(What’s Left of) Our Economy: Hold Your Applause on Inflation Progress Signs

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consumers, demand, Employment, Federal Reserve, fiscal policy, gas prices, GDP, gross domestic product, household spending, housing, inflation, Jobs, manufacturing, manufacturing jobs, manufacturing production, monetary policy, mortgages, personal consumption, personal spending, recession, retail sales, trade deficit, {What's Left of) Our Economy

At the end of last month, I wrote that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge.” Basically all that’s needed is the willingness to take some combination of the kinds of fiscal and monetary measures that are guaranteed to slow economic growth.

Keep that in mind as you read the mushrooming number of claims that America’s recent historic burst of inflation is either peaking (see, e.g., here, here, and here) or should peak soon (e.g., here, here, and here). Because wherever softening prices can be seen, levels of demand have fallen off either because goods and services are becoming unaffordable and sales are down, or because easy money has gotten harder, or some degree of both. So let’s not conclude that inflation progress stems from a sudden outburst of policy-making genius.

Anyone doubting the start of a economic downshifting should check out the many of the latest reports released by the federal government on the economy’s performance. In the first quarter of this year, the gross domestic product (GDP – the standard measure of the economy’s size) fell by 1.58 percent at an annual rate adjusted for inflation, and the pretty reliable forecasters at the Atlanta branch of the Federal Reserve system expect about the same kind of contraction for the second quarter.

If this prediction holds, the United States will have entered a recession by the most widely used yardstick – two straight quarters of what economists call “negative growth.”   

Manufacturing production – which RealityChek regulars know has held up very well during the pandemic period – has now dropped sequentially for two straight months. And a downshifting U.S. economy is importing less, which has reduced the bloated trade deficit for two straight months as well.

The employment picture is better (including in manufacturing) but on an economy-wide basis some signs of deterioration are visible as well. Chiefly, if you look at three-month averages (which help smooth out often misleading short-term fluctuations, you see that from January through March, this measure of private sector job growth totalled 527,000. From April through June, it dropped to just under 362,000, and may sink lower, as the April and May figures have been downwardly revised, signaling that the same may be in store for June’s results.

Some of the best evidence of declining affordability – across the board – come from the official retail sales figures. On an annual basis, their increase is down from the mid-double digit levels of January and February (propped up by the unusually weak numbers from the heavily pandemic-affected figures for the previous – baseline – winter), to 9.26 percent in June.

That may not sound like a lot, but when inflation is considered, these retail sales increases turn into decreases for three of the last four months through June’s preliminary report. In other words, because of rapidly rising prices, consumers weren’t actually buying more in the way of goods and services. They were simply paying more for quantities that had actually shrunk. And the month-on-month sales numbers have been negative for three of the last four months, too.

The affordability issue is especially clear from the recent decrease in gasoline prices. Yes, they’ve tumbled for more than a month. But less driving is the obvious reason. For example, here we are in the middle of peak summer driving season, when the subsiding of the pandemic supposedly has millions of Americans determined to engage in so-called “revenge travel.”

But according to the U.S. Energy Information Administration, gasoline consumption “is just above the same time two years ago [when revenge travel was popular, too, as the virus’ first wave receded, but was still taking a much bigger toll than today] but below every other year going back to 2000.”

The American Petroleum Institute added that last month’s 9.1 million barrels per day of demand was “down 2.3% y/y compared with June 2021—a third straight month in which gasoline trailed its year-ago levels.” Moreover, so far, this year’s May-June increase of 0.4 percent in gasoline use has badly “lagged the average 2.9% seasonal increase seen between May and June in 2012-2021.”

Meanwhile, the role of higher interest rates (and consequently tighter credit) is best seen in the housing market. Summarizing the latest findings of the National Association of Realtors, The Wall Street Journal just reported that “sales of previously owned homes fell for a fifth straight month, dropping 5.4% in June to an annualized rate of 5.12 million.”

The main reason? The big run up in mortgage rates has depressed mortage applications for three straight weeks has pushed them down to their lowest levels since 2000. That means they’re below where they were even during the deflation of the mid-2000s housing bubble that helped trigger the global financial crisis and Great Recession.

