(What’s Left of) Our Economy: Why Cutting China Tariffs to Fight U.S. Inflation Looks More Bogus Than Ever

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Biden, China, consumer price index, CPI, currency, currency manipulation, Donald Trump, import prices, inflation, non-oil goods, Section 301, tariffs, yuan, {What's Left of) Our Economy

As RealityChek readers may have noted, I haven’t followed the U.S. government data on import prices for a while. That’s been because global trade has been so upended for the last two-plus years by the CCP Virus pandemic and the supply chain turmoil it’s fostered. Three big recent developments warrant returning to import price numbers, though.

First, President Biden has confirmed that he and his administration is seriously considering lowering tariffs on imports from China in order to help fight inflation. Second, since early March, China has dramatically driven down the value of its currency, the yuan. Since the yuan’s value is controlled by the Chinese government, rather than trading freely, Beijing has been giving its exports price advantages over all the competition (and in the U.S. and other foreign markets as well as in its own) for reasons having nothing to do with free trade or free markets. Third, new import price statistics just came out this morning.

And developments number two and three make clearer than ever that blaming the China tariffs for any of the torrid price increases afflicting American consumers or businesses is the worst kind of fakeonomics.

In a previous post, I explained why the scant actual tariffs imposed by former President Donald Trump on Chinese-made consumer goods and remaining on them, and the negligible portion of the Consumer Price Index (CPI) they represented, couldn’t possibly move the inflation needle notably.

Further, there’s the timing issue: The Trump tariffs imposed under Section 301 of U.S. trade law were slapped on in stages between March, 2018 and August, 2019. And by their nature, each of them could only generate a one-time price change. Yet consumer inflation in America didn’t take off until early 2021. Obviously, something(s) else was (were) responsible.

China’s currency moves, moreover, show that any Biden tariff-cutting will only add more artificial price edges to those Beijing is already creating for itself – thereby recreating some of the predatory Chinese pressure that competing U.S. employers and workers had long endured before the relief granted by Trump’s tariffs.

Since early March, the yuan has weakened by fully 7.75 percent versus the dollar. And with China’s leaders facing a substantial economic slowdown that could challenge the Communist Party’s political legitimacy, don’t expect Beijing to abandon quickly any practice that could prop up growth and employment.

Those new U.S. import price data reveal that the yuan’s depreciation hasn’t much affected China’s (government-made) competitiveness yet. But as indicated by the chart below, it soon will. As you can see, for years, the prices of Chinese imports entering the American market and the yuan’s value have risen and fallen pretty much in tandem.  

In addition, according to the new import price statistics, over the past year (April to April), import prices from China have risen much more slowly (4.6 percent) than the prices of the closest global proxy, total American non-fuel imports (7.2 percent). And the Trump tariffs should be singled out as a meaningful inflation engine?

Of course, these price trends could be cited to argue that these tariffs had no notable impact on U.S. competitiveness at all. But U.S. Census data show that, between the first quarter of 2018 (when the first Section 301 Trump tariffs were imposed), and the first quarter of this year, goods imports from China fell from 2.44 percent of the U.S. economy to 2.26 percent. (And this despite a big surge in American purchases of CCP Virus-fighting goods from the People’s Republic due to Washington’s long-time neglect of the nation’s health security and the secure supply chains it requires.) During this same period, total non-oil goods imports (the closest global proxy) increased as a share of the economy from 11.35 percent to 12.41 percent. So the Trump policies must have had some not-negligible effect.

The case for reducing the China tariffs is feeble enough even without these inflation points. After all, the Chinese economy is running into significant trouble due to its over-the-top Zero Covid policy, the deflation of its immense property bubble, and dictator Xi Jinping’s crackdown on the country’s tech sector. So the last thing on Washington’s mind should be throwing Beijing a tariff lifeline. Boosting China’s export revenue also means boosting the amount of resources available to the armed forces of this aggressive, hostile great power. And none of the tariff-cutting proposals is conditioned on any reciprocal concessions from China.

Citing bogus inflation arguments is the icing on this rancid cake, meaning the tariff-cutting proposal can’t be dropped fast enough.

(What’s Left of) Our Economy: The Latest Sign That Inflation is Here to Stay

Tags

baseline effect, consumer price index, cost of living, CPI, Federal Reserve, inflation, monetary policy, PPI, Producer Price Index, recession, supply chains, wholesale inflation, wholesale prices, {What's Left of) Our Economy

If you follow the news about the U.S. economy, you know by now that the federal government’s Producer Price Index (PPI – its measure of wholesale price inflation), rose at a slightly slower annual rate in April (11.03 percent) than in March (11.18 percent).

Ditto for the core PPI, which omits not only food and energy but trade services – since supposedly they’re volatile for reasons having nothing to do with the economy’s fundamental vulnerability to out-of-the-ordinary price changes (decreases as well as increases).

Both PPIs measure how much businesses charge each other for the goods and services they turn into final products and sell to households and individuals. That’s why they’re naturally seen as precursors of future consumer inflation rates (measured by the Consumer Price Index, or CPI).

After all, as long as the economy’s overall demand levels (reflecting overall growth levels) remain healthy, these businesses mostly will be able to pass these cost increases on to customers and actually will. Higher consumer inflation follows. So anything like the opposite is happening, and if producer prices are easing at all (even from historic highs), that’s got to be encouraging news on the consumer and overall inflation fronts.

But did the April yearly rate of increase really slow down? Maybe not. That’s because it’s a preliminary reading and, as shown by the left-hand column in the table below, since last September, every revision of that first estimate went up.

