(What’s Left of) Our Economy: The Latest Data Remain Full of Normalization Puzzles

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Biden, CCP Virus, China, construction, coronavirus, COVID 19, Donald Trump, exports, goods trade, imports, inflation, inflation adjusted wages, labor shortages, leisure and hospitality, lockdowns, manufacturing, metals, non-oil goods trade deficit, non-supervisory workers, private sector, real wages, reopening, retail, services trade, shutdowns, tariffs, Trade, Trade Deficits, transportation, wage inflation, wages, Wuhan virus, {What's Left of) Our Economy

While I was away for a few days last week, two major U.S. government reports came out both giving off conflicting signals on on whether the economy has started to return to normal in critical ways as the CCP Virus subsides and reopening, along with consequent changes in consumer behavior, proceed.

The monthly trade figures (for April) showed a sequential decline, following a record surge, in America’s chronically huge gap between exports and much larger amounts of imports. Moreover the monthly drop took place as economic growth sped along at unusual rates after being shut down by government mandates and consumer caution. So maybe they’re an early sign that a return to immediate pre-virus conditions has begun?

Or is their most important message that these deficits, and especially the import levels, are still hovering near all-time highs in (the most widely followed) pre-inflation terms even though the economy as of the latest (first quarter) numbers is still a bit smaller in (the most widely followed) inflation-adjusted terms than during the last full pre-pandemic quarter (the fourth quarter of 2019)?

Indeed, the deficits are gargantuan even though President Biden has left former President Trump’s substantial tariffs on metals and goods from China practically untouched. 

The monthly inflation numbers (for May) are similarly confusing. They revealed that consumer prices (just one inflation measure published by Washington, but an important one) rose by 4.93 percent in seasonally adjusted terms. That was their fastest annual pace since September, 2008’s 4.95 percent. Surely, as widely claimed (including by the Federal Reserve, which wields so much influence over the economy, this upswing stems from a combination of bottlenecks resulting from (1) the sudden, widespread reopening; (2) the unusually low overall inflation numbers generated a year ago, when the economy was near the depths of its viruts- and shutdown-induced slump; and (3) the immense dose of stimulus injected into the economy by both elected politicians and the unelected Fed.

At the same time, the Fed has told us that its stimulus isn’t ending anytime soon, and although the Biden administration and Congressional Democrats are displaying some cold feet about approving more such levels of economic fuel (e.g., in the form of outlays on infrastructure, and a wide variety of income supports and enhanced unemployment benefits), it’s difficult to imagine that most or even much of this spending will actually be withdrawn even once a post-virus recovery is an indisputable reality.

But the biggest surprise of all: Despite the economy-wide inflation pressures, and by-now-routine claims that employers are dealing with nearly crippling labor shortages, wages overall adjusted for inflation keep going down.

Compounding the confusion over whatever conclusions can legitimately be drawn from these two reports: They cover two different months.

But let’s begin with the most important details from the April trade report. The ambiguity embodied in the data begins with the total deficit figure. The record March result was revised up from $74.45 billion to $75.03 billion but April’s $68.90 shortfall for goods and services combined, though the second worst monthly figure ever, was 8.17 percent smaller. That’s the biggest sequential drop since February, 2020 (8.39 percent), when China’s export-heavy economy was still largely closed because of the virus.

The same holds for the goods trade gap. The record March figure was revised up, too, from $91.56 billion to $92.86 billion. But April’s $86.68 billion result represented a 6.65 percent monthly decline, and this falloff was the biggest since the 8.39 percent plunge of January, 2019 – when American businesses were still adjusting both to Trump’s tariffs and anticipated tariffs.

Also still fueling the high U.S. deficits – a worsening of services trade balances. Here, U.S. trade has long been in surplus, but the surpluses keep shrinking because service sectors like travel are still suffering from the pandemic’s arrival and the consequent decimation of travel and othe transportation in particular. In fact, the April figure of $17.78 billion was the lowest since September, 2012’s $18.62 billion.

One key set of trade flows does, however, provide some evidence of Trump tariff effectiveness – U.S. non-oil goods trade, which encompasses those exports and imports whose magnitudes are most heavily influenced by trade policy (because, as known by RealityChek regulars, trade in oil is almost never the subject of any trade policy decisions and services trade liberalization remains at very early stages). In April, the monthly shortfall retreated 4.16 percent from its March record of $90.12 billion to $86.37 billion – which is only the fourth highest such total ever.

The import figures I focused on last month exhibit the same overall patterns: April saw big drops from record levels but the absolute numbers remain distressingly high. March’s initially reported record $274.48 billion in total imports was revised up considerably – to $277.69 billion. April’s total of $273.89 billion represented a 1.37 percent drop, but nonetheless was the second worst such figure on record.

March’s record monthly goods import figure was upgraded, too – from $234.44 billion to $236.52 billion. April’s total of $231.97 billion was a 1.92 percent drop but these purchases also still represented the second highest of alll time.

As for non-oil goods imports, the $215.33 billion April total was 1.98 percent down from an upwardly revised record $219.68 billion, and also the second biggest ever. Biggest drop since last April’s 10.91

Whether normalization is returning in manufacturing is more difficult to tell. Imports in March hit a record $207.59 billion, and did drop by 4.59 percent sequentially to $198.06 billion in April. That decrease, however, was a typical monthly move for manufacturing imports, and the April figure was still the third highest ever.

Incidentally, the April manufacturing deficit of $103.60 billion was 4.64 percent lower than March’s $108.66 billion. The March total was the second highest on record, but April’s figure was only the seventh all-time worst. The record, $110.20 billion, came last October, and it’s notable that the gap has narrowed on net despite the resilience shown during the pandemic period by manufacturing output.