Most important of all, even those believing that American leaders deserve credit for figuring out a successful anti-inflation fighting strategy, should remember that although interest rates are higher, they’re far from historically high and even fall well short of even recent very low norms; and that even though some prices are down, they’re still historically high. And that’s not even considering that the supply chain troubles also contributing to recent inflation could well intensify as long as the Ukraine war drags on, and the threat of more over-the-top Zero Covid lockdowns in China can’t be dismissed.

So even though this kind of bitter policy medicine is needed to avoid worse inflation down the road, and genuinely harsh austerity measures (especially as long as U.S. leaders seem to lack a clue regarding the inflation-fighting potential of productivity growth improvement), American voters aren’t likely to be grateful this November – or in any elections in the foreseeable future. And who could blame them?

 

(What’s Left of) Our Economy: Why U.S. Manufacturing’s Record Trade Deficits Aren’t Biting — Yet

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Biden administration, CCP Virus, China, consumers, coronavirus, COVID 19, Covid relief, exports, Federal Reserve, imports, inflation, manufacturing, manufacturing jobs, manufacturing production, stimulus, tariffs, Trade, Trade Deficits, {What's Left of) Our Economy

Perceptive RealityChek readers (no doubt the great majority!) have surely noticed something odd about my treatment of trade-related developments and the American domestic manufacturing base. For most of the CCP Virus period, I’ve been writing both that U.S.-based industry has been performing well according to practically every major measure, and that the manufacturing trade deficit has been setting new record highs.

It’s not that I’ve ignored a situation that would normally strike me as being utterly paradoxical and even inconceivable over any serious time span. I’ve mainly attributed it to the pandemic’s main economic damage being inflicted on services industries, and to the Trump tariffs on Chinese imports, which have shielded domestic manufacturers from hundreds of billions of dollars’ worth of competition that has nothing to do with free trade or free markets.

But the longer manufacturing has excelled as the trade gap has skyrocketed, the more convinced I’ve been that something else was at work, too. What finally illuminated this influence has been the recent controversy these last few weeks over President Biden’s suggestion that he might cut some of those Trump China tariffs in order to curb inflation.

As I’ve written previously (see, e.g., here), there’s no shortage of economic-related reasons to dismiss the claims that levies that began being imposed in mid-2018 bear any responsibilityfor inflation that only became worrisome three years later, and that reducing the tariffs would ease this inflation meaningfully. Even the Biden administration keeps admitting the latter point.

But the increasingly striking contrast between manufacturing’s strong output, job creation, and capital equipment spending on the one hand, and its historically awful trade deficits on the other points to the paramount importance of another explanation I’ve mentioned for doubting that tariffs have fueled inflation. It’s the role played by the economy’s overall level of demand.

I’ve written that trade levies will contribute to higher prices or boost prices all by themselves overwhelmingly when consumers are spending freely – and consequently when businesses understandably believe they have scope to charge more for tariff-ed goods. That is, companies are confident that the higher costs stemming from tariffs can be passed along to customers who simply aren’t very price sensitive.

Strong enough demand, however, has another crucial effect on manufacturing – and on other traded goods: It creates a market growing fast enough to enable domestic companies to prosper even when their foreign competitors are out-performing them and taking share of that market. In other words, even though all entrants aren’t benefitting equally, all can still benefit.

Conversely, when demand for manufactures is expanding sluggishly, or not at all, this kind of win-win situation disappears. Then U.S.-based and foreign industry are competing for a stagnant group of customers, and one’s gain of market share becomes the other’s loss. In this situation, increasing trade deficits mean that American demand is being met by imports to eliminate any incentive for domestic manufacturers to boost production or employment. Indeed, they become hard-pressed even to maintain output and payrolls.

Of course, even if trade deficits keep surging during periods of slow domestic demand, U.S.-based manufacturers can still in principle keep turning out ever more products and hiring ever more workers if they can achieve one goal: super-charging their export sales. But the persistently mammoth scale of the American manufacturing trade shortfall indicates either that foreign demand for U.S.-made goods almost never improves enough to compensate for reduced or stagnant domestic sales, or that foreign economies prevent such growth by keeping many American goods out, or some combination of the two.

