate of core inflation. And on both adjusted and unadjusted basis, they were down between August and September – by 0.1 and 0.3 percent, respectively. Don’t forget: Both the adjusted and unadjusted monthly figures show that core inflation rose in September.

Take canned fruits and vegetables. Year-on-year, their price is up 1.9 percent as of September – nearly the rate of core inflation and overall inflation. But look beneath the hood: Most of those higher prices were generated by canned vegetables, which were 3.2 percent more expensive this September than during the previous September. So it sounds very much like the price hikes had little to do with cans made more expensive by more expensive metals.

On a sequential basis, the price changes in canned fruits and vegetables seem to make the tariff-induced inflation claims look more convincing. When seasonally adjusted, in particular, prices for the group rose by 0.7 percent in September – much faster than the overall or core consumer inflation rates. But look even more closely at that line item, and you’ll find a footnote making clear that the size of the sample on which the figure is based is “substantially smaller” than the norm. So presumably its reliability isn’t sterling.

Because the CPI data don’t distinguish between canned beer, soda, and soup, and the uncanned varieties, the impact of higher metals prices on these foods is tougher to figure out.

For example, for carbonated drinks, September year-on-year prices rose by 2.1 percent – again, close, but not quite at the overall CPI rate. And of course, many of these drinks are sold in bottles as well. Both the adjusted and unadjusted monthly September consumer inflation rates for these drinks were actually a good deal higher than the overall rate – 0.3 percent and 0.6 percent, respectively. But how many of the drinks surveyed were cans?

The same question arises for beer. The Labor Department distinguishes between suds consumed at home and away from home. For beer (and “ale and other malt beverages”) drunk at home, prices rose in September at an annualized 1.1 percent – less than half the overall inflation rate. On an adjusted and unadjusted basis on month in September, the increases were greater – 0.5 percent and 0.7 percent, respectively. Indeed, they were both greater than the comparable overall inflation numbers. But what was the can-bottle ratio?

For these malt beverages consumed away from home, the annual September price increase was twice as great as for home-consumed drinks in the beer category (2.2 percent). But the monthly increases were in the same neighborhood as for beer etc drunk at home – 0.5 percent adjusted and unadjusted. And there’s still that can-bottle puzzle.

Therefore, there’s no reason to think that price for canned produce and beer-type drinks are rising through the roof due to the metals tariffs.  The case for tariff-led inflation is even weaker for soups – many of which are canned but some of which are powdered or otherwise dried. On-year, their prices were down by 3.8 percent. On month, prices also dropped on both adjusted and unadjusted bases – by 1.4 percent and four percent, respectively. So if anything, prices for soups are deflating.

And finally, let’s take those washing machines. Year-on-year, their September prices rose by a robust 10.6 percent. But the latest figures show that the pricing trend has actually shifted into reverse.  On month, washing machine prices were down by 1.9 percent on an unadjusted basis and by fully 3.8 percent on an adjusted basis.  Moreover, the rate of monthly price drops has been speeding up.  So although producers tried to jack up prices in response to the tariffs, they’re failing to make those price hikes stick.   

As for the future, who knows? But the tariff-led inflation alarmists still haven’t answered this crucial question: If business thinks it will have great scope to boost prices after tariffs are imposed, why isn’t it raising those prices right now? That is, why will companies have the major extra pricing power on Tariff Day Plus One that they will have lacked up until Tariff Day Minus One?

Once that question is answered, tariff alarmism will start looking highly plausible, even if no tariff-led inflation is visible yet. But not one day before.

(What’s Left of) Our Economy: Raging Tariffs-Led Inflation Still Isn’t a Thing – or Even Close

Tags

aluminum, Canada, household appliances, housing, inflation, metals-using industries, Producer Price Index, producer prices, softwood lumber, steel, tariffs, Trump, washing machines, {What's Left of) Our Economy

Good luck to everyone trying to find some signs in this morning’s producer price report of President Trump’s tariffs igniting ruinous, raging inflation throughout the U.S. economy. How come? Because they aren’t there. Yet again.

Let’s quickly examine some of the main products in the tariff spotlight, starting with washing machines, imports of which were slapped in February with levies aimed at countering sharp surges of product streaming into U.S. markets that harm domestic producers (called “safeguard tariffs).

Even though this Producer Price Index (PPI) data from the Labor Department focus on inflation or lack thereof for wholesalers, it does contain information on the consumer goods in which wholesalers deal. This morning’s report shows that prices for “household appliances” (including several products aside from the tariff-ed washing machines) rose by 4.1 percent from September, 2017 to September, 2018. That’s higher than the 2.7 percent year-on-year overall advance for such goods less the volatile food and energy sectors. But it’s anything but the steepest price rise in this category.

Moreover, on a monthly basis, household appliance prices don’t seem to be going anywhere lately. Between June and July, they actually fell by 0.2 percent. From July to August, they dipped another 0.1 percent. From August to September, they increased by 1.3 percent. Again, that’s greater than the 0.1 percent average for “Final demand goods less foods and energy.” But not excessively so. P.S.: Household appliance prices are affected by many factors other than tariffs.

How about steel and aluminum, where a series of tariffs began to be imposed in late March? Steel mill product prices did indeed jump by 18.1 percent year-on-year in September. But here are the last three monthly prices changes: +1.6 percent, +2.6 percent, and zero percent. So let’s hold off on the inflation alarmism here, too. And don’t forget: Thanks to Chinese and other foreign subsidies, steel prices have long been depressed for reasons having almost nothing to do with free market forces. So the tariffs have mainly been encouraging the restoration of accurate price signals – something that all free market supporters should regard as key to long-term economic health and prosperity.

The ebbing of inflation is even more striking when it comes to aluminum mill shapes. In September, their prices rose by a sharp 10.1 percent on an annual basis. But over the last three months? They’ve actually fallen significantly – by three percent, 2.1 percent, and 0.3 percent, sequentially. So thanks to the tariffs, normality seems to be returning to the aluminum market, too.

Much the same story is being played out in metals-using sectors – where reports of tariffs-caused devastation have been widespread. The pricing developments in fabricated structural metals products are a typical example: up 8.3 percent year-on-year in September, down sequentially by 0.6 percent in July, up by 0.2 percent in August, up by 0.5 percent in September.

Softwood lumber from Canada is another important economic input being tariff-ed by President Trump – this time since last November. Of course, they resulted in forecasts of impending disaster for the U.S. housing industry. But the PPI report shows that softwood lumber prices were up only 5.4 percent on year in September, and have been dropping sharply on month since July – by 2.5 percent, 9.6 percent (I repeat: 9.6 percent!), and 0.4 percent. That looks like deflation, not inflation.

To repeat a point I’ve made often, it’s entirely possible that these pricing trends could reverse themselves in the months ahead. But since we’ve seen nothing of the kind so far, it’s also entirely legitimate to suppose that current trends will continue – and important to start examining possible reasons why. Even though such an exercise will doubtless be more difficult and less fun that repeating forecasts of Tariffs-mageddon.