Jan 2021: 1.60 percent now 1.59                                1.97 percent

Feb 2021: 2.96 percent now 2.95                               1.11 percent

March 2021: 4.15 percent now 4.06                           0.34 percent

April 2021: 6.51 percent now 6.43                  -1.52 percent now -1.44

May 2021: 6.99 percent now 6.91                   -1.10 percent now -1.01

June 2021: 7.56 percent now 7.49                   -0.68 percent now -0.59

July 2021: 7.96 percent now 7.83                    -0.25 percent now -0.17

Aug 2021: 8.65 percent now 8.58                    -0.25 percent now -0.17

Sept 2021: 8.78 percent now 8.82                             0.34 percent

Oct 2021:  8.87 percent now 8.90                             0.59 percent

Nov 2021: 9.88 percent now 9.94                     0.85 percent now 0.76

Dec 2021: 9.99 percent now 10.58                   0.84 percent now 0.76

Jan 2022: 10.08 percent now 10.17                  1.60 percent now 1.59

Feb 2022: 10.27 percent now 10.51                 2.96 percent now 2.95

March 2022: 11.18 percent now 11.54             4.15 percent now 4.06

April, 2022: 11.03 percent                                       6.43 percent

Sure, the April revision could be a downgrade – like those between January and August, 2021. But the odds of an upgrade look pretty good.

Moreover, the right-hand column in the table shows that the baseline effect, which was cause for some optimism that inflation might peak before too long, is more over than ever.

As known by RealityChek regulars, the unusually high and robustly rising annual CPI and PPI figures for last year stemmed largely from the change they represented from unusually low inflation rates the year before – which were driven down by the arrival of the CCP Virus and the sharp recession it induced by prompting on-and-off lockdowns of huge chunks of the economy, and major behavioral caution by businesses and individuals alike.

What that right-hand column shows is that these effects – even with the slightly better revisions displayed above – were profound enough to result in actual PPI annual decreases from April, 2019-2020 through August, 2019-2020. (The right-hand column also brings the story up to 2020-2021 for January through April – the baseline comparison year for the first four data months of 2021-2022.)

That is to say, the table reveals that the economy’s recovery in 2021 from virus-ridden and downturn-y 2020 amounted to a great catching up process that largely explains the bloated PPI figures. (The other major factor was supply chain disruption resulting from the stop-and-start nature of some of the virus waves and lockdowns, and therefore of the recovery itself.)

But the above table also shows that the baseline effect began fading significantly this past February. That month, the annual PPI rise of 10.27 percent came off a February, 2020-2021 increase of 2.95 percent. The similar January annual increase of 10.08 percent, by contrast, came off a 2020-2021 rise of a much lower 1.59 percent.

And just look at April! That 11.03 percent annual PPI jump has followed a 6.43 percent increase between the previous Aprils.

Moreover, the same kind of trend (at lower absolute levels) is evident from the core PPI data, as shown below. Again, the left-hand column displays the annual increases by month starting in January, 2021. The right-hand column shows the annual changes by month for the year before – the baseline. The only possible significant difference is that I haven’t tracked the revision record for this core PPI series, so I don’t know if the latest April result is likely to be upgraded or downgraded, or unrevised.

Jan 2021: 1.79 percent                                                    1.64 percent

Feb 2021: 2.33 percent                                                   1.36 percent

March 2021: 3.15 percent                                               1.00 percent

April 2021: 4.81 percent                                                -0.09 percent

May 2021: 5.25 percent                                                 -0.18 percent

June 2021: 5.60 percent                                                  0.09 percent

July 2021: 6.01 percent                                                   0.27 percent

Aug 2021: 6.19 percent                                                   0.36 percent

Sept 2021: 6.14 percent                                                  0.72 percent

Oct 2021: 6.26 percent                                                    0.90 percent

Nov 2021: 7.04 percent                                                   0.99 percent

Dec 2021: 7.18 percent                                                    1.17 percent

Jan 2022: 6.91 percent                                                     1.79 percent

Feb 2022: 6.76 percent                                                    2.33 percent

March 2022: 7.10 percent                                               3.15 percent

April, 2022: 6.92 percent                                                4.81 percent

The big takeaway here: Even more than yesterday’s April Consumer Price Index report, today’s release on the Producer Price Index is saying that alarmingly high inflation is here to stay for Americans for the forseeable future. It’s possible that the Federal Reserve, the U.S. government agency mainly responsible for handling inflation, can tighten monetary policy (to reduce that aforementioned consumer demand and in turn growth) skillfully enough to engineer a “soft landing” for the economy – i.e., bring price increases back to much less damaging levels while avoiding a recession. But keep in mind that the next time the central bank achieves this goal starting from inflation rates this hot will be the first.

(What’s Left of) Our Economy: The Baseline Effect’s Gone and U.S. Inflation is Settling In

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baseline effect, consumer price index, consumers, cost of living, CPI, Federal Reserve, inflation, PPI, Producer Price Index, recession, {What's Left of) Our Economy

Sorry to be the bearer of bad news on the U.S. inflation front, especially considering even the modest cheers (at least in early Wall Street trading) that greeted this morning’s official data on rising prices. But I see the new figures confirming that inflation has entered a worrisome new phase, and mainly because they show that annual living costs are no longer soaring largely because they increased so feebly the year before. Instead, that “baseline effect” is unmistakably gone, and inflation has acquired its own momentum.

The yearly inflation figures by month are the strongest evidence. As noted last month, the baseline effect was most prominent from March through July of last year. During that stretch, the annual headline growth in the overall (or “headline”) Consumer Price Index (CPI) sped up from 2.64 percent to 5.28 percent. But this acceleration owed much to the fast (but choppy) economic recovery from the deep CCP Virus-induced recession of mid-2020, when the annual inflation rate actually fell fom 1.51 percent to 1.05 percent. That’s considerably below the two percent inflation target set by the Federal Reserve, the U.S. government agency with the greatest responsibility for keeping prices stable.