More evidence of the Trump tariffs’ impact comes from the data on goods trade with China – whose products have attracted nearly all of these levies, and that cover hundreds of billions of dollars worth of products. The April figure of $37.59 billion was 6.56 percent lower than its March predecessor – a thoroughly unexceptional sequential decline and monthly level by historical standards. But the monthly dropoff was consideraby greater than the aforementioned 1.98 percent decrease for non-oil goods – the closest global proxy.

As a result of all these inconclusive developments, I’ll be awaiting the May trade report with even more interest than usual.

But despite all the uncertainties I mentioned at the start of this post, those May inflation figures have made me more confident than before in my previous contention that current price surges are anomalies by the extremely low inflation generated by the CCP Virus-battered economy of a year ago, and by the sudden reopening of so much of the economy following the long shutdowns and lockdowns. Even clearer, as I see it: Claims of significant, troubling wage inflation are especially weak.

After all, that 4.93 percent year-on-year May price increase followed a previous May-to-May rise that was just 0.22 percent. That was the feeblest such rise since September, 2015’s 0.13 percent. In addition, May’s month-to-month 0.64 price advance was smaller than April’s 0.77 percent. Two months do not a trend make, but these numbers certainly don’t point to raging inflation fires.

Nor do the wage data. Otherwise after-inflation total private sector wages wouldn’t be down more on-month in May (-0.18 percent) than in April (-0.09 percent). And the same couldn’t be said of constant dollar wages for non-supervisory workers (-0.20 percent in May versus flat in April).

Getting more granular, the price-adjusted wage trends are as bad or worse in construction; trade, transportation and utilities overall; retail trade; and education and health services.

The two big exceptions: the leisure and hospitality workforces that have been so decimated by the virus (and especially the non-supervisory group) and the transportation and warehousing sub-sector of the transportation and utilities industry category that contains a trucking sector unusually strained by the rapid reopening. In both cases, however, (and especially the leisure and hospitality industry), inflation-adjusted wages in absolute terms are well below the national private sector average. If anything, therefore, it seems like some wage inflation for these workers is long overdue.

(What’s Left of) Our Economy: Wage Inflation? Seriously?

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CCP Virus, construction, coronavirus, COVID 19, housing, inflation, inflation-adjusted wages, labor shortages, leisure and hospitality, private sector, real wages, recession, recovery, wage inflation, wages, Wuhan virus, {What's Left of) Our Economy

Reports keep abounding that U.S. businesses can’t find enough workers to match their needs amid an ongoing rapid reopening of the economy from its lockdowns-induced slump, and that companies are therefore being forced to attract employees with ever higher – and even alarmingly higher – pay offers.

All of that makes perfect sense except for one critical detail: The official U.S. wage figures show precious few signs of soaring wages whatever. In fact, when you adjust for the inflation that has been recorded in Washington’s statistics, you see that workers’ hourly pay generally keeps falling behind, not racing ahead, of rising prices in the economy.

First let’s look at the pre-inflation figures for the entire economy (except for government, where pay levels mainly reflect politicians’ choices, not economic fundamentals).

When it comes to the entire private sector, hourly earnings in April (the latest figures available, which are still preliminary) grew by 0.33 percent year-on-year. That result, though, is somewhat misleading, since the previous April’s level was artificially high. That month, remember, was the depth of the CCP Virus-induced recession, and companies were largely laying off their least experienced (and cheapest) staffers. So the wage number for retained workers rose (and strongly) simply because their pay levels remained relatively lofty, and they accounted for a much bigger percentage of employment. Therefore, perhaps that misleadingly high April, 2020 figure was the main reason that the 2020-2021 improvement is misleadingly low?

Unfortunately, the data shoot down that hypothesis, too. For example, between “normal” April, 2018 and 2019, economy-wide pre-inflation wages jumped by 3.30 percent. That’s ten times the 2020-2021 increase. And in fact, the April, 2019 to 2020 pay hike was by far the smallest since 2006 (when this particular data series began).

But maybe the biggest wage inflation only began this calendar year – when overall inflationary pressures have arguably become visible?  Between January and April, current dollar hourly wages for the entire U.S. private sector did climb by 0.84 percent, and that advance was more than twice as fast as the April year-on-year change. Moreover, this 2021 wage growth was faster than that for “normal” January-April, 2019 (0.76 percent). Indeed, it was the fastest since 2008, another recessionary year when layoffs heavily concentrated among the least experienced, lowest-paid employees rendered the 0.90 percent result artificially high.

But aside from 2008, the January-April increase wasn’t that much higher than that seen in many recent years. For example, the January-April result for “normal” 2019 was 0.76 percent. For 2018, it was 0.71 percent. Just as important – does anyone think that those years, or any time lately, has been a golden age of wage increases?

There’s another possibility to consider: that strong wage inflation has taken place only among the production and other non-management workers, who both tend to be the lowest-paid and who in principle therefore are likeliest to be kept out of the job market by unusually generous unemployment benefits.

Average hourly earnings before inflation for this group have actually risen much more strongly year-on-year in April than for the overall workforce – by 1.15 percent versus 0.33 percent. And this 2020-2021 result, as with wages for the entire workforce, does seem to have been artificially depressed by the equally artificially high (7.84 percent!) figure for 2019-2020.

But historically, the 2020-21 wage increase not only looks anything but exceptional. It’s positively pitiful – by far the weakest April-April rise on record. Just to compare, from April to April in “normal” 2019 and 2018, current dollar wages for these “blue collar” workers were up 3.46 percent and 2.83 percent, respectively. .

Are the trends much different for January-April periods – which in principle should reveal whether wage inflation has waited till this calendar year to take off? For 2020 so far, pre-inflation blue collar hourly pay has improved by 1.23 percent – more than the 0.84 percent increase for all private sector workers.

