(What’s Left of) Our Economy: U.S. Manufacturing Hiring’s Sloughing Off Delta – For Now

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aerospace, aircraft, aircraft engines, aircraft parts, appliances, automotive, Boeing, CCP Virus, China, coronavirus, COVID 19, Delta variant, electrical equipment, Employment, fabricated metal products, food products, healthcare goods, Jobs, logistics, machinery, manufacturing, medical equipment, metals, non-farm payrolls, pharmaceuticals, plastics and rubber products, PPE, private sector, semiconductor shortage, supply chains, tariffs, transportation, vaccines, {What's Left of) Our Economy

This morning’s official monthly U.S. jobs report (for August) brought a notable departure from recent trends. Athough the overall results were lousy (as total employment rose by just 235,000 during the month), manufacturing hiring soared by 37,000.

It’s true that nearly two-thirds of these gains (24,100) came from the automotive sector, which has been roiled recently by a shortage of semiconductors that’s wreaked havoc on the output of today’s increasingly electronics-stuffed vehicles. It’s also true that this progress might be snuffed out soon by the still widening spread of the CCP Virus’ highly infectious Delta variant and whatever new curbs on economic activity and consumer behavior it might keep prompting.

But it’s also true that domestic industry’s strong hiring in August came during a month when Delta had already become front-page news – which surely expains much of the much-weaker-than expected rise last month in overall non-farm payrolls (NFP – the U.S. jobs universe of the Labor Department that produces the employment data).

And it’s true as well that the major upward revision revealed to the July manufacturing jobs increase (all the way from 27,000 to 52,000 – the best such performance since last August’s 55,000) entailed much more than the vehicles and parts sectors (where the hiring advance was judged to be 10,500 instead of merely 800).

For example, July’s machinery jobs gains were upgraded from 6,800 to 9,100 (its strongest monthly result since last September’s 12,200); those for electrical equipment and appliances was estimated at 1,500 instead of 200; and employment in the plastics and rubber sectors was pegged at 2,300, not 300.

Despite its last excellent two months, U.S.-based manufacturing remained a job-creation laggard during the pandemic period as of August. But it became less of a laggard. Since the deep CCP Virus- and lockdowns-induced downturn of March and April, 2020, when manufacturers shed 1.385 million jobs, these companies have boosted employment by 1.007 million – erasing 72.71 percent of those losses. That share of regained jobs is up from the 68.74 percent level it reached in July.

That’s faster improvement than registered by the private sector, whose regained job percentage rose from 76.96 to 78.72, and by the total non-farm economy, where the advance rose from 74.50 percent to 76.60 percent.

Moreover, it’s important to remember that during the economy’s spring, 2020 woes, manufacturing employment suffered less than payrolls in the rest of the economy. Its job levels fell by 10.82 percent, compared with 16.46 percent for the private sector and 14.66 for the entire non-farm economy.

As with the July revisions, the list of significant manufacturing employment winners in August was hardly confined to the automotive industry. Among the major industry categories used by the U.S. government, fabricated metal products payrolls increased by 6,600 on month (the highest sequential boost since March’s 10,100); plastics and rubber products by 3,100 (its best such performance since February’s 4,500); and food manufacturing (1.600).

The biggest July jobs losers were electrical equipment and appliances (down 3,100, for its worst hiring month since January, when its payrolls fell by 3,400) and miscellaneous durable goods (a category containing personal protective equipment – PPE – and other medical supplies crucial for fighting the CCP Virus), whose 1,800 jobs lost were the worst such total since the entire economy’s spring, 2020 meltdown.

Also somewhat discouraging – job creation in the machinery sector, whose products are used elsewhere in manufacturing and throughout the rest of the economy, flatlined in August following its big 9,100 July spike.