Moreover, from September, 2021 at least through January, 2022, the baseline effect made a major comeback. During those months, the annual inflation rates increased from 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent – still below the Fed target.

As I also wrote in March, the February CPI report contained signs that the baseline effect was fading, and today’s April numbers leave no doubt that it’s gone. Headline CPI that month worsened on year much faster than the comparable January rate, and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 annual increase in prices that was significantly higher than the Fed target.

It’s true that April’s 8.22 annual overall inflation rate was a little slower than that March figure of 8.56 percent. But the March cost surge came off a 2.66 percent annual increase for March, 2021. The April result is coming off an April, 2020-2021 jump of 4.15 percent. That was more than twice the Fed target.

In other words, inflation was already hitting disturbing levels last year, and now it’s advancing nearly twice as fast.

Much the same story emerges from the so-called core inflation rate, which strips out food and energy prices supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying vulnerability to high inflation. Since energy prices in particular affect the cost of everything whose production requires energy (i.e., everything) the distinction tends to become pretty artificial after a while. But even playing along with this claim reveals grounds for concern.

As with the headline rate, April’s annual core CPI inflation of 6.13 percent was a moderation from March’s 6.44 percent. But the March result was coming off a March, 2020-2021 period when core inflation rose by 1.66 percent – again, well below the Fed’s two percent target. April’s number followed annual core inflation for the previous April of 2.97 percent – again, much higher than the Fed target.

Meanwhile, the month-to-month CPI data released today don’t bolster the case for inflation optimism emphatically, either. Glass-half-full types will correctly point out that the 0.33 percent sequential rise in the headline April CPI was the lowest since last August, and shrank dramatically from March’s 1.24 percent.

But in April, core CPI advanced on-month by 0.57 percent, a noteworthy increase from March’s 0.32 percent. And the recent rise in gasoline prices will surely push the May headline CPI back up.

Tomorrow, Washington will provide another clue on inflation’s future – the report for the Producer Price Index (PPI) for April.  Unlike the CPI, which measures the prices of what businesses sell to consumers, the PPI tracks what businesses themselves pay for the goods and services they need in order to turn out their whatever they sell to consumers.  Think of it as gauging wholesale inflation versus measuring retail inflation.

The March PPI hit a new record high, and since in a U.S. economy like this one, where consumer demand remains strong, businesses generally can pass on rising costs to consumers, this result made today’s hot CPI almost inevitable.  Unless tomorrow’s April PPI comes way down (which may happen soon since growth looks to be decelerating markedly — ironically because some indications of consumer inflation fatigue are appearing), the CPI will stay far too strong in May  And that news would surely boost the odds that the Fed sees no choice but to tame inflation by crippling demand further — possibly enough to induce a recession.     

(What’s Left of) Our Economy: More Evidence that Pay Really is Worsening U.S. Inflation

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ECI, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor productivity, multifactor productivity, productivity, recession, wages, workers, {What's Left of) Our Economy

Back in February, I wrote that although U.S. workers’ hourly wages were rising more slowly than the standard measure of consumer prices (the Consumer Price Index, or CPI), and therefore on that basis couldn’t be blamed for the recent, historically high inflation, there was one reason to be worried about the last few years’ healthy pay hikes: Such pay was rising faster than worker productivity.

I explained that this trend inevitably fueled inflation because “when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.”

And more important than my views on the subject, these concerns have been expressed by Jerome Powell, Chairman of the Federal Reserve, the U.S. central bank that has the federal government’s main inflation-fighting responsibilities.

So it’s discouraging to report that new government data on both pay and productivity have come out in the last two weeks, and they make clear that the pay-productivity gap has just been widening faster than ever.

The pay data come from the Labor Department’s latest Employment Cost Index (ECI), which tracks not only hourly wages but salaries and benefits, while the productivity figures come from Labor’s new release on labor productivity, which measures how much output a single worker turns out in a single hour. And conveniently, both releases take the story through the first quarter of this year.

The results? From the fourth quarter of last year through this year’s first quarter, total compensation for all private sector workers, the ECI increased by 1.42 percent, while labor productivity for non-farm businesses (the category most closely followed, and basically identical with the private sector) fell by 1.93 percent. That last number was labor productivity’s worst such performance since the third quarter of 1947. (As RealityChek regulars know, I focus on private sector workers because their pay levels largely reflect market forces, not politicians’ decisions, and consequently reveal more about the labor picture’s fundamentals.)  

The year-on-year statistics aren’t much better – if at all. Between the first quarter of last year and the first quarter of this year, the ECI for the private sector grew by 4.75 percent, but labor productivity dipped by 0.62 percent.

And since the U.S. economy began recovering from the first wave of the CCP Virus pandemic, during the third quarter of 2020, the private sector ECI is up by 6.61 percent, while labor productivity is down by 0.78 percent.

As also known by RealityChek readers, labor productivity isn’t the economy’s only measure of efficiency. Multifactor productivity is a broader, and therefore presumably more useful gauge. It’s not as easy to work with because its results only come out annually, and the latest only take the story up to the end of last year.

The picture is decidedly more encouraging – at least recently. From 2020-2021, multifactor productivity for non-farm businesses improved by 3.17 percent. But it still wasn’t good relatively speaking, since from the fourth quarter of 2020 through the fourth quarter of 2021, the private sector ECI increased by 4.38 percent.

Worse, from 2001 (when the Labor Department began the ECI) to last year, pay b that gauge was up 74 percent while non-farm business multifactor productivity had advanced by a mere 16.46 percent.  Therefore, clearly the recent pay and productivity numbers don’t simply stem from pandemic-related distortions of the economy. 