That’s much slower than the comparable 5.36 percent jump last year, but we agree that last year was weird. The 2021 results are faster than those of normal 2019 (0.91 percent), but the gap doesn’t seem gargantuan to me. At the same time, current dollar January-April pay increases of one percent or greater for blue collar workers have been experienced five times since 1998, and before then, you need to go back to the late-1980s for a period when they were routine.

So describing the January-April, 2021 results as wage inflation-y could be justified. But that’s a far cry from reasonably concluding that this inflation will have much in the way of legs, since the economy, as widely noted, has never seen this kind of sudden stop-start transition in peacetime.

There’s another set of numbers, though, that needs to be examined to put the wage inflation issue in full perspective – recent wage changes after taking into account inflation across the entire economy. And in these real terms, hourly pay has actually been going down lately.

That’s true for all private sector workers between last April and this past April (down 3.66 percent).

It’s true for these workers between January and April of this year (down 0.88 percent).

It’s true for private sector blue collar workers between last April and this past April (down 3.37 percent).

And it’s true for these workers between January and April of this year (-0.71 percent).

Moreover, the “2020 effect” caused by that year’s artificially high baseline doesn’t seem to account fully for this wage deterioration. It’s definitely been apparent for all private workers (for whom average real wages soared by 7.81 percent between 2019 and 2020), and for private sector blue collar workers (whose inflation-adjusted average hourly pay surged by 7.68 percent).

In addition, since 2006, (when real wages for the whole private sector workforce began to be tracked), these wages have fallen on an April-April basis five other times. But they’ve never fallen by remotely as much as in 2021. And this year, employers are supposed to be desperate for workers. Much the same holds for private sector blue collar workers during this period.

Looking at the January-April periods, the 2021 decrease of 0.88 percent for all private sector workers is the second biggest since 2006 (trailing only 2011’s 0.97 percent). Further, this four-month stretch has only seen one other instance of constant dollar wage decrease (2019’s 0.37 percent). And the 2021 result is all the more strange given the strangely strong and sudden nature of the recovery.

When it comes to their blue collar counterparts, 2021’s 0.71 percent drop in after-inflation wages between January and April is also the second biggest since 2006 (trailing only the 1.24 percent fall-off suffered, again, in 2011). Pay declines during this period for these workers has been more frequent than for the private sector overall. (They’ve occurred five times all told before 2021.) Again, however, 2021’s has been puzzlingly steep given the economy’s unusually fast recovery this year and all the labor shortage claims that have resulted.

More convincing signs of out-of-the-ordinary wage inflation can be seen in sectors like construction and leisure and hospitality, especially during the first four months of this year. In the former, which has enjoyed strength in residential housing throughout the pandemic period, pre-inflation wages have increased by 1.24 percent. That’s the most since 2006 (again, the earliest data available) – though not outlandishly so. But after accounting for inflation, real construction wages have dropped by 0.49 percent between January and April of this year.

For blue collar construction workers, pre-inflation wages have improved by 1.75 percent during the first four months of 2021 – another post-2006 high. But even though their real wages have dipped during this period by only 0.17 percent, that’s still a dip.

The leisure and hospitality industries are of course coming out of a disastrous pandemic period, and with Americans now flocking to restaurants and bars and resuming travel, it’s not surprising that January-April current dollar hourly pay has risen by 3.71 percent – far and away a post-2006 record. The post-inflation number is up nicely, too (1.98 percent), and also a performance that’s smashed previous records. So this sector so far is telling a stronger wage inflation story.

Non-supervisory blue collar leisure and hospitality workers have fared even better, with pre-inflation wages zooming up by 5.87 percent between January and April of this year, and real hourly pay better by 3.98 percent.

Will these healthy pay hikes continue? That’s a big question for these parts of the economy. But even though wage figures don’t capture the entire compensation picture (in particular, they leave out non-wage benefits and all the signing bonuses employers are reportedly offering to lure workers off the sidelines), with wage and salary income representing more than 80 percent of total employee compensation throughout the economy (including in the public sector), they capture lots of the picture. And the overall message is that, like a famous economist once said about computers being everywhere but in the productivity statistics, wage inflation worth worrying about, and related worker shortage claims, to date are everywhere but in the wage statistics.

(What’s Left of) Our Economy: Why Inflation Isn’t Worrisome So Far

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CCP Virus, CNBC, coronavirus, COVID 19, Federal Reserve, inflation, logistics, reopening, semiconductor shortage, shutdowns, Steve Liesman, stimulus, supply chains, transportation, West Coast ports, Wuhan virus, {What's Left of) Our Economy

By now you’ve surely seen or heard – or should have seen or heard – that the new U.S. official figures (for April) show that inflation is back big time and could all too easily spin out of control. The emphasis should be on “could,” because, as also widely observed (including by the Federal Reserve, which is a major U.S. government line of inflation defense), the recent price rises arguably stem from developments that are temporary byproducts of America’s utterly unprecedented economic circumstances these days – reopening in fits and starts, but overall quickly, from lengthy government-mandated shutdowns aimed at fighting the CCP Virus.

I’m pretty firmly convinced that the inflation optimists are right, even though the pessimists make strong points in observing that (a) prices have been rising faster on a monthly basis with each passing month this year; and (b) inflation tends to generate its own momentum. That is, the expectation of rising prices typically encourages households and businesses alike to step up their purchases in order to avoid paying more for the same goods and services later on. Further, more expensive inputs for specific businesses can easily prompt those companies to compensate by raising the prices they charge their customers, while at the same time generating the same reactions from other businesses that are their customers, and so on.

I’ll also grant that the pessimists shouldn’t be dismissed when they contend that even temporary inflation can cause serious damage to an economy, especially when we’re talking about price increases that only come to an end after, say, a year or longer rather than after two or three months. Therefore, it’s important to note that the optimists’ case depends heavily on the relatively rapid end to the price-boosting combination of sudden increases in consumer demand resulting from the reopening, and of all the supply bottlenecks that have emerged as businesses struggle to catch up with that demand – which of course is being buoyed by the immense doses of stimulus being injected into the economy, and that may be increased in the near future.   