The most detailed employment data for pandemic-related industries is one month behind those in the broader categories, but their July job-creation performance was decidedly mixed. In surgical appliances and supplies (the sector containing PPE and similar goods), May’s previously reported payroll decline of 900 is now judged to be a drop of 1,900, but June’s 500 jobs increase remained intact and was followed by an identical improvement in July. As a result, employment in this crucial national health security sector is now 9.22 percent above immediate pre-pandemic levels.

The overall pharmaceuticals and medicines industry saw hiring slow down notably in July – from a downwardly revised 2,300 in June to 400. May’s downwardly revised loss of 300 jobs stayed intact. These changes left payrolls in the sector 4.72 percent above February, 2020’s immediate pre-pandemic levels.

The story was little better in the pharmaceuticals subsector containing.vaccines. Its May and June employment gains are still judged to be 1,000 each, and no jobs at all were added in July. But its workforce is still 10.21 percent higher than just before the pandemic.

The July results showed that aircraft industry employment is still on a roller coaster, since Boeing is still struggling to overcome the manufacturing and safety issues it’s faced in recent years, along with the CCP Virus-related slump in business and leisure travel. May’s 5,500 monthly plunge in employment was unrevised in this morning’s figures, June’s 4,500 increase was upgraded to 4,700, but payrolls retreated again in July – by 1,500. Due to all these fluctuations, aircraft employment fell to 8.08 percent below its levels just before the pandemic arrived in force in the United States.

The aircraft engines and parts industries added 200 employees on month in July, but June’s previously reported increase of 500 was downgraded to 400. As a result, payrolls are down fully 14.80 percent since immediate pre-pandemic February, 2020.

It’s still possible that the Delta, or some other, CCP Virus variant will lower the boom on domestic manufacturing employment going forward – both because economic activity and therefore demand for manufactured goods will stagnate or drop not only in the United States, but in industry’s important foreign markets. Supply chain snags are no sure bet to clear up any time soon, either.

Nonetheless, U.S.-based manufacturing is still clearly benefiting from the Trump tariffs continued by President Biden that are pricing huge amounts of metals and Chinese-made goods out of the domestic market. Vast amounts of economic stimulus are still pouring into the American and foreign economies. And there remains tremendous pent-up demand among U.S. consumers and businesses alike, due to the lofty heights that household savings have reached and to clogged logistics systems. (A “hard” infrastructure bill will help U.S.-based manufacturers, too. But despite efforts to speed up the permitting process, regulations that can long delay the launch of new projects still may mean that the much of the new work will take months and even years before they’re “shovel ready.”)

And as I keep pointing out, those with the most skin in this game – domestic manufacturers themselves – keep professing optimism. (See, e.g., here and here.) That last consideration still tilts the balance toward manufacturing bullishness for me.

Making News: Podcast of National Radio Interview on China’s Economy Now On-Line

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CCP Virus, China, coronavirus, COVID 19, Delta variant, Donald Trump, exports, globalization, Gordon G. Chang, logistics, Making News, supply chains, tariffs, The John Batchelor Show, Trade, trade war, transportation, Wuhan virus

I’m pleased to announce that the podcast is now on-line of my latest interview on John Batchelor’s nationally syndicated radio show. The segment, which aired last night, can be found here, and focused on China’s economic performance lately – which John, co-host Gordon G. Chang, and I all agreed is showing definite signs of struggling.

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

(What’s Left of) Our Economy: Dangerous New Bubbles or a Virus Mirage?

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bubbles, business investment, CCP Virus, consumer spending, coronavirus, COVID 19, Financial Crisis, GDP, Great Recession, gross domestic product, housing, lockdowns, logistics, nonresidential fixed investment, real GDP, recession, recovery, reopening, Richard F. Moody, semiconductor shortage, toxic combination, transportation, West Coast ports, {What's Left of) Our Economy

Here’s a great example of how badly the U.S. economy might be getting distorted by last year’s steep, sharp, largely government-mandated recession, and by the V-shaped recovery experienced since then.as CCPVirus-related restrictions have been lifted. Therefore, it’s also a great example of how the many of the resulting statistics may still be of limited usefulness at best in figuring out the economy’s underlying health.

