(What’s Left of) Our Economy: How Certain Should We be About Trade War-Spurred Business Uncertainty?

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business investment, capex, China, Dallas Federal Reserve, manufacturers, manufacturing, Philadelphia Federal Reserve, tariffs, tax incentives, Trade, trade war, Trump, {What's Left of) Our Economy

Among my most vivid memories of my years trying to make some sense out of the economy is one of a conversation with my late father. Since he was a tax lawyer for many decades, I once asked him if he supported some ideas that keep coming up for strengthening American manufacturing, chiefly making permanent the tax credit for corporate research and development (which Congress approved in 2015), and permitting companies to claim deductions for spending on machinery and equipment sooner rather than later, and even immediately (which the tax bill passed in 2017 allowed in some circumstances).

His answer: They’re small beans. His explanation: Any business-person with The Right Stuff will try and capitalize on new business opportunities whatever the tax laws allow (within reason).

I’ve been thinking of that conversation often as President Trump has waged his trade wars, especially against China (a long-time trade and broader economic predator), particularly in regard to the widespread claims that unanswered questions about his real aim (a bilateral level playing field? Decoupling the two economies?), and the herky-jerky nature of his tariff announcements and postponements have created enough uncertainty to paralyze business investment in new products and processes. Of course, that’s the type of activity that fosters healthy, sustainable, and not bubble-ized, growth.

I’m not unsympathetic to the difficulties of planning in this environment. But my father’s analysis makes me wonder if – assuming the uncertainty narrative is correct – too many American executives have lost their nerve. And this suspicion has just been borne out by a report spotlighting how many companies look to be plowing ahead with upgrades and innovations, trade war or not.

The evidence came from the latest monthly survey of mid-Atlantic state manufacturing published by the Philadelphia branch of the Federal Reserve system. As often the case, the October edition, released a week ago, featured responses to questions posed by “Philly Fed” researchers seeking regional manufacturers’ views on specific economic issues and challenges, and the current queries included:

>”Do you expect the following capital expenditure categories over the next year (2020) to be higher than the same, or lower than in the current year”; and

>”How has trade policy (including tariffs) affected your expected capital spending for 2020 compared with 2019?”

Here are the answers to the first question, by spending category measured in percentage of responses:

                                                            Higher           Same            Lower

Noncomputer equipment:                     41.1              44.6              14.3

Software:                                              28.6              58.9               12.5

Energy-saving investments:                 21.3              68.1               10.6

Computer and related hardware:         26.8              55.4                17.9

Structures:                                           32.1              45.3                22.6

Total:                                                   39.1              41.3                19.6

No overwhelming evidence of uncertainty-induced paralysis here. If anything, mid-Atlantic manufacturers seem pretty determined to take steps they deem necessary to bolster their competitiveness even though the trade wars are far from over. Especially encouraging are the results for noncomputer equipment and structures, since they’ve been capital spending laggards lately.

And here are the answers to the second, more specific, question, about trade policy’s effects on capital spending plan, again measured in percentage of responses:

Significantly increase: 5.3

Modestly increase: 8.8

No change: 54.4

Modestly decrease: 15.7

Significantly decrease: 1.8

All increases: 14.1

No response: 14.0

All decreases: 17.0

These results add slightly to the case that Trump-ian trade policies are depressing capital spending. But only slightly.

Trade war opponents can point out that this year’s business investment has been weaker than the previous year’s, so that some capital spending increase was inevitable barring concerns about a major economic slowdown or recession. But supporters can observe that such spending was rising strongly from spring, 2017 through summer, 2018, and so some cooling off was just as inevitable (and not only for mean-reverting-type reasons, but because it would be natural for companies to try to finish current projects before starting new ones).

It’s also possible that mid-Atlantic manufacturers are simply pluckier than their counterparts elsewhere in America. But similar responses to similar questions were provided by southwestern companies in the Dallas Fed’s June manufacturing sounding. In other words, there’s lots of uncertainty surrounding the trade war-related uncertainty claims.