Indeed, the prolonged shipping backups at West Coast ports should be making clear that the more optimistic definition of “temporary” might rest on some pretty dicey assumptions. In addition, we’re unlikely to see a quick end to the global semiconductor shortage that’s shut down considerable automobile production and thinned inventories all over the world – curbing supply and of course driving up prices.

So why am I optimistic? Largely for a reason that’s been generally overlooked in the inflation uproar. (One major exception has been CNBC’s Steve Liesman, whose segment yesterday partly inspired this post.) When you look at where prices actually are now in the economy as a whole, and even in particularly hot sectors, you find that they’re not much higher than they were just before the pandemic hit (in February, 2020, which will be the baseline month I’ll use). And that’s because they had been falling or weak for so many months while much of the economy was closed.

This methodology, to start, puts an entirely different shine on the news that the overall April inflation rate of 4.2 percent year-on-year was the strongest such surge since September, 2008. But from February, 2020 to April, prices by this broadest measure increased by just 3.1 percent. That’s much higher than the 1.3 percent increase during the previous comparable period (February, 2019-April, 2020). Remember, however: April, 2020 was the depth of the virus-related lockdowns and consequent recession.

During the February-April period before that, prices rose 2.4 percent – and that’s with none of the stop-start distortions currently being experienced. The period before that it was 2.6 percent. And the period before that – also a normal stretch – it was 2.9 percent. And in comparable (also normal) 2011-2012 timespan, it was 3.3 percent. So the new 3.1 percent doesn’t seem all that exceptional when you consider all the abnormalities of this post-virus recovery.

Another widely watched inflation gauge is called “core inflation.” It strips out food and energy prices because they can be volatile over whatever timeframe examined for reasons having nothing to do with the economy’s fundamentals – and supposedly fundamental vulnerability to inflation (e.g., unusual weather that impacts agriculture, or oil price decisions by the OPEC cartel and other major foreign producers).

On a monthly basis, they advanced by 0.9 percent, and year-on-year they were up three percent in April. The former figure was the worst since 1982, and the latter is on the high side as well. But let’s look at the February-April numbers. Between 2020 and 2021, core inflation was 2.6 percent. It was just two percent during the previous comparable period, but again, those numbers are distorted by deflationary April, 2020. The period before it was 2.6 percent – the same as this year, but without the reopening issues. And as recently as 2016, it was even higher – 2.7 percent – even with no virus-related confusion.

As they say in the investment advice world, past performance is no guarantee of future results. Nor should it be forgotten that many economists still find inflation frustratingly difficult to measure, and criticisms of the U.S. government’s methodology abound as well. (See, e.g., here.) But the official American figures are still widely followed, and certainly lie at the heart of the latest bout of inflation angst. And until these data start showing outsized price gains compared with pre-CCP Virus levels that haven’t been affected by virus-era abnormalities, I’m going to stay pretty relaxed about the U.S. inflation picture.*

Please note: This inflation analysis should not be used as investment advice, because I’m not in that business and don’t feel qualified to be in that business. Also, what I do know of that business teaches that asset prices are much more profoundly influenced by what investors as a whole think about the economy than by what I think about it.

(What’s Left of) Our Economy: Biden Trade Policy’s Off to a Flying Stop

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China, inflation, Joe Biden, Katherine Tai, National Foreign Trade Council, offshoring lobby, tariffs, Trade, trade policy, trade war, Trump, U.S. Trade Representative, USTR, {What's Left of) Our Economy

Any minimally intelligent discussion of the incoming Biden administration’s trade policy and the role of his pick for U.S. Trade Representative (USTR) needs to recognize at the start that Katherine Tai will make exactly none of the big calls on trade.

That’s not a knock on her specifically. But as nearly always the case (and the Trump administration was a major exception, as its trade envoy, Robert Lighthizer, was a prime author of specific, central initiatives), these decisions will be made way above her pay grade – almost certainly by the President himself or Treasury Secretary-designate Janet Yellen, or a combination of those two, along with the various special interests they need to please.

Even so, Tai will play an important message-bearing and policy defense role, especially in testimony before Congress, and in this vein, her first effort following her brief remarks following her nomination announcement got the Biden team’s record off to a start just ever so slightly above “same-old-stuff” level.

Most noteworthy, puzzling, and perhaps revealing was the choice of audience: the National Foreign Trade Council. For with its membership consisting of U.S. multinationals and big firms from highly protectionist economies like Germany and Japan, it’s long been a pillar of the corporate Offshoring Lobby.

Sure, many of these members have started to voice complaints about their China-related troubles in particular. But they’ve made equally clear that they have no clue as to realistic ways of solving them. In fact, their dogged opposition to unilateral, Trump-like U.S. tariffs as remedies (which have sharply curbed the access to the American market of their overseas production, and the availability of massively subsidized Chinese inputs for their domestic operations) has rendered them big obstacles to the remaining overhaul national trade policy needs.

It’s also true that everything known about Biden’s own long record on the matter, and his own statements during the campaign, makes clear the incoherence – and just as likely cynicism – of his own current stated approach (notably, stressing the imperative of working with – deeply conflicted and chronically fence-sitting — American allies to counter China’s trade and broader economic abuses).

Even so, given the pains Biden took to portray himself as “Middle Class Joe” whose trade initiatives and related decisions would prioritize American worker interests above all else, it needs to be asked why, from a purely political standpoint, his choice for trade negotiator chose an audience whose members have long pushed for exactly the opposite. Why not appear before a union audience?