Super-strong demand for manufactured goods is precisely what’s characterized the economy since the CCP Virus arrived in force. As a result, the pie has gotten so much bigger that domestic industry as a whole has had no problem finding enough new customers to support healthy production and hiring levels even though imports’ sales have been lapping them.

Specifically, between the first quarter of 2020 and the fourth quarter of last year (the last quarter for which current-dollar (or pre-inflation) U.S. manufacturing production data are available, the U.S. market for manufactures increased by 22.83 percent – or $1.518 trillion. Revealingly, this demand would have been strong enough to enable domestic industry to pass tariff hikes on to customers, and enable these levies to fuel inflation on at least a one-time basis. But tariffs of course have not been raised during this stretch.

Meanwhile, the manufacturing trade deficit soared by 64.31 percent ($566 billion). And the import share of the U.S. market rose from 29.50 percent to 32.47 percent.

But domestic industry was able to boost its production (according to a measure called current-dollar gross output) by 16.55 percent, or just under $954 billion. ,

Contrast these results with the pre-CCP Virus expansion. During those 10.5 years (from the second quarter of 2009 through the fourth quarter of 2019), the U.S. market for manufactured goods increased by just 45.37 percent, or $2.154 trillion. That is, even though it was more than five times longer than the above pandemic period, that market grew by only about twice as much.

The manufacturing trade deficit actually also grew at a slower rate than during the much shorter pandemic period (169.2 percent). But because the pie was expanding more slowly, too, the import share of this domestic manufacturing market climbed from 23.12 percent to 31.10 percent.  These home market share losses combined with inadequate exports were enough to limit the growth of U.S. manufacturing output to 34.64 percent, or $1.512 trillion. Again, though this 2009-2019 growth took place over a time-span more than five times longer than the pandemic period, it was only about twice as great. That is, the pace was much more sluggish.

And not so coincidentally, because pre-CCP Virus demand for manufactures was so sluggish, too, businesses concluded they had little or no scope to raise prices when significant tariffs began to be imposed in 2018. Further, the levies generated no notable inflation over any significant period even on a one-time basis. Companies all along the relevant supply chains (including in China) had to respond with some combination of finding alternative markets, becoming more efficient, or simply eating the higher costs.

The good news is that as long as the U.S. market for manufactures keeps ballooning, domestic industry can keep boosting production and employment even if the manufacturing trade deficit keeps worsening or simply stays astronomical, and even if domestic industry keeps losing market share.

The bad news is that the rocket fuel that ignited this growth spurt is running out. Massive pandemic relief programs that put trillions of dollars into consumers’ pockets aren’t being renewed, and Americans are starting to dig into the savings they were able to pile up in order to finance their expenses (although, as noted here, these savings remain gargantuan). Credit is being made more expensive by the Federal Reserve’s decision both to raise interest rates and to reduce its immense and highly stimulative bond holdings. And some evidence shows that U.S. consumer spending is shifting from goods like manufactures to services (although some other evidence says “Don’t be so sure.”)

Worse, when the stimulus tide finally recedes, domestic industry will likely find itself in a shakier competitive position than before. For without considerably above-trend demand growth, and with the foreign competition controlling more of the remaining market than before the pandemic, it will find itself more dependent than ever on maintaining production and employment (let alone increasing them) by winning back customers it has already lost. And changing purchasing patterns in place will be much more challenging than selling to customers whose patterns haven’t yet been set.

U.S. based manufacturing is variegated enough – including in terms of specific sectors’ strengths and weaknesses – that the above generalizations don’t and won’t hold for every single industry. But the macro numbers make clear that domestic manufacturing as a whole has experienced unusually fat years lately, and generally has been competitive enough to take some advantage of these favorable conditions. But industry’s continuing and indeed widening trade shortfall and market share losses in its own back yard should also be warning both manufacturers overall and Washington that many of domestic industry’s pre-pandemic troubles could come roaring back once leaner years return.