(What’s Left of) Our Economy: More Evidence that Trump’s Trade Wars are Winning for America

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capital spending, Dallas Federal Reserve, Federal Reserve, Jobs, manufacturers, manufacturing, output, production, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Here’s how weird today’s (covering June) Dallas Federal Reserve Bank manufacturing report is. It’s prompted me to write my first ever RealityChek post on an individual regional Fed manufacturing report. And I’m writing this subject instead of my original plan to blog on the Iran/Persian Gulf crisis – which is of course generating lots of headlines.

The main reason? The Dallas findings include considerable evidence that domestic U.S. manufacturing is withstanding President Trump’s trade wars quite well thank you – at worst – and that his tariffs are bringing back a good deal more production to the United States than widely supposed. 

For readers not familiar with such reports, every month, several of the regional branches in the national Federal Reserve system issue results of surveys they conduct on the state of manufacturing in the geographic districts they monitor and whose financial sectors they help regulate. The Dallas Fed’s “jurisdiction” is Texas, northern Louisiana, and southern New Mexico. And because Texas is such an important manufacturing state, the Dallas reports are considered especially important in judging the health of American manufacturing as a whole.

Today’s Dallas Fed report began unusually enough, with a series of seemingly contradictory findings stemming from its usual indicators. For example, the so-called headline figure – which purports to measure district manufacturers’ perceptions of overall industry conditions for a particular month – not only worsened for the second straight month. It sank even deeper into numerical territory that supposedly signals manufacturing contraction.

At the same time, these companies’ reports on their output (like all the regional Fed manufacturing surveys, the Dallas Fed’s gauges “sentiment,” or companies’ descriptions of their activities, rather than measuring the activity itself), rose slightly higher into the numerical territory signaling manufacturing expansion. So did the “new orders” indicator – though it was slightly weaker in absolute terms. (That is, it wasn’t signaling expansion as strongly as the output indicator.)

Dallas Fed district manufacturers also stated that they were continuing to hire, and work their employees more hours per weak – though the growth here slowed from that they reported the previous month. The only indicator which registered a major monthly drop was capital spending. It dropped by double-digits percentage points to a two-year low, but still remained in expansion territory.

Interestingly, the Dallas results roughly mirrored the June report from another closely watched Fed district – Philadelphia’s.

But what was really weird about today’s Dallas Fed report were the answers regional manufacturers gave to a series of “Special Questions” about the impact of President Trump’s tariffs. The responses from 115 companies made clear that they believed that the levies effects were more damaging than last September, when they previously answered these questions (and when Texas and national manufacturing was going great guns).

But the difference was anything but dramatic. By many key measures, strong majorities reported that the tariffs had “no impact” on their fortunes. The companies expected the tariff damage to fade considerably within two years. And many of them were responding to tariff pressures they faced by replacing foreign suppliers with domestic suppliers. In other words, they were replacing imports with domestic orders and production.

For example, between last September and this month, the share of Texas manufacturers stating that the U.S. and foreign retaliatory tariffs had had “no impact” on their production levels fell only from 65.9 percent to 60.9 percent. The share reporting “no impact” on employment dipped from 82.1 percent to a still lofty 78.3 percent, and on capital spending from 69.4 percent to 64.9 percent. I.e., these results don’t exactly scream “Tariffmageddon!”

For those companies that did report tariff-related changes, the gap for each of these indicators between those reporting damage and those reporting benefits definitely widened in favor of damage. But again, the differences – over a nine-month period during which lots of tariffs were actually imposed or increased – were on the limited side. The biggest deterioration, for example, took place in capital spending. In September, 20 percent of the manufacturers responding reported that the tariffs were leading them to cut such investments. This month, that share rose to 27.2 percent. Slightly behind capital spending in this respect was output, with the “decrease” share increasing from 20 percent to 26.1 percent.

The share of companies reporting benefits from the tariffs declined, too – but much more modestly. And in June, they still averaged close to ten percent.