To repeat important points from last February’s post, the productivity lag doesn’t mean that U.S. workers overall don’t deserve nice-sized raises and better benefits, and it certainly doesn’t mean that they’re solely or largely to blame even for poor labor productivity growth. After all, managers are paid as handsomely as they are fundamentally to figure out how to make their employees more productive. Also, productivity is a barometer of economic performance that’s unusually difficult to determine precisely.

But the new figures do strengthen the case that labor costs bear significant responsibility for boosting inflation, and that a major fear surrounding overheated price increases – that inflation acquires powerful momentum as surging prices lead to big wage hike demands and vice versa, and create a spiralling effect that’s excuciatingly difficult to end without the Fed throwing the economy into recession. Just as depressingly, the new pay and productivity figures also strengthen the case that, unless the economy becomes a lot more productive very quickly, the sooner this harsh medicine is administered, the better for everyone in the long run.

(What’s Left of) Our Economy: U.S. Manufacturing Job Creation Gains More Momentum

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aircraft, aircraft engines, aircraft parts, automotive, CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, furniture, inflation, Jobs, machinery, manufacturing, miscellaneous durable goods, non-farm payrolls, personal protective equipment, pharmaceuticals, plastics and rubber products, PPE, recession, semiconductor shortage, semiconductors, supply chains, transportation equipment, Ukraine-Russia war, vaccines, {What's Left of) Our Economy

Today’s official April U.S. jobs report featured such a strong showing by U.S.-based manufacturers that, by one measure, they reclaimed title of America’s best job-creating sector during the CCP Virus era (and its aftermath?).

Domestic industry boosted its payrolls sequentially last month by 55,000 workers, its best such performance since July’s 62,000 gain. In addition, revisions were excellent. March’s initially reported 38,000 increase is now pegged at 43,000, and February’s upgraded 38,000 rise is now judged to have been 50,000.

As a result, manufacturing’s share of U.S. non-farm employment (the federal government’s definition of the American jobs universe), has improved from 8.38 percent in February, 2020 – the last full data month before the virus began roiling the national economy – to 8.41 percent as of last month.

And during this period, manufacturing’s share of America’s private sector jobs is up from 9.83 percent to 9.86 percent.

Domestic industry has recovered a slightly smaller share of the jobs it lost during the sharp pandemic-induced downturn of spring, 2020 (95.89 percent) than the private sector (97.62 percent). But it also shed fewer jobs proportionately than the rest of the private sector during that terrible March and April. (For the record, because of a drag created by public sector hiring, the share of all non-farm jobs regaine d now stands at 94.59 percent.

In all, U.S.-based manufacturing employment is now down a mere 0.44 percent from immediate pre-pandemic-y February, 2020.

April’s manufacturing jobs winners were broad-based, but the biggest among the major sectors tracked by the Labor Department were:

>transportation equipment, whose 13,700 employment improvement was its best such performance since last October’s 28,200. (Last month I erroneously reported that the sector’s best recent monthly performance was last August’s 19,000.) Unfortunately, March’s initially reported employment advance of 10,800 was revised down to 8,800, and February’s previously estimated 19,800 jobs plunge (the worst monthly performance since April, 2021’s automotive shutdown-produced nosedive of 48,100) is now judged to be 19,900. Bottom line: This sector’s employment levels are still 3.38 percent below those of that last full pre-pandemic data month of February, 2020;

>machinery, where 7,400 jobs were added on month – an especially encouraging result since its products are so widely used throughout the rest of manufacturing and the entire economy. Even better, March’s initially reported 1,700 employment increase was revised all the way up to 6,700, and February’s perfomance – which had been revised down from an 8,300 rise to one of 6,600, recovered a bit to 6,700. As a result, machinery employment is off just 1.55 percent from its February, 2020 levels;

>automotive, which boosted headcounts by 6,400 – its best monthly gain since last October’s 34,200 plant reopening-driven burst. But March’s initially reported 6,400 jobs rise was downgraded to 3,600, and even though February’s major job losses were revised for the better again, they’re still pegged at 14,000 – the worst since the 49,100 employees shed during the shutdowns last April. These gyrations have left the combined vehicles and parts workforce 0.78 pecent smaller than in February, 2020;

>plastics and rubber products, which upped employmment by 5,700 sequentially in April, the best such performance since last August’s 7,800. Job-wise, these sectors are now 3.38 percent larger than in February, 2020.

The only significant jobs losers in April were furniture and related products and miscellaneous durable goods. The former lost 1,100 positions in April, but employment has still inched up by 0.57 percent since pre-pandemic-y February, 2020. The latter – which includes much of the protective gear needed to fight and contain the CCP Virus – reduced employment by 1,400 sequentially last month. But this decrease was the first since last August’s 600 loss, and followed a strong 3,100 jobs gain in March. This catch-all category’s employment is now 1.54 percent higher than in February, 2020.

As always, the most detailed employment data for pandemic-related industries are one month behind those in the broader categories, and as with the rest of domestic industry for March, their employment picture showed improvement overall.

The semiconductor and related devices sector is still struggling to meet demand, but hiring continued its slow-but-steady pandemic-era increase in March with job gains of 700. February’s initially reported 100 employment loss now stands at a 100 employment gain, and January’s numbers stayed at plus-300 – the best monthly performance since last October’s 1,000. This sector now employs 1.34 percent more workers than in February, 2020 – impressive since during the sharp spring, 2020 economic downturn, it kept adding jobs.

The latest employment results were mixed for surgical appliances and supplies makers – a category within the aforementioned miscellaneous durable goods sector, and one in which personal protective equipment and similar medical goods abound. In March, the industry added 1,100 workers, but revisions completely wiped out February’s initially reported 800 jobs gain. The January hiring increase stayed at a downwardly revised 1,300. Even so, since just beforet the pandemic’s arrival in force in the United States, these companies have increased payrolls by 4.07 percent.