(What’s Left of) Our Economy: At Least Pre-Ukraine, U.S. Manufacturing’s Solid Growth Continued

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aerospace, aircraft, aircraft parts, automotive, Boeing, CCP Virus, coronavirus, COVID 19, Federal Reserve, interest rates, lockdowns, mandates, manufacturing, manufacturing production, medical devices, monetary policy, pharmaceuticals, real output, semiconductor shortage, semiconductors, Ukraine, Ukraine invasion, Ukraine-Russia war, {What's Left of) Our Economy

This morning’s Federal Reserve report on U.S. domestic manufacturing production (for February) was especially interesting for three reasons. First, it showed that the output of America-based factories rose month-on-month in inflation-adjusted terms by 1.20 percent. That was the best such performance since October’s 1.71 percent, and although it covers the period just before whatever Ukraine war-related disruption is going to hit the U.S. economy, it also contrasts with most (sluggish) estimates of overall American growth for the first quarter of this year. Manufacturing production revisions, moreover, were only slightly negative.

Second, since February, 2020 was the final data month before the CCP Virus and related lockdowns and voluntary behavioral changes started roiling and distorting the economy, it’s noteworthy that exactly two data years later, manufacturing output has grown by a real 3.37 percent. (As of last month’s Fed release, this figure was 2.49 percent.)

Third, these results hardly mean that domestic industry is in top shape, at least not historically speaking. For in inflation-adjusted production terms, it’s still 3.88 percent smaller than at its all-time peak – reached in December, 2007, just before the economy plunged into the Great Recession prompted by the global financial crisis.

February’s biggest monthly manufacturing production winners were:

>non-metallic mineral products, whose 3.46 percent monthly real expansion was its best since the 4.34 percent achieved in June, 2020 – during the rapid economy-wide recovery from the first wave of the virus and resulting activity curbs and dropoffs. This latest sequential increase brought output in the sector to 4.36 above its February, 2020 levels;

>the broad aerospace and miscellaneous transportation equipment industry, which increased after-inflation output in February by 3.22 percent. That rise was its best since July, 2021’s 4.21 percent, and the sector is now fully 16.90 percent bigger production-wise than in February. 2020;

>the small apparel and leather goods industries, which improved its constant dollar output on month by 2.96 percent, for its best sequential gain since January, 2021’s 3.31 percent. This industry’s production – which shrank greatly for decades due to low-cost foreign competition – is now up by just 1.85 percent since February. 2020; and

>wood products, where price-adjusted output expanded sequentially by 2.58 percent – the most since March, 2021’s 4.05 percent. In real terms, wood products production is now 6.28 percent greater than in February, 2020.

RealityChek regulars know that the broad machinery sector is a key barometer of national economic health generally speaking, since its products are used by so many manufacturing and non-manufacturing industries. So it’s good news that its sequential inflation-adjusted output advanced by a solid 0.78 percent in February, and even better news that January’s results were revised up from 1.08 percent to 1.83 percent – its best such perfomance since July. The machinery industry’s real output is now a strong 7.62 percent greater than in Febuary, 2020.

Of all the biggest manufacturing sub-sectors tracked by the Fed, only two suffered after-inflation monthly downturns in February:

>The automotive industry continued suffering from the global semiconductor shortage, with its constant dollar output sinking by 3.55 percent sequentially in February – its worst monthly performance since September, 2021’s 6.32 percent plunge. Price-adjusted production of vehicles and parts is now fully 10.68 below Febuary, 2020’s levels; and

>miscellaneous non-durable goods. Its real month-on-month output dipped by 0.36 percent in February, but since February, 2020, it’s off by 16.00 percent.

Industries that consistently have made headlines during the pandemic generally enjoyed February’s at least as strong as manufacturing overall.

Likely stemming from the widening flow of long overdue news from industry giant Boeing (see, e.g., here), aircraft- and parts-makers grew their after-inflation output in Febuary by 2.52 percent over Jauuary’s figure – their strongest such showing since August’s 3.44 percent. That January figure was revised down from 1.37 percent sequential growth to a still impressive 1.21 percent, and December’s upgraded 0.38 percent monthly dip is now judged to be a 0.62 percent decline. But after-inflation output for these companies is now up 16.35 percent since February, 2020 – up from the 13.14 percent calculable from last month’s Fed report.