Just as bizarre, Tai emphasized to these died-in-the-wool offshorers that “The President-Elect’s vision is to implement a worker-centered trade policy. What this means in practice is that U.S. trade policy must benefit regular Americans, communities, and workers.”

What did she and her superiors (who of course cleared her remarks) hope to accomplish with this declaration? Agreement? Or even the beginnings of theological conversion?

Weirder still: Her observation that “people are not just consumers — they are also workers, and wage earners” and, more pointedly, that when thinking about trade, it’s crucial to emphasize that “Americans don’t just benefit from lower prices and greater selection in shops and markets.” After all, her boss emphasized throughout the campaign that “President Trump may think he’s being tough on China. All that he’s delivered as a consequence of that is American farmers, manufacturers and consumers losing and paying more.”

It’s of course possible that Biden and his team could figure out a way to shield the entire U.S. domestic economy, from Chinese – and other countries’ – predatory practices without reducing the price competitiveness of these imports in the U.S. market. But it’s suggestive at the very least that after months on the campaign trail – and many decades in public life – the President-Elect has offered no specifics. And Tai’s speech did nothing to clear up this mystery.

(Not that there’s been any sign of noteworthy trade-related inflation during the “trade war” period – as shown, e.g., here – but one way greatly to boost the odds that tariffs don’t send prices upward would be to accompany trade restrictions with greater anti-trust enforcement that increases domestic competition, as I’ve argued here.)      

Tai advertised her and the broader Biden trade policy points as part of the former Vice President’s promise to “Build Back Better.” So far, though, the most charitable description of these is actually more like “Pretend More Assertively.”

(What’s Left of) Our Economy: Some Big Trade News in Today’s GDP Revisions

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constant dollars, current dollars, GDP, gross domestic product, inflation, real GDP, real trade deficit, shutdown, Trade, trade deficit, {What's Left of) Our Economy

And here I thought that the only big surprise in this morning’s U.S. government report on the nation’s economic output (the gross domestic product, or GDP) would come in the annual revisions – which update the data going back to the first quarter of 2015. After all, it’s long been obvious that the second quarter results would be dreadful, due to the CCP Virus-induced shutdown of so much of the U.S. economy.

The revisions were indeed pretty surprising, but the first set of estimates covering the second quarter of this year still contained one entirely (at least to me) unexpected finding: Despite the nearly 38 percent inflation-adjusted sequential crash dive of the economy (at annual rates), the real trade deficit didn’t fall much at all. Indeed, between the first and second quarters, the annualized decrease was only 3.71 percent (from $788 billion at annual rates to $780.7 billion).

The big virus-related effects came during the first quarter, when the annualized quarterly shrinkage was 34.13 percent annualized. Moreover, the price-adjusted trade shortfall had also plummeted by 37.33 percent at an annual rate between the third and fourth quarters of last year, as President Trump’s massive tariffs on China continued to be felt, and tariff front-running – which aimed at avoiding theatened and imposed new levies since the Trump trade wars began, and which inflated import totals over the short-term – subsided.

As for that huge first quarter sequential decrease in the price-adjusted trade deficit, it’s now the biggest such move since the 72.53 percent plunge between the first and second quarters of 2009, when the Great Recession was bottoming.

All the same, the revisions were indeed interesting – and important. For starters, that $788 billion annualized first quarter trade deficit was previously reported as being $815.5 billion. Meanwhile, the $780.7 second quarter after-inflation trade deficit is the country’s smallest quarterly gap since the $792.3 billion figure of the first quarter of 2017.

At least as interesting, the GDP revisions make the Trump administration’s trade record look a good deal better than previously reported, while leaving the results for the last two years of the Obama administration basically unchanged. That’s not obvious from the table below, which shows the old and new constant dollar trade deficit results for the last four full years in billions of dollars:

                 New                    Old

2019:       917.6                  953.9

2018:       877.7                  920.0

2017:       816.8                  858.7

2016:       763.6                  586.3

2015:       719.5                  540.0

But there’s a big problem with these statistics. They’re measuring apples versus oranges. The 2017-19 results have been presented by the Commerce Department in terms of 2012 dollars. The original 2015 and 2016 results, however, (which I found by going through pre-revisions GDP releases) were presented in 2009 dollars, but in their updated versions, they’re presented in 2012 dollars. In other words, the inflation adjustment factor is different. All the same, the Trump deficits, themselves, are notably smaller than they were previously reported.

To permit a legitimate comparison between the two administrations, it’s necessary to drop the inflation adjustment altogether, and present the annual trade deficit results in current (billions of) dollars. That’s what the next table shows:

                 New                   Old

2019:       610.5                 631.9

2018:       609.5                 638.2

2017:       555.5                 578.4

2016:       512.5                 521.2

2015:       526.6                 522.0

All three Trump results are, again, better than previously reported, although the difference is significantly smaller than for the inflation-adjusted figures. For the Obama years, the 2016 results are a little better, but the 2015 results are a little worse.

Even so, there’s still no doubt that the Trump trade deficits are higher than those of the last two Obama years. But as known by RealityChek regulars, sometimes individual data sets like this don’t tell the whole story. And with the trade figures, it’s important to compare them with the size of the whole economy. For this exercise, let’s keep it simple and stick with the new pre-inflation statistics. This table shows the current dollar trade deficit as a percentage of current dollar GDP:

2019:  2.85 percent

2018:  2.96 percent

2017:  2.84 percent

2016:  2.73 percent

2015  2.89 percent

Here a modest edge goes to those two Obama years, at least looking at the average. At the same time, the former President was conducting trade policy business-as-usual. Mr. Trump is conducting a major experiment in disruption that’s bound to create adjustment-related inefficiencies, at least in the short run. That is to say, the full results aren’t in. And a major question looming over the U.S. economy in this election year is how long it will be permitted to continue.