The very big pharmaceuticals and medicines industry continued to be a moderate employment winner in March. It hired an additional 900 workers on month, and though its February improvement was downgraded (from 1,300 to 1,000), the number was solid. Moreover, January’s hugely upgraded 1,100 employment rise stayed intact. Since February, 2020, this sector’s headcount is up fully 9.23 percent.

March jobs gains were more subdued in the medicines subsector containing vaccines, but they still totaled 400. February’s initially reported employment increase of 800 is estimated at just 500 now, and January’s identical increase stayed the same. But over time, this industry’s jobs growth has been impressive – 23.15 percent since the last pre-pandemic data month of February, 2020.

Good job gains continued in March in the aviation cluster as well. Aircraft manufacturers (including still-troubled industry giant Boeing) rose by 1,100 sequentially – the best monthly gain since last June’s 4,400. February’s increase was upgraded from 500 to 600, but January’s sequential job loss stayed unrevised at 800. This net increase brought aircraft employment to within 11.08 percent of its February, 2020 level.

The aircraft engines and engine parts industry followed February’s unrevised 900 hiring increase by adding 500 more workers in March. January’s results, however, stayed at a slightly downgraded 900 loss. And these companies’ still employ 12.65 percent fewer workers than in February, 2020.

The deep jobs depression in the non-engine aircraft parts and equipment sector remained deep in March, but a little less so. Jobs gains for the month totaled 700, February’s initially reported 200 increase was unrevised, and January’s way upwardly revised job rise was downgraded only from 1,500 to 1,400. But since just before the pandemic, the non-engine aircraft parts and equipment sector has still shrunk by 15.74 percent.

Having recently navigated its way skillfully through a once-in-a-century pandemic, a virtual shutdown of the entire U.S. economy, continuing supply chain disruption, multi-decade high inflation, a major war in Europe (so far), former export champ Boeing’s woes, and sluggish-at-best growth in much of the foreign markets it relies on heavily, it’s tempting to say that U.S-based manufacturing will have finally met its match if the Federal Reserve’s inflation-fighting campaign dramatically slows growth domestically — or worse.  But since the pandemic began, the next time the manufacturing pessimists are right will be the first.       

 

(What’s Left of) Our Economy: A Terrible March for U.S. Trade – With Worse Likely to Come

Tags

Advanced Technology Products, Canada, China, currency, dollar, European Union, exchange rates, exports, Federal Reserve, goods trade, imports, inflation, Japan, Made in Washington trade deficit, manufacturing, Mexico, oil, services trade, Trade, trade deficit, {What's Left of) Our Economy

So many records (mainly the wrong kind) were revealed in the latest official monthly U.S. trade figures (for March) that it’s hard to know where to begin. Some important points need to be made before delving into them, though.

First, don’t blame oil. Sure, this trade report broke new ground in containing a full month’s worth of Ukraine war-period data. But despite the disruption in global energy markets triggered by the conflict, on a monthly basis, the U.S. petroleum balance actually improved sequentially, from a $2.94 billion deficit to a $1.58 billion surplus on a pre-inflation basis (the trade flow gauges from these monthly government releases that are most widely followed)

And even on an inflation-adjusted basis, February’s $8.73 billion oil deficit shrank to $5.15 billion in March.

Second, don’t blame inflation much at all. The Census Bureau doesn’t report after-inflation service trade results on a monthly basis, but it does provide this information for goods (which comprise the great majority of U.S. trade flows). And the March figures show that before factoring in inflation, the goods trade deficit worsened by 18.89 percent from $107.78 billon in February to a new record $128.14 billlion, whereas when inflation is counted, this gap widened on month by 18.86 percent, from $115.96 billion in February to $137.83 billion in March. (Major trade wonks will note that these goods and services data are presented according to two different counting methods, but trust me: the difference in results is negligible.)

Third, don’t blame China. The March pre-inflation goods deficit with the People’s Republic was up sequentially from $42.26 billion to $47.37 billion (12.10 percent). But neither that absolute level nor the rate of increase was anything out of the ordinary, much less a record. In fact, the monthly percentage increase was just half the rate of that of the shortfall for total non-oil goods (a close worldwide proxy for China goods trade) – which hit 24.06 percent. One big takeaway here: the Trump China tariffs are still exerting a major effect, along of course with the supply chain knots Beijing has created with its over-the-top Zero Covid policy.

But regardless of where the blame lies, (and it looks like major culprits are continued strong U.S. spending on both consumer goods and capital equipment, combined with an improvement of the supply chain situation outside China), all-time highs and worsts abounded in the March trade report, include worsenings at record paces.

The combined goods and services trade deficit jumped on-month by 22.28 percent, to $109.80 billion. That total was the third straight record for a single month and the increase the fastest since the 43.71 percent explosion in March, 2015 – a month during which much of the country was recovering from severe winter weather.

As mentioned above, the $128.14 billion goods trade gap was the highest ever, too, topping its predecessor (January’s $108.60 billion) by 17.99 percent. As for the 18.89 percent monthly increase, that was also the biggest since March, 2015 (25.18 percent).

Even a seeming trade balance bright spot turns out to be pretty dim. The headline number shows the service trade surplus improving by 1.96 percent – from $17.98 billion to $18.34 billion. Unfortunately, nearly all of this increase stemmed from a big downward revision in the initially reported February surplus, from $18.29 billion.

As known by RealityChek regulars, the aforementioned non-oil goods trade deficit can also be called the Made in Washington trade deficit – because by stripping out figures for oil (which trade diplomacy usually ignores) and services (where liberalization efforts have barely begun), it stems from those U.S. trade flows that have been heavily influenced by trade policy decisions.

And not only was the March Made in Washington deficit’s monthly increase of 24.06 percent the second fastest ever (after March, 2015’s 31.24 percent). The March, 2022 level of $128.70 billion was the biggest ever.