The combination of a solid February and negative revisions also marked the big pharmaceuticals and medicines sector. February’s 1.08 percent price-adjusted monthly output gain was the industry’s best since August’s 2.39 percent. But January’s initially reported 0.27 percent sequential uptick is now pegged as a 0.14 percent decrease, and December’s upwardly revised 0.81 percent rise is now judged to be a 0.10 percent drop. Even so, total real pharmaceutical and medicines production is 14.91 percent higher than in February, 2020 – up from the 13.42 percent calculable last month.

Much better February results were turned in by the medical equipment and supplies sector. Monthly production improved by 1.39 percent – the best such result since the 10.78 percent reported in July, 2020, early during the recovery from the first pandemic wave.

And revisions were positively eye-popping. January’s initially reported 2.50 percent monthly real output rise is now judged to have been 3.26 percent, and December’s first estimate of a 2.75 percent after-inflation fall-off is now estimated at just a 0.37 percent decline. All told, this grouping is now 8.44 percent bigger real growth-wise than in February, 2020 – as opposed to the 4.43 percent increase calculable last month.

Those semiconductors in such short supply were more abundant after February’s price-adjusted sequential production increase of 1.96 percent that was the best such performance since May’s 2.61 percent growth. January’s previously reported fractional decline is now pegged at a 0.37 percent decrease, but December’s 0.52 percent rise is now estimated at 0.88 percent. Consequently, these industries’ real output is now up 21.97 percent since February, 2020, as opposed to the 20.66 percent calculable last month.

The economic fall-out of the Ukraine war won’t start being reflected in the Fed manufacturing production reports until next month, but it looks virtually certain that it will either keep inflation (and therefore manufacturers’ input costs) high or push it higher. A bigger wild card could be the Fed itself. The central bank yesterday did keep its quasi-promise to start increasing the federal funds rate, but the hike was only 0.25 percent. And though more increases supposedly are scheduled, they’re far from certain if overall growth weakens markedly (as the Fed itself has forecast). New, more dangerous CCP Virus variants can always emerge. But national rates of vaccination and natural immunity seem high enough – and the public fed up enough with restrictive mandates – to keep supporting growth all else equal for the foreseeable future.

So unless the fortunes of manufacturing and the broader economy diverge sharply, it looks like domestic industry’s steady-for-the-most-part expansion since the depths of spring, 2020 will remain on course.

(What’s Left of) Our Economy: New Fed Figures Show the U.S. Manufacturing Recovery is Proceeding Nicely

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automotive, CCP Virus, China, coronavirus, COVID 19, Federal Reserve, inflation-adjusted output, lockdowns, manufacturing, manufacturing production, real growth, shutdown, stimulus package, Trump tariffs, Wuhan virus, {What's Left of) Our Economy

It’s not apparent from the overall numbers, but the most important takeaway from this morning’s monthly Federal Reserve report on U.S. manufacturing production is that American industry has continued a steady comeback from the ravages of the CCP Virus and the government-induced shutdown of much of the U.S. economy. And the continuing healthy pace of this comeback is all the more impressive given the stop-and-start nature of so many of the economic restrictions imposed by Washington, D.C. and by the states and localities, and given the recent uncertainty about a new virus-relief bill.

The overall Fed numbers, as indicated above, do show a manufacturing bounceback that’s losing noteworthy steam. In August (the latest available data month), inflation-adjusted manufacturing output grew by 0.96 percent sequentially. That’s definitely a weaker pace than July’s growth (now pegged at 3.97 percent on month), much weaker than June’s 7.64 percent monthly burst, and well short of May’s 3.91 monthly percent production rise.

Grounds for encouragement, though, are justified even by these aggregate figures, as revisions for recent months generally were positive, and July’s was really positive – that month’s previously estimated manufacturing real growth was 3.41 percent.

But the best and most important news comes from the numbers on manufacturing production outside the automotive sector. As known by RealityChek regulars, the wild sequential swings in output from vehicle and parts makers have dominated the Fed manufacturing production reports for nearly the entire CCP virus period. (See., e.g., last month’s post on this subject.) So important though automotive is – both because of its size per se and because it affects the rest of its industry due to its big domestic supply chain – the non-auto results arguably provide a more accurate picture of U.S. manufacturing’s fundamentals. And this picture looks remarkably good, and still displays significant momentum.