Glad I Didn’t Say That! The Epic Fail of Tariff Fear-Mongering

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aluminum, China, consumer price index, consumers, core inflation, Glad I Didn't Say That!, inflation, manufacturing, metals, metals-using industries, Producer Price Index, steel, tariffs, Trade, trade war, Trump

“Trump’s trade war may soon hit consumers’ wallets and paychecks.”

–NBC News, July 18, 2018

“Tariffs will surely lead to higher prices for imported goods and, to a lesser extent, prices for non-imported goods that use imported materials.”

–Wharton School of Business, University of Pennsylvania, July 18, 2018

“Tariffs are about to hit consumers, and it won’t be pretty.”

–CNBC, July 25, 2018

“Trade restrictions, by their nature, result in price increases for the goods in question. If the price of steel and aluminum goes up, manufacturers will be forced to pass those costs onto American consumers.”

–The Heritage Foundation, March 2, 2018

U.S. core consumer price* index year on year, November: +0.1 percent

U.S. core producer price index** year on year, November: +0.5 percent

*commodities less food and energy

**final demand goods less food and energy

(Sources: “Trump’s trade war may soon hit consumers’ wallets and paychecks,” by Ben Popken, NBC News, July 18, 2018, https://www.nbcnews.com/business/economy/trump-s-trade-war-may-soon-impact-consumers-wallets-paychecks-n890576: “Tariff Troubles: Will Consumers Feel the Pinch?” Public Policy, Knowledge@Wharton, Wharton School of Business, University of Pennsylvania, July 30, 2018, https://knowledge.wharton.upenn.edu/article/trumps-tariffs-will-impact-average-consumer/; “Tariffs are about to hit consumers, and it won’t be pretty,” by Jeff Cox, CNBC, July 25, 2018, https://www.cnbc.com/2018/07/25/tariffs-are-about-to-hit-consumers-and-it-wont-be-pretty.html; “3 Reasons Why Trump’s Tariffs Would Hurt American Workers,” by Tori K. Smith and Jay Van Andel, Commentary, The Heritage Foundation, March 2, 2018, https://www.heritage.org/trade/commentary/3-reasons-why-trumps-tariffs-would-hurt-american-workers. All compiled in “Christmas Miracle: Rising Wages and Low Inflation Promise a Very Merry Holiday Season,” by John Carney, Breitbart.com, December 11, 2018, https://www.breitbart.com/economy/2019/12/11/low-inflation-christmas/. “Consumer Price Index – November 2019, USDL-19-2144, News Release, Bureau of Labor Statistics, U.S. Department of Labor, December 11, 2018, https://www.bls.gov/news.release/pdf/cpi.pdf; and “Producer Price Indexes – November, 2019, USDL 19-2146, News Release, Bureau of Labor Statistics, U.S. Department of Labor, December 12, 2018, https://www.bls.gov/news.release/pdf/ppi.pdf)

(What’s Left of) Our Economy: Mainstream Media Never Trump-ism on Trade Gets Weirder and Weirder

Tags

China, consumers, inflation, Mainstream Media, retail, Reuters, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

It’s like they can’t help themselves. Even when Mainstream Media organizations and reporters conduct detailed research showing that President Trump’s tariffs-heavy China trade policies aren’t hurting U.S. consumers in the slightest, they feel compelled to issue dire warnings about the possibility. If you doubt me, check out this Reuters piece from the day before Thanksgiving on how the levies are affecting America’s major retailers.

Reuters, to its credit, actually took the trouble to look at prices to gauge the impact of the Trump levies by examining actual prices – as opposed to economists and to analysts from think tanks and other groups bought and paid for by the corporate offshoring lobby, who toss out apocalyptic numbers based on bogus-at-best methodologies.

The findings, “based on a pricing study conducted for Reuters by retail analytics firm Profitero, which examined online prices from seven large retailers for 21,000 products”?

From the October and November, 2018 to the same months this year, for goods “in key holiday categories including appliances, electronics, toys and video games,” leading big box and other retailers overall have held prices “lower than the average rate of inflation during the same period….”

More specifically, at “Walmart, Walmart-owned Jet.com, Amazon, Target Corp, Best Buy, GameStop, and Staples,” electronics prices rose somewhat more than prices in the U.S. economy across the board, but prices for the other products rose at much lower rates, and toys and video games actually became less expensive in absolute terms.

Nor did Reuters try to hide these results, as the headline reads “Top U.S. retailers absorb tariff pressure ahead of holiday shopping season,” and the same point was made in the lead paragraph.

Nonetheless, the report felt compelled to warn that “America’s trade war with China threatens to push up product prices, which could hurt consumer spending this holiday season, a period which makes up nearly 40% of annual revenue for many retailers.”

Sure that’s true in a technical sense. But this sentence is also about as responsible and accurate as one stating that “disciplining a child threatens to alienate him or her” when there’s no sign of that outcome developing, and when in fact all the evidence shows the discipline working. And as for hurting consumer sales, that currently seems far-fetched as well, based on what’s known about the current holiday shopping season. How do I know this? I read it in another Reuters article.

Moreover, it’s legitimate to ask why Reuters didn’t draw the opposite conclusion from its research: The Trump administration and tariff supporters so far have been right in insisting that consumers could be shielded from tariff-induced inflation, and in fact would be, because retailers know full well that they lack the leverage needed to force prices up, and would need to offset them themselves – by eating the extra costs, offsetting them by becoming more efficient, or some combination of the two.

Yes, this would have entailed writing something positive about the President and his trade policies.  But noxious as that might seem to the Mainstream Media, it would have gad the added virtue of being true. 

(What’s Left of) Our Economy: The Offshoring Lobby Admits Americans are Standing Tall in the China Trade War

Tags

2020 elections, capex, Charles Koch, China, CNBC.com, consumers, Democrats, inflation, manufacturing, national security, recession, slowdown, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

Another trade war myth bites the dust! And its demise is especially big news, given that its killers are some of the leading myth-makers.