The story of the non-oil goods trade gap’s growth was overwhelmingly a manufacturing story. The sector’s huge and chronic trade shortfall shot back up from $106.49 billion in February (which was a nice retreat from January’s $121.03 billion) to a new record $142.22 billion. And the monthly percentage jump of 33.55 percent was the biggest since the 37.62 percent during weather-affected March, 2015.

Manufactures exports advanced sequentially by a strong 20.53 percent this past March. That topped the previous all-time monthly high of $105.37 billion (set back in October, 2014), by 8.15 percent. But the much greater volume of imports skyrocketed by 27.43 percent. And their $256.18 billion total smashed the old record of $222.79 billion (from last December) by 14.98 percent.

Within manufacturing, U.S. trade in advanced technology products (ATP) took a notable beating in March, too. The $23.31 billion trade gap was an all-time high, and its 73.65 percent monthly growth the worst since the shortfall slightly more than doubled on month in March, 2020 – as the Chinese economy and its huge electronics and infotech hardware manufacturing bases reopened after the People’s Republic’s initial pandemic wave.

Yet as noted above, despite these extaordinary manufacturing and ATP trade numbers, the latest March numbers for manufacturing-heavy U.S. China trade were anything but extraordinary. U.S. goods exports to the People’s Republic increased on-month by 15.36 percent – slower than the rate for manufactures exports globally, but the fastest rate since the 52.47 percent rocket ride they took  last October.

Goods imports from China, however, rose much more slowly from February to March than manufactures imports overall – by just 12.10 percent, from $42.26 billion to $47.37 billion.

When it comes to other major U.S. trade partners, the March American goods deficit with Canada of $8.03 billion was the highest such total since July, 2008 ($9.88 billion). It was led by a 30.81 percent advance in imports reflecting the mid-February reopening of bridges between the two countries that had been closed due to CCP Virus restrictions-related protests.

The goods deficit with Mexico worsened even faster – by 35.11 percent, to $11.92 billion. That total was its highest since August, 2020’s $12.77 billion.

Another major monthly increase (31.59 percent) was registered by the U.S. goods shortfall with the European Union, but its March level ($16.87 billion) was subdued relative to recent results.

Anything but subdued was the Japan goods shortfall, which shot up sequentially in March by 49 percent. The $6.77 billion total also was the biggest since November, 2020’s $6.78 billion, and the monthly jump the greatest since the 84.37 percent burst in July, 2020, during the rapid recovery from the sharp U.S. economic downturn induced by the first wave of the CCP Virus and related economic and behavior curbs.

The Europe and Japan trade figures stem significantly from a development that’s bound to turn into an increasingly formidable headwind for the U.S. trade balance for the foreseeable future – the dollar’s rise versus other leading currencies to levels not seen in 20 years. And unless it’s reversed substantially soon, China’s latest currency devaluation, which began in mid-April, will weaken the effects of both the Trump tariffs and the Zero Covid policy. So even if the Federal Reserve’s (so far modest) inflation-fighting efforts do slow the American economy significantly, it’s likely that, as astronomical as the March trade deficits were, we ain’t seen nothin’ yet.

Following Up: Podcast Now On-Line of National Radio Interview on Manufacturing Defeatism

Tags

CBS Eye on the World with John Batchelor, China, Following Up, Gordon G. Chang, inflation, manufacturing, reshoring, supply chain, tariffs, Trade, trade policy

I’m pleased to announce that the podcast of my interview last night on the nationally syndicated “CBS Eye on the World” with John Batchelor is now on-line.

Click here for a timely discussion – including co-host Gordon G. Chang – of whether the U.S. manufacturing revival pessimists are right, and bringing factories back from China really is a fool’s quest.

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

Making News: Back on National Radio Tonight to Talk Bringing Back Manufacturing…& More!

Tags

CBS Eye on the World with John Batchelor, China, Financial Times, Gordon G. Chang, inflation, John Batchelor, Making News, manufacturing, reshoring, supply chains, tariffs, Trade, trade deficit

I’m pleased to announce that tonight I’m scheduled to be back on the nationally syndicated “CBS Eye on the World with John Batchelor.” The segment is slated to begin at 11:15 PM EST, but every night’s entire program is well worth your while, and starts each week night at 9 PM.

Tonight, John, co-host Gordon G. Chang, and I will focus on recent remarks by a Wall Street big-wig claiming that manufacturing supply chains can’t be brought back to the United States from China for many years – suggesting of course that the attempt shouldn’t even be made.

You can listen live on-line here and, as usual, if you can’t tune in, the podcast will be posted as soon as it’s on-line.

In addition, RealityChek‘s work on the real deal with trade, tariffs, and inflation was cited in this Financial Times column on Sunday.

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

(What’s Left of) Our Economy: New Signs that High U.S. Inflation is Here to Stay

Tags

baseline effect, core PCE, cost of living, energy, Federal Reserve, food, inflation, PCE, personal consumption expenditures index, prices, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

The new official figures on the Federal Reserve’s preferred gauge of consumer inflation are a good news/bad news story only if you follow the economy closely.

They amounted to good news for that group because they’ve made the inflation picture clearer than it’s been since the economy began recovering from the deep spring, 2020 downturn generated by the arrival in force of the CCP Virus and all the mandated and voluntary curbs on individual and business behavior it produced. And it’s noteworthy that the group includes the Fed, which bears the federal government’s prime responsibility for keeping inflation under control.

Specifically, today’s data represent annual inflation figures (the ones that attract the most attention because they measure price changes over a reasonable period of time) that finally aren’t being substantially distorted by baseline effects. That is, the multi-decade highs they’ve hit no longer stem significantly from the fact that the previous pandemic-y year’s inflation levels were so abnormally low.