Ex-auto, as the cognoscenti put it, constant dollar manufacturing production increased by 1.40 percent on month in August. So since that’s much faster than overall manufacturing’s performance (up 0.96 percent) that means automotive output fell (by 2.13 percent, specifically).

The August sequential improvement for ex-auto manufacturing, moreover, isn’t dramatically lower than July’s (1.93 percent). And it compares pretty well with June’s (now estimated at 3.82 percent) and May’s (now judged to be 2.12 percent).

Even better, all the pre-July results have been revised up except for May’s.

When all is said and done, the August Fed report underscores just how resilient domestic manufacturing has been despite the formidable CCP Virus challenges (which also include major economic slowdowns in the foreign markets U.S. industry has always relied on for much of its sales). As of August, overall price-adjusted American manufacturing output was just 6.39 percent below its levels in February (the final month before virus effects began impacting the economy). Manufacturing ex-auto’s real production was just 7.04 percent less than in February. And automotive’s after-inflation production was a mere 1.98 percent below that February benchmark.

And another factor to consider: Since China’s has been the world’s first major economy to resume growth since the virus struck, and since its recent growth has been so markedly export-led, think of how much worse U.S. industry’s state would be had the steep Trump tariffs on hundreds of billions of Chinese goods normally sent to the United States not been imposed, or left almost completely in place by the Phase One trade deal.

(What’s Left of) Our Economy: Automotive Output Keeps Driving Virus-Era U.S. Manufacturing Production

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automotive, CCP Virus, coronavirus, COVID 19, Federal Reserve, inflation-adjusted output, manufacturing, manufacturing production, Wuhan virus, {What's Left of) Our Economy

As with the last few Federal Reserve reports on U.S. manufacturing production, today’s release (covering June) is mainly a combined CCP Virus/automotive story. And intriguingly, if worker pressures to re-close at least some of the nation’s vehicle and parts factories succeeds due to the surge seen in virus cases in recent weeks, this pattern could well continue.

The overall results – which measure domestic manufacturing output in inflation-adjusted terms – were decidedly encouraging. Last month, this real production sequentially jumped by 9.06 percent – the biggest such increase on record, and smashing the old mark of 7.03 percent recorded in August, 1997. (File this date  away for future reference.)

Of course, this constant dollar output improvement, along with May’s upwardly revised 5.06 percent advance, have followed historic after-inflation monthly production nosedives. And these revisions have only been slightly mixed (April’s drop is now judged to be 16.94 percent, not the previously reported 15.66 percent, while the March decrease was shaved from 5.27 percent to 4.09 percent.) So the hole out of which U.S. based industry must dig itself out was just about as deep as originally estimated. (Of course, all these figures, along with those for the previous several years, will be further revised by the Fed sometime later this year, so don’t view them as being set in stone.)

But the automotive results keep driving (pun intended?) the overall manufacturing growth figures. In June, combined real output of vehicles and parts soared by 115.02 percent. In other words, it more than doubled in a month. And that surge followed a monthly automotive comeback in after-inflation terms of 117.12 percent – another more-than-doubling. Moreover, this figure has revised down only from a previously reported 120.83 percent .

As with manufacturing in general, though, these remarkable increases have followed deep decreases in April and March (now judged to have been 77.81 percent and 28.05 percent, respectively, with revisions minimal) due to a CCP Virus-led decision by the automakers to suspend most of their operations . Indeed, as of June, constant dollar automotive production is still 25.47 percent below February’s pre-pandemic level.

History, moreover, makes clear that outsized automotive influence on the total manufacturing production numbers is a well-established pattern. For example, the previous record increase for after-inflation monthly overall U.S. manufacturing production (that 7.03 percent rise in August, 1997) stemmed largely from a 49.17 percent increase in real automotive output – which in turn resulted from the end of a strike at General Motors.

And strikes aside, production in the sector fluctuates tremendously during the summer because that’s when factories have often been shut down to get their acts together for the upcoming model year. Don’t expect this kind of boost this year, though, as a number of automakers have decided to skip these annual retooling and maintenance pauses since their virus-related factory closings have already hit them hard enough.