Specifically, as reported by CNBC,com, top officials of a major lobbying campaign aimed at forcing President Trump to overturn his tariff-heavy trade policies, and in particular, to make nice with China, have openly admitted that the ace-in-the-hole they thought they held turned out to be joker. According to a CNBC posting yesterday, the political network funded partly by billionaire libertarian Charles Koch has concluded that their efforts to restore the pre-Trump, offshoring-happy, U.S. trade policy status quo have failed because it completely misread the American public’s willingness to pay an economic price for combating China’s trade predation.

This news comes on the heels of ongoing evidence that, contrary to widespread predictions from economists, think tank hacks, globalist politicians, and the Mainstream Media reporters who keep taking their cues from all these trade zealots, raging American inflation has not been ignited, business investment has not been paralyzed, domestic manufacturing has not suffered a death blow (though it’s been in a shallow recession for a year), and the economy has not plunged into recession (though growth has slowed).

The advertising-focused Koch drive sought to convince President Trump to back off his strategy of trade pressure by exploiting the selfishness of U.S. consumers in particular and the supposed vulnerabilities of the U.S. political system. The apparent central assumptions (and they’ll be familiar to anyone who’s been following Mainstream Media coverage of trade issues): Affluent, and indeed spoiled, Americans have much less tolerance for economic pain than their long impoverished Chinese counterparts; and China’s dictators will find it much easier to resist any public pressure that did develop than American leaders. Therefore, the Koch operatives reasoned, stoking fears that Mr. Trump’s tariffs would supercharge retail prices in particular and kill jobs by prompting retaliatory Chinese measures and slumping American capital spending would set off a political firestorm that the President would need to extinguish if he hoped to win reelection.

But at a briefing it held in New York City yesterday, a Koch official told reporters that “The argument that, you know, the tariffs are adding a couple thousand dollars to the pickup truck that you’re buying is not persuasive. It doesn’t penetrate with the people that are willing to go along with the argument that you have to punish China.”

Nor did the Koch campaign make this decision lightly. The CNBC.com piece noted that “the network came to this conclusion after conducting weekly focus groups on trade policies.” Also cited in the post was a recent national poll showing that “63% of registered voters believe tariffs will ultimately hurt the United States more than China, but 67% of the electorate is convinced it’s necessary to confront China over its trade practices.”

In other words, the American public is wiser and more farsighted than the U.S-owned businesses that have worked overtime to help strengthen the Chinese economy – including by voluntarily transferring to the Chinese the technology they need to upgrade their mechanisms of repression and modernize their military. And everyday Americans are much smarter than those companies that China has begun victimizing once Beijing concluded they’d outlived their usefulness, but that keep hoping against hope that enough boot-licking will save their corporate skins in the Chinese market. Because the American public evidently understands that U.S. prosperity and national security alike require reversing these China-enabling policies, and that slightly more expensive imports from China are a small price to pay for preserving and achieving these goals.

Ironically, the poll indicates that the Koch campaign (along with similar efforts) has succeeded in one respect: It represents some evidence that Americans believe that their country is more vulnerable to a trade war than China – even though the Chinese economy is much more trade dependent, and even though, as noted above, the United States keeps growing (albeit more slowly), and its overall inflation remains subdued by any reasonable standard.

Maybe that’s why the Koch network says it’s far from giving up, and is considering delivering the same message with different tactics. Two seem especially promising to these Friends of China:

>“putting together a team of almost 100 business leaders to call on the Trump administration and lawmakers to end the trade war with China”; and

>educating “100,000 activists in at least 35 states about the potential negative impact of using tariffs to battle China. Those volunteers will then be expected to start reaching out to their congressional leaders. The network hopes these activists can convince lawmakers on Capitol Hill to stand up against the administration’s current trade policy. The latest phase of the Koch campaign is expected to cost the network millions of dollars.”

Of course, short of a major economic downturn, if the Koch network has already established that the public is rejecting its advertising-carried China fear-mongering, it’s unclear why President Trump would be more responsive to the 100 business leaders than he’s been to date? And why would most Members of Congress not already backing China coddling pay more much attention to the 100,000 activists?

That’s a question that also needs to be asked by some other major actors in the U.S.-China trade war: the majority of current Democratic presidential candidates, who clearly believe that there’s lots of voter China-related trade whining that they can turn into votes, and ultimately into victory over Mr. Trump; and Chinese dictator Xi Jinping himself, who just as clearly believes that if the President is defeated, he’ll be back to dealing with Uncle Sucker on trade – and so many other fronts.

Making News: Quoted in National News Service…& More!

Tags

Breitbart News Tonight, consumers, IndustryToday.com, inflation, Making News, McClatchy News Service, Miami Herald, tariffs, trade war

I’m pleased to announce two recent media appearances and present the link to a podcast.

First, it was great to see the McClatchy News Service quote my views yesterday on whether President Trump’s tariff-centric trade policy is likely to boost U.S. consumer prices greatly.  Here’s the link, and since McClatchy is a national news organization, the piece has been published in major dailies like the Miami Herald.

In addition, on Tuesday, IndustryToday.com re-posted my August 25 RealityChek post explaining China’s unexpectedly (at least to me!) hard line in its trade conflict with the United States.  Here’s the link.

Finally, the podcast is now on-line of my Tuesday night interview on Breitbart News Tonight on the state of the economy – and whether a recession is coming soon.  Click here, and scroll down till you see my name under the August 27 programs.

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

 

(What’s Left of) Our Economy: Trump’s Latest China Tariff Moves – & Why They’re Mistaken

Tags

China, consumer goods, consumers, Hong Kong, inflation, producer goods, tariffs, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

If you’re confused by President Trump’s latest China tariffs moves, don’t feel bad. They’re really confusing!