But the new results for the price indexes for personal consumption expenditures (PCE) were bad news for everyone else. For they still did show near-multi-decade highs, and the baseline boost has now been in essence replaced by an energy price boost largely created by Ukraine war-related disruptions that aren’t likely to end any time soon.

It’s true that the U.S. government and most students of the economy distinguish between the inflation rates with and without energy prices, since the latter, along with food prices, are seen as prone to shocks that have nothing to do with the economy’s fundamental vulnerability to inflation. But it’s also true that this distinction can get awfully artificial awfully quickly because energy is used so prominently to turn out practically every good and service that Americans buy. So if energy prices remain strongly on the rise, prices everywhere else are bound to feel the effects. Or at least they’re bound to feel the effects until and unless businesses figure out how to offset their higher energy costs with greater efficiencies.

The first clues that energy prices are now unquestionably major inflation drivers comes from the month-to-month figures for overall PCE percentage change – which do include food and energy prices – starting with January, 2021.

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.5

Feb.           0.6 revised to 0.5

March       0.9

As is clear, overall monthly PCE really took off in March – reaching its highest level during this period after several months of virtually identical monthly increases (which themselves jumped to a new level starting in October).

Keep in mind that these numbers don’t show that prices stopped rising during that period. What they show is that they weren’t rising at ever faster rates, which matters because one of the biggest fears harbored about inflation concerns its tendency to feed on itself and spiral out of control.

When food and energy prices are stripped out, and so-called core inflation can be seen, the monthly trend since January, 2021, is significantly different. Since last October, weakening momentum (though not actually falling prices) is the story here. And the sequential percentage increases in absolute terms have been lower recently. That’s why it’s ever more obvious that recent inflation is due mainly to those two supposedly volatile food and energy sectors. Here are these core PCE rises:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

Feb.           0.4 revised to 0.3

March        0.3

As always, the baseline effect emerges upon examining the annual rates of change in inflation. Here they are for overall inflation since January, 2021:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.  21-22           6..0

Feb. 21-22           6.4 revised to 6.3

March 21-22        6.6

Again, the latest March figure is the highest in the series, and again, the pace quickened dramatically starting last October.

The annual inflation rates for the previous year, though, demonstrate a big fade in the baseline effect starting in March. Here they are in percentage terms.  

Jan.             1.8

Feb.            1.8

March        1.3

April          0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21           1.4

Feb. 20-21          1.6

March 20-21       2.5

Think of it this way: For many years before the CCP Virus began distorting the economy the Federal Reserve struggled to push yearly inflation up to two percent and keep it there for decent intervals. The central bank reasoned (correctly, IMO), that when prices rise too slowly, that can threaten deflation – a period prices that are falling in absolute terms. And when that happens, consumers in particular keep putting off purchases in hopes of finding better bargains in the future, demand for goods and services keeps dropping, production eventually follows suit, and a recession can ensue that’s not only deep but very difficult to escape as the new sets of expectations create their own downward spiral.

But as shown above, for all of (pandemic-y) 2020, annual inflation rates were well below two percent, and they stayed there till March, 2021. So the latest annual overall PCE figure of 6.9 percent (for this March) is coming off an overall PCE figure for last March that was already pretty strong. And the upcoming number for April, 2022 will represent the change from an April, 2021 figure that was much stronger – 3.6 percent. Unless that next annual overall inflation rate comes down considerably, the case that overall price increases have entered a new, more worrisome phase, will look awfully convincing.

The baseline fade is less pronounced so far for core PCE. Here are the annual percentage change figures starting again with January, 2021:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 21-22             5.2

Feb. 21-22            5.4 revised to 5.3

March 21-22        5.2

Where the month-to-month figures showed weakened recent momentum as well as lower prices, these show stalled recent momentum – which isn’t greatly different given inflation’s above-noted tendency to keep speeding up.

And here are the annual core figures for the preceding year

Jan.             1.7

Feb.            1.9

March        1.7

April          0.9

May           1.0

June           1.1

July           1.3

Aug.          1.4

Sept.          1.5

Oct.           1.4

Nov.          1.3

Dec.          1.4

Jan. 20-21             1.4

Feb. 20-21            1.5

March 20-21         2.0

Judging by that two percent Fed target, these 2020 and early 2021 annual core inflation rates were decidedly feeble, and only hit two percent in March, 2021. So a baseline effect arguably remains in place here, and as I wrote previously, and probably won’t end until next month – because the April, 2021 annual core inflation rate breached the Fed target (and then some), rising all the way to 3.1 percent.

And as with overall PCE inflation, if that next core result (for April) doesn’t fall significantly, this type of price increase will start looking troublingly elevated for reasons related to current, not past, economic trends and developments. Further, even though the absolute core PCE rate is, as noted, lower than the over PCE rate, it’s still near multi-decade highs and, again, it’s sure to be increasingly affected by lofty energy prices for the foreseeable future.

Wall Street Journal columnist Greg Ip wrote Wednesday that the Ukraine war and its fallout could be “a prelude to an era in which geopolitical tensions, protectionist policies and natural disasters repeatedly stress the world’s supply networks. Central banks, which spent the last decade fighting off deflationary headwinds, might spend the next battling inflationary headwinds.”

Today’s PCE data look like they support that call to me. 

(What’s Left of) Our Economy: Trade-Wise, the New U.S. GDP Report Reveals the Worst of All Worlds

Tags

currency, dollar, exchange rates, exports, GDP, goods trade, gross domestic product, imports, inflation, inflation-adjusted growth, real GDP, real trade deficit, services trade, trade deficit, {What's Left of) Our Economy

The U.S. economy’s quarterly shrinkage in the first quarter of this year that U.S. government data just revealed – the first such inflation-adjusted decline since the darkest days of the CCP Virus pandemic in the second quarter of 2020 – was led by leaps and bounds by a soaring and all-time record quarterly U.S. real trade deficit.