By contrast, the companies’ views on their ability to cope successfully over time with the U.S. and foreign retaliatory tariffs brightened through 2021. The share expecting net tariffs damage dropped from 41 percent to 32 percent, and the share expecting net benefits doubled – to 18 percent.

And potentially most interesting of all – many more companies that reported net negative impacts from tariffs were responding by replacing imports with domestic production, not with non-tariff-ed foreign products. The sample size here is small (46 firms), but 17.4 percent said they were “mitigating” the tariff damage by finding new domestic suppliers and another 17.4 percent were bringing “production or processes” back in-house. Only 10.9 percent answered “finding new foreign suppliers.”

When it comes to China, I’ve long maintained that any reduction in Chinese industrial capacity benefits the United States, even if imports from China are replaced by imports from elsewhere. But the Dallas results show that the number of companies responding by bringing production back home in one way or another – as President Trump has promised – could be much higher than many skeptics have claimed and predicted.

Sentiment surveys like the regional Fed reports are no substitute for the actual data (largely for the “survivorship bias” problems I’ve explained in this post). But if more of these institutions could keep track of their manufacturers’ stated experiences with and responses to the Trump trade wars – and on an ongoing, not sporadic, basis – they could help the nation better understand the real consequences.

Im-Politic: Why I’m Not a Think Tank Hypocrite

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business groups, Clyde V. Prestowitz, Economic Strategy Institute, Google, idea laundering, Im-Politic, John B. Judis, Jr., manufacturers, New America Foundation, The New Republic, think tanks, Trade, U.S. Business and Industry Council, USBIC Educational Foundation

Freelance journalist and author John B. Judis is a long-time professional friend. He’s also a pioneer in the study of think tanks and how they’ve added to the corruption of America’s policy-making process, especially in Washington, D.C., where so many of them are headquartered and concentrate their efforts.

So it’s with a double dose of regret that I write this dual-purpose post – which will aim to explain why he’s recently done me a not-trivial injustice in describing me and my relationship with the think tank complex, and in the process contributed to the mis-impression that all organizations that seek to influence policy are alike in their basics.

The problem was created last week in John’s otherwise insightful New Republic article on the uproar kicked up by the news last month that the New America Foundation think tank fired a prominent researcher (and his entire team at a particular program) because their work had begun threatened to antagonize a major donor to the Foundation – Google. You can read my take on this super-revealing incident here.

Because his work on the subject has been so important, I was initially pleased to see John cover the controversy, and even more pleased that he decided to quote me. Unfortunately, he mysteriously decided to use the passage (from that above RealityChek post) in a decidedly and unjustly unflattering way. As John wrote:

“The controversy over New America…has prompted hand-wringing among Washington’s policy community, but some of it seems self-serving. ‘Slowly, and not so surely, the American media is waking up to the pervasiveness of corporate corruption of the nation’s think tank complex,’ wrote Alan Tonelson, who did research for decades at the Business and Industrial Council, which got much of its funds from Roger Milliken and Milliken & Co.”

I don’t think I’m being overly sensitive in believing that this paragraph insinuates that I’m a hypocrite. That is, I’d belonged to that Think Tank World for decades, and now that it’s becoming fashionable, have decided to bite the hand that fed me.

What John didn’t seem to realize is that the work for my former long-time employer that he refers to was done for a business group, not a think tank. As a result, whereas I’ve criticized think tanks for their lack of transparency regarding their (corporate) funders, and accused them of “idea laundering” (that is, issuing materials that push the special interest agendas of their funders while garbing them in quasi-academic raiment), the U.S. Business and Industry Council (USBIC) can’t fairly be accused of this practice even it had been a think tank because its orientation has always been obvious from its name.

Unlike the case with the Brookings Institution or the Center for Strategic and International Studies or the Heritage Foundation or the Carnegie Endowment or the Peterson Institute, when a policymaker or journalist received some information from USBIC, it couldn’t have been clearer that it represented a particular perspective, rather than the work of some disinterested scholar esconced in a ivory tower.