One more sign of how profoundly the auto figures have distorted manufacturing’s overall recent production performance – stripping out this sector, real manufacturing output would have risen on mont in June not by 9.06 percent, but by 5.45 percent. That’s still a great performance, though – in fact, it’s the best since the 6.32 percent improvement in August, 1967.

Indeed, without the automotive sector, U.S. price-adjusted manufacturing output is down only 7.13 percent from its last pre-pandemic reading in February. Add in automotive, and this figure becomes 8.82 percent.  But due the CCP virus, lockdown and reopening decisions, and restiveness in some of the nation’s automotive workforce, the road ahead for domestic manufacturing is anything but clear.    

(What’s Left of) Our Economy: U.S. Manufacturing Keeps Gaining Independence

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Commerce Department, decoupling, GDP-by-industry, health security, healthcare goods, manufacturing, manufacturing production, manufacturing trade deficit, Obama, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Like a strike-shortened sports season’s champion, the conclusion in today’s RealityChek post needs an asterisk. The conclusion stems from this morning’s Gross Domestic Product (GDP) by Industry report from the Commerce Department, which shows that U.S. domestic manufacturing continues to become ever more self-reliant. In other words, it’s reducing its dependence for growth on foreign-made industrial goods of all kinds generally speaking.

The asterisk is needed because the new data covers the first quarter of this year, and therefore it includes March – when much of the U.S economy was shut down by government order or recommendation due to the CCP Virus. As a result, a chunk of the results say nothing about how manufacturing or the rest of economy would have performed in normal times.

Still, this morning’s evidence that U.S.-based industry is becoming more autonomous comes from several different findings calculable from the GDP by Industry’s raw data.

For example, again, due partly to the shutdowns’ effects, the report shows that according to a widely followed measure called value-added, domestic manufacturing’s output dipped by 0.99 percent between the first quarter of 2019 and the first quarter of this year. At the same time, the manufacturing trade deficit during this period shrank by 7.31 percent – more than 13 times faster. During the last comparable period (fourth quarter, 2018 to fourth quarter, 2019), manufacturing production grew by 0.70 percent, and its trade gap narrowed by 7.59 percent – a somewhat better performance on both scores.

At this point it’s vital to note that these growth rates are by no means good. In fact, they’re the worst by far since the final year of the Obama administration – when on a calendar year basis, domestic industry shrank by 1.19 percent. Yet during that same year 2016, despite this contraction, the manufacturing trade shortfall expanded by 4.66 percent. So if you value self-sufficiency (as you should in a world in which the United States has found itself painfully short of many healthcare-related goods, and in which dozens of its trade partners were hoarding their own supplies), it’s clear that during 2016, the nation was getting the worst of all possible manufacturing worlds.

Also important: there’s no doubt that the same Trump administration tariffs and trade wars with which domestic manufacturing has been dealing over the past two years have slowed its growth. In other words, industry has been adjusting to policy-created pressures to adjust its global, and in particular China-centric, supply chains. That’s bound to create inefficiencies.

If you don’t care about significant American economic reliance on an increasingly hostile dictatorship, you’ll carp about paying any efficiency price for this decoupling from China (and other unreliable countries). If you do care, you’ll recognize the slower growth as an adjustment cost needed to correct the disastrous choice made by pre-Trump Presidents to undercut America’s economic independence severely.

Moreover, during the last year, domestic manufacturing output was held back by two developments that had nothing to do with President Trump’s trade policy: the strike at General Motors in the fall of 2019, which slashed U.S. production both of vehicles and parts, and of all the components and materials that comprise dedicated auto parts; and the safety problems at Boeing, which resulted in the grounding of its popular 737 Max model worldwide starting in March, 2019, and in a suspension of all that aircraft’s production this past January.

Also encouraging from a self-reliance standpoint. During the first quarter of 2019, the manufacturing trade deficit as a percentage of domestic manufacturing output sank from just under 43 percent in the fourth quarter of 2019 (and 43.36 percent for the entirety of last year) to 37.27 percent. That’s the lowest level since full-year 2013’s 35.82 percent.