Even as the gross domestic product (GDP – the chief measure of the economy’s size) fell sequentially in price-adjusted terms by 1.42 percent at annual rates, the after-inflation trade gap swelled to a record $1.5417 trillion by the same measure. In other words, the trade deficit and growth arrows are moving in the worst possible combination of ways.     

This ballooning reduced real GDP in the first quarter by 3.20 percentage points – the biggest such subtraction in absolute terms since the 3.25 percentage point loss recorded in the third quarter of 2020 (when the economy was rapidly recovering from the deep downturn induced by the first CCP virus wave).

Had the price-adjusted trade deficit simply stayed the same in the first quarter, the economy would have actually expanded by 1.78 percent at annual rates.

Moreover, this soaring constant dollar trade deficit’s hit to growth was the greatest since the second quarter of 1982, when the shortfall’s sequential surge reduced growth by 3.22 percentage points as the economy shriveled by 1.53 percent after inflation. And for good measure, the quarterly swing in the trade deficit’s effect on growth (from a 0.23 percentage point subtraction) was the greatest in absolute terms since that first pandemic recovery between the second and third quarters of 2020 – when the impact changed from a 1.53 percentage point boost to growth to a 3.25 percentage point contraction.

The first quarter’s record trade deficit was the seventh straight, and the 14.19 percent sequential widening was the biggest since the 31.81 percent jump between the second and third quarters of 2020 – again, when the economy was bouncing back rapidly from that pandemic-induced cratering, not contracting. In fact, these latest GDP figures revealed the first time that both the economy shrank and the trade deficit grew since the first quarter of 2020 – when the virus’ economic impact was first starting to be felt.

At least as bad, at 7.81 percent of real GDP in the first quarter, the relative size of the inflation-adjusted trade deficit blew past the old record of 6.82 percent – set in the previous quarter. Since the fourth quarter of 2019, the final quarter before the CCP Virus began impacting the U.S. economy significantly, the overall inflation-adjusted trade gap is up by fully 81.89 percent.

Nor did the all-time and multi-month worsts stop with the total real trade deficit.

The first quarter real goods trade deficit of $1.6685 trillion annualized was the seventh straight record and the 13.65 percent increase over the fourth quarter tota was the biggest sequential rise since the 20.40 percent between the second and third quarters of 2020 – during that early pandemic recovery. Since the CCP Virus era began, the after-inflation goods trade shortfall has worsened by 55.73 percent.

The firist quarter’s services trade surplus of $120.9 billion annualized was actually slightly higher than the fourth quarter’s $120.1 billion, and represented the third straight quarter of improvement. The absolute level, moreover, was the highest since the $152.4 billion recorded in the second quarter f 2021. But since the fourth quarter of 2019, the services surplus is down by 44.46 percent, reflecting the uusually hard virus-related blows this portion of the economy has suffered.

Inflation-adjusted combined goods and services exports dipped by 1.51 percent on quarter – from an annualized $2.3906 trillion to $2.3545 trillion. The drop was the fourth in the nine quarters since that first pandemic-affected first quarter of 2020. On a quarterly basis, total U.S. constant dollar exports are down 7.79 percent since the last pre-pandemic fourth quarter of 2019.

Yet total imports achieved their fifth straight quarterly record, reaching $3.8963 trillion in real terms at annual rates. The 4.16 percent sequential increase was only slightly smaller than the 4.21 percent rise in the fourth quarter of last year. These imports are now 14.57 percent greater than they were in the immediate pre-pandemic fourth quarter of 2019.

Goods exports sank by 2.50 percent on quarter, from an after-inflation $1.793 trillion at annual rates to $1.7482 trillion. The sequential drop was also the fourth in the nine quarters since the pandemic first arrived in the United States and the biggest since the 23.08 percent collapse in the second quarter of 2020. Quarterly goods exports have now decreased by 1.92 percent since the fourth quarter of 2019.

Constant dollar goods imports grew by 4.77 percent in the quarter, from $3.2611 trillion annualized to a second consecutive record of $3.4167 trillion. The increase was the third in a row, and its rate was the fastest since the 6.80 percent for the fourth quarter of 2020. On a quarterly basis, these overseas purchases have surged by 19.72 percent since just before the pandemic struck in force.

Real services exports climbed 0.94 percent sequentially in the first quarter, from $627.7 billion at annual rates to $633.6 billion. This second straight advance propelled these sales to their highest absolute level since the first quarter of 2020’s $695.3 billion. At the same time, quarterly-wise, inflation-adjusted services exports have plummeted 18.11 percent from immediate pre-CCP Virus levels.

Real services imports rose one percent sequentially in the first quarter, and the increase from $507.6 billion to $512.7 billion annualized sent them to their highest level since that immediate pre-pandemic fourth quarter of 2019. But these results still left these purchases 6.27 percent below that $547 billion annualized number.

And the lousy trade news doesn’t seem likely to stop, even if U.S. economic growth continues to under-perform because of multi-decade high inflation, Federal Reserve efforts to tame it by slowing the economy via monetary policy tightening, and ongoing supply chain disruptions due to China’s Zero Covid policy and the Ukraine War.

The main reasons? First, growth overseas is much more vulnerable to supply chain issues than American growth, and all else equal, relative U.S. economic strength will surely pull in more imports and crimp exports. Second, as of today, the U.S. dollar’s recent rise has brought the greenback to its highest level in twenty years, which will increase the cost of American exports versus the global competition and decrease the cost of U.S. imports versus the domestic competition. And finally, the Biden administration has been dropping broad hints that it will cut tariffs on many imports from China before long – ostensibly to help fight inflation.