The possible example?  New official figures showing that, as of the second quarter of this year, the U.S. economy is even more dangerously bubble-ized than it was just before the financial crisis of 2007-08.

As RealityChek regulars might recall, for several years I wrote regularly on what I called the quality of America’s growth. (Here‘s my most recent post.) I viewed the subject as important because there’s broad agreement that a big reason the financial crisis erupted was the over-reliance earlier in that decade n the wrong kind of growth. Specifically, personal spending and housing had become predominant engines of expansion – and therefore prosperity. Their bloated roles inflated intertwined bubbles whose bursting nearly collapsed the U.S. and entire global economies, and produced the worst American economic downturn since the Great Depression of the 1930s.

As a result, there was equally broad agreement that the nation needed to transform what you might call its business model from one depending largely on borrowing, spending, and paying for them by counting on home prices to rise forever, to one based on saving, investing, and producing. As former President Obama cogently put it, America needed “an economy built to last.”

Therefore, I decided to track how well the nation was succeeding at this version of “build back better” by monitoring the official quarterly reports on economic growth to examine the importance of housing and consumption (which I called the “toxic combination”) in the nation’s economic profile and whether and how they were changing.

For some perspective, in the third quarter of 2005, as the spending and housing bubbles were at their worst, these two segments of the economy accounted for 73.90 percent of the gross domestic product (GDP – the standard measure of the economy’s size) adjusted for inflation (the most widely followed of the GDP data. By the end of the Great Recession caused by the bursting of these bubbles, in the second quarter of 2009, this figure was down to 71.55 percent – mainly because housing had crashed.

At the end of the Obama administration (the fourth quarter of 2016), the toxic combination has rebounded to represent 72.31 percent of after-inflation GDP. So in quality-of-growth terms, the economy was heading in the wrong direction. And under President Trump, this discouraging trend continued. As of the fourth quarter of 2019 (the last quarter before the pandemic began significantly affecting the economy), this figure rose further, to 73.19 percent.

Yesterday, the government reported on GDP for the second quarter of this year, and it revealed that the toxic combination share of the economy in constant dollar terms to 74.24 percent. In other words, the toxic combination had become a bigger part of the economy than during the most heated housing and spending bubble days.

But does that mean that the economy really is even more, and more worrisomely lopsided than it was back then? That’s far from clear. Pessimists could argue that recent growth has relied heavily on the unprecedented fiscal and monetary stimulus provided by Washington since spring, 2020. Optimists could point out that far from overspending, consumers have been saving massively. Something else of note: Business investment’s share of real GDP in the second quarter of this year came to 14.80 percent – awfully lofty by recent standards.  During the 2005 peak of the last bubble, that spending (officially called “nonresidential fixed investment”) was 11.62 percent. 

My own take is that this situation mainly reflects the unexpected strength of the reopening-driven recovery and the transportation and logistics bottlenecks it’s created. An succinct summary of the situation was provided by Richard F. Moody, chief economist of Regions Bank. He wrote yesterday that the new GDP data “embody the predicament facing the U.S. economy, which is that the supply side of the economy has simply been unable to keep pace with demand.” The result is not only the strong recent inflation figures, but a ballooning of personal spending’s share of the economy.

Moody expects that both problems will end “later rather than sooner,” and for all I know, he (and other inflation pessimists) are right. But unless you believe that West Coast ports will remain clogged forever, that semiconductors will remain in short supply forever, that truck drivers will remain scarce forever, that businesses will never adjust adequately to any of this, and/or that new CCP Virus variants will keep the whole economy on lockdown-related pins and needles forever, the important point is that these problems will end. Once they do, or when the end is in sight, we’ll be able to figure out just how bubbly the economy has or hasn’t grown – but not, I’m afraid, one moment sooner.

(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.