Of course, we tried to be as accurate as possible – both because we were confident enough in the substance behind our viewpoints that we felt no need to exaggerate or soft-pedal or leave out context when such tactics might have strengthened our case, and because those who depart from the conventional wisdom nearly always receive greater and harsher scrutiny than those who stay comfortably inside it.

Moreover, we spent countless hours trying to publicize exactly who we were – an association of smaller manufacturers who had largely rejected an offshoring business model and sought to oppose its nurturing by government trade policies. The reason? We wanted to make sure that our audiences knew that not all businesses or manufacturers favored such policies.

In addition, because the organization wasn’t a household name, whenever we identified ourselves as authors of an article written for an outside publication, we included a brief description of USBIC – something on the order of “an association of small, mainly family-owned, domestically focused manufacturers.” The same went for whenever we were interviewed for an article or broadcast segment. And if we’d been given more space, we’d have been happy to go into more detail.

Now, to be completely accurate, I was employed by the Council’s think tank wing – which we called the USBIC Educational Foundation. And that doesn’t look like a terribly transparent name at first glance. But only at first glance, since even the most casual research effort will reveal the connection. 

Moreover, as with the Council, when the Foundation marketed materials and speakers (like me), it was made completely clear that the very purpose was to represent the views of this distinctive group of manufacturers. In other words, that was the point. I only wish we had been more successful in debunking the stereotype of all industrial companies as footloose multinationals that roamed the world in search of the lowest labor and other costs, heedless or uncaring about the impact on the domestic U.S. economy.

Much the same holds for the organization I worked for previously – the Economic Strategy Institute (ESI). Although the name was less transparent than USBIC’s, from the very start, founder Clyde V. Prestowitz, Jr. strove tirelessly to publicize ESI’s corporate backers, and for a reason very similar to USBIC’s – he wanted to inform policymakers and journalists that not all industries and companies that dissented from an orthodox free trade line were “losers” that were simply seeking government protection from superior competitors. Nothing made that point more clearly that noting that many of ESI’s supporters (like Intel and Motorola) were leaders in the world’s most advanced industries.

Indeed, John might have mentioned that I wound up leaving ESI after a few years precisely because these donors changed their tune on trade issues for various reasons – and unfortunately, the Institute for the most part changed with them, along with venturing into new areas. I was fortunate to find a more like-minded group in the form of USBIC precisely because the Standard Operating Procedure of the donor community have always ensured that organizations analyzing these international economic issues in unconventional ways would be few and far between.

As a result, the tale above should also make embarrassingly obvious that if an author like John wanted to use a policy analyst as an example of opportunistic tut-tutting about the system that long supported him and his family, I was anything but that guy. In that vein (as is clear from the above link), John might have mentioned that I have written about the practice of idea-laundering for more than ten years.

So I hope that John keeps training his eye on the think tank world and the troubling role it plays in the national policy and political worlds. I just hope that his next offerings make their points more carefully and precisely.

(What’s Left of) Our Economy: Is it the National Association of Manufacturers or the National Association of Offshorers?

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auto parts, automotive, China, domestic content, exports, fast track, Gregg Sherrill, imports, India, Jobs, manufacturers, manufacturing, Mexico, NAM, National Association of Manufacturers, Obama, offshoring, production, Tenneco, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, {What's Left of) Our Economy

Here’s hoping that the National Association of Manufacturers (NAM) gets to testify in Congress on President Obama’s trade agenda – and soon. That’s not because there’s any reason to expect the organization voluntarily to shed any genuine light on the likely impact of granting the president fast track negotiating authority or the Trans-Pacific Partnership (TPP). Instead, it’s because it will be a great opportunity for lawmakers with some smarts to find out whether and to what extent, like the rest of the big business organizations pressing for new trade deals, NAM’s views are shaped by offshoring interests.

NAM’s focus on maximizing opportunities to send American jobs and production overseas rather than boosting them at home could become especially apparent if the organization sends its new board chairman, Tenneco chief Gregg Sherrill, to Washington. By its count, his auto parts giant currently runs 101 production-related facilities around the world – and only 19 are in the United States.