Much clearer is their main implication: Once more, the President has needlessly let China off the trade war hook – and significantly reduced the odds of U.S. success no matter how it’s defined.

To summarize the chain of announcements and decisions that have produced the present situation: As of August 1, in various stages, the United States had imposed 25 percent tariffs on $250 billion worth of goods imports from China based on the latest data. And on May 5, Mr. Trump threatened to place tariffs of 25 percent on the rest of China’s merchandise shipments to the United States (about $300 billion worth).

That announcement was seen as especially significant because the previous tariffs mainly hit what businesses and economist call “producer goods” or “intermediate goods.” They’re the parts, components, and materials that companies use to produce final products, including consumer products. As a result, even when they do lead to higher consumer prices, the role played by these duties is difficult for consumers (i.e., voters) to identify, much less complain about to the politicians responsible.

In addition, as I’ve frequently noted (e.g., here), tariffs on these producer goods often don’t lead to any inflation, or much inflation, at all, for a variety of reasons and combinations of reasons. In many instances, retailers and other businesses simply lack the needed pricing power. As a result, they often seek to persuade their entire supply chain to preserve market share by eating some or all of the higher prices and accepting lower profits. Alternatively, various parts of the supply chain – including the final customer – can try to offset tariff-induced price increases by boosting productivity. That’s actually good for the economy in the long run, as improved efficiency not only enables companies to absorb cost increases while maintaining and even increasing margins. Such better productivity tends to spur the development of new efficiency-enhancing products, services, and technologies – a great way to boost living standards in a healthy, sustainable way.

Yet the May Trump $300 billion threat – which stemmed from the President’s unhappiness with the lack of progress in the trade talks with China – would have finally hit most consumer goods imports. Therefore, it would have created the risk that shoppers would blame the President for any price increases they did encounter. Even worse, the timing of the threat practically ensured that these higher prices would start appearing just as holiday shopping heated up – or typically heats up.

In late June, however, after meeting with Chinese leader Xi Jinping at a global summit in Japan, Mr. Trump agreed to a trade truce and to hold off on the $300 billion threat. Two weeks later, though the threat was back on the table, according to a Trump tweet.

On August 1, following a new round of apparently unsuccessful trade negotiations and the President’s belief that China had broken a promise connect with the late June trade truce to buy more American farm products, Mr. Trump specified that ten percent tariffs on the $300 billion worth of consumer goods-dominated imports from China would begin on September 1. Just four days later, his administration announced another “hawkish” trade war decision – officially designating China as a country that manipulated its currency to gain trade advantages (by keeping its products artificially cheap and therefore making goods and services from trade competitors artificially expensive in comparison). At the same time, the currency decision by law doesn’t automatically result in new tariffs, although it could eventually bring about some other penalties.

And yesterday came the latest turnaround: Mr. Trump decided to postpone tariffs on an estimated $160 billion of the $300 billion from September 1 to December 15. Not coincidentally, as his remarks on benefiting holiday shoppers made clear, many of the items on the postponement list included particularly popular gift items like toys and smartphones.

In addition, tariffs on some $30 billion worth of imports from China would be lifted permanently (at least for now!). But new duties on some $110 billion worth of imports from China are at this point slated to go into effect at the beginning of next month, and this group, too, is dominated by consumer goods.

Commentators focusing on the postponed goods called the latest Trump move a cave to China spurred by the President’s fears of a falling stock market, weakening U.S. economy, and angry consumers. Others, pointing to the products that will be slapped with new levies, and to the continuation of previously announced tariffs, insisted that Mr. Trump was keeping considerable pressure on the Chinese.

I lean toward the former interpretation, for these reasons. First, there’s no sign that the President’s forbearance has won any concessions from China. Second, the tight Trump focus on appeasing holiday shoppers can only signal weakness to Beijing, and feed its hopes that it can prevail in the trade and broader economic conflict by waiting for the President to be replaced by a more conventional, more pliable chief executive in 2020. Third, the delay announcement came just before a batch of absolutely terrible economic data was released by China. And given Beijing’s history of publishing overly bullish figures, it’s a safe bet that its economy is even weaker than most recently indicated. Fourth, Xi Jinping is under pressure not only economically, but politically, due to the rising unrest in Hong Kong.

Fifth, it’s true that from the standpoint of China’s longer-term prospects, maintaining the tariffs on its producer goods matters crucially. For this category includes most of the high tech and other advanced manufactures that represent any economy’s hope for continued technological progress, and therefore faster, healthier growth and a stronger military. But the consumer goods matter politically – because since they’re largely labor-intensive in nature, they’re mass employers. And China’s dictators view high unemployment as a mortal danger to their rule.

Sixth, although it’s clear that U.S. investors hate the trade war, the President needs to remember that, however much he likes to tout the stock market as a barometer of his economic performance, these markets and the real economy are by no means identical. We’ll be getting some key economic data tomorrow, when the Federal Reserve releases its new report on industrial (including manufacturing) production. But so far, the manufacturing numbers have shown that, after a soft patch in the winter, both inflation-adjusted output and capital spending are trending upward again. So unless these and other upcoming data break notably from their most recent patterns, recession – and even further slowdown – predictions will keep looking far-fetched.

Importantly, none of the above analysis means that I’ve changed my view that no China trade deal acceptable for U.S. interests is possible because of insurmountable verification obstacles. Instead, America’s only realistic option is to keep disengaging economically from China – both to reduce U.S. economic reliance on an increasingly hostile power, and to weaken further the only country capable of posing noteworthy national security threats. As a result, however, Washington should pass up no opportunity to inflict pain on China’s economy. And although no one would be shocked if he reversed course yet again before too long, that’s exactly the mistake that President Trump just made with his latest China tariffs delay.