According to Tenneco, this breaks down into 16 U.S. factories out of a global total of 86, and three engineering centers out of a global total of 14. The company’s only software development center is in India.  (It couldn’t find any qualified Americans to do the work?)

Tenneco explains its location decisions by declaring that “We are where our customers are.” At first glance, the figures bear out the firm. Tenneco makes a wide range of auto parts, and according to the latest figures I could find, the United States in the second quarter of 2014 accounted for only 13.14 percent of global auto and truck production (by units). That was second behind China – by a wide margin. China’s 11.783 million vehicle output represented 26.06 percent of the global total. And the company maintains 18 factories and one engineering center in the PRC.

Similarly, India produced 4.22 percent of the world’s motor vehicles in the second quarter of 2014, and accounted for just under seven percent of Tenneco’s worldwide factories (along with the software center). And Mexico’s 4.65 percent of the company’s manufacturing locations seems appropriate given its 3.68 percent of world vehicle output.

But when it comes to trade, the subject of trade policy hearings, Tenneco’s strategy raises big questions. For example, if its aim is to produce close to its customers, it would seem that expanding exports isn’t a high priority. Yet boosting these U.S. overseas sales, and thus increasing American growth and hiring clearly is the Obama administration’s top stated trade priority. So why is the NAM, now headed by Tenneco’s boss, so enthused about new trade deals?

Perhaps more important, is Tenneco’s factory location pattern in fact related to its trade behavior? The company doesn’t disclose that information, so it’s clearly a question Members of Congress and Senators should ask. Moreover, Tenneco is far from the only parts maker in NAM’s ranks. Sherrill (or whatever surrogate is sent) should be asked comparable questions about the entire industry, especially since sector-wide trade data is eminently available, and it shows clearly that the United States has steadily turned into an import magnet from low-wage countries where Tenneco (and other parts makers) have lots of factories.

Let’s take China. True, it’s now far and away the world’s vehicle output leader. And indeed, total U.S. parts exports to the People’s Republic rose by nearly 107 percent between 2007 (chosen as a baseline since it’s the year the American recession began) and 2013. Year-to-date 2013 to 2014 (we won’t have full 2014 data for another week), these exports are up another 13.90 percent.

Yet between 2007 and 2013, American auto parts imports from China were up nearly as fast – nearly 96.50 percent. And their value in 2014 was 5.77 times the value of U.S. parts exports. The same trends describe U.S.-India auto parts trade. The 2014 import-export ratio for the much larger amount of U.S.-Mexico auto parts trade is smaller – 2.20:1. But an enormous number of parts imports from Mexico are contained in the enormous number of finished vehicles America buys from the country. Vehicle imports from China and India are still small.  Given Tenneco’s stated aim of producing near its customers – a strategy that many other American-owned manufacturers also profess to be following – why such a large and growing gap in trade flows?

Tenneco’s Sherrill could certainly clear up all such questions about his own company by telling Congress how much the firm exports and imports nowadays annually, and how those numbers have changed since the North American Free Trade Agreement (also strongly supported by NAM) launched the current era of U.S. trade policymaking. He should also disclose the levels of domestic and foreign content in his company’s products and how they’ve changed during this period.

Sherrill should add how the company’s domestic and foreign output and employment levels have changed during this period. Similar figures for all the other companies and industries represented by NAM would be helpful, too – from Sherrill or any of the organization’s other spokespersons.

Any witnesses from NAM – or the other offshorer-dominated business groups favoring the president’s trade agenda – will no doubt claim that such information represents valuable commercial secrets, and can’t be revealed without surrendering major strategic advantages to rivals. But that problem is easily solved by requiring such disclosures from all companies, foreign or domestic-owned, above a certain size that do business in the United States.  That way, no one would come out on top on net.

NAM claims that it’s devoted to creating “job across the United States” – and presumably production, too. But without details about its companies’ actual performance, the official trade figures show that Congress and the public are entitled to wonder whether the organization’s name should be changed to the National Association of Offshorers.