These figures should make clear that the manufacturing trade deficit’s share of manufacturing output kept growing during the final Obama years and into the Trump years. Indeed, on an annual basis, this number peaked at 47.01 percent in the third quarter of 2019. To some extent, blame what I’ve previously identified as tariff front-running (the rush by importers throughout the trade war to bring product into the United States before threatened tariffs were actually imposed) along with those supply chain-related adjustment costs.

To complicate matters further, as suggested above, that very low first quarter result stemmed partly from the nosedive taken by manufacturing and other U.S. economic activity in March. Since that level is clearly artificially low, it’s probably going to bob up eventually – but hopefully not recover fully.

In all, though, the first quarter GDP by Industry report points to a future of more secure supplies of manufactured goods for Americans. And unless you believe that domestic manufacturers have completely lost their ability to adjust successfully to a (needed) New Normal in U.S. trade policy, the release points to a return of solid manufacturing output growth rates as well.

Following Up: Inside April’s U.S. Manufacturing Crash II

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aerospace, appliances, automotive, CCP Virus, chemicals, components, computers, coronavirus, COVID 19, durable goods, electrical equipment, electronics, fabricated metals products, Federal Reserve, Following Up, food products, healthcare goods, inflation-adjusted output, machinery, manufacturing, manufacturing output, manufacturing production, medical devices, metals, non-durable goods, paper, real growth, Wuhan virus

A little earlier today, RealityChek presented some lowlights from this morning’s Federal Reserve U.S. manufacturing production report (for April). As promised, here’s a more granular look at the results, which yield even more insights as to how the CCP Virus blow to the economy is reflecting – and probably influencing dramatically changed spending patterns.

The table below shows the findings for durable goods industries, the super-category that covers products with expected usage and shelf lives of three years or more. Included are the original March inflation-adjusted output changes, the revised March data, and the April statistics:

Wood products:                                                -4.22%       -3.15%      -9.04%

non-metallic mineral products:                        -6.56%      -6.50%     -16.26%

Primary metals:                                                -2.82%      -3.95%     -20.37%

Fabricated metal products:                               -8.28%      -4.23%     -11.33%

Machinery:                                                       -5.56%      -3.05%     -10.98%

Computer & electronic products:                     -1.89%      -1.24%      -5.02%

Electrical equip, appliances, components:       -2.24%      -2.83%      -5.99%

Motor vehicles and parts:                               -28.04%    -29.96%    -71.69%

Aerospace/miscellaneous transport equip:      -8.12%      -8.90%     -21.65%

Furniture and related products:                       -9.99%      -6.50%     -20.60%

Miscellaneous manufacturing:                        -9.94%      -7.09%       -9.05%

   (contains most of those non-pharmaceutical healthcare goods)

As in the broader category analysis from earlier today, the automotive collapse – over both March and April – stands out here, although it was joined in the double-digit neighborhood (at much lower absolute levels of course) by six of the other eleven sectors. And as predicted in last month’s post on the March Fed report, the sector that’s held up best has been the computer and electronics industry – though following surprisingly close behind is electrical equipment, appliances, and their components.

It’s also easy to see how the rapid deterioration in automotive and the miscellanous transportation category that includes aerospace (especially in April for the latter) spilled over into supplier industries like metals and fabricated metal products, and machinery.

One durable goods puzzle: the relatively fast April decrease in the miscellaneous manufacturing category, which contains non-pharmaceutical medical goods so crucial for the nation’s CCP Virus response.

The second table shows the same information for the non-durables super-category, where the virus impact has been considerably lighter. Among notable results – the sharp worsening of after-inflation output in the food sector. Although it fared relatively well, there can be little doubt that the worker safety problems in meat-packing plants, along with the cratering of big customers – mainly the restaurant and hotel businesses – played big roles.

The non-durables results also make clear that the sector that’s survived best so far has been paper. Also excelling (at least relatively speaking): the enormous chemicals sector. This industry also contains the pharmaceutical industry, although the any positive CCP Virus impact seems unlikely to date because no vaccines or treatments have been developed yet.

Food, beverage, and tobacco products:          -0.76%      -1.56%       -7.10%

Textiles:                                                        -14.05%      -6.98%     -20.72%

Apparel and leather goods:                          -16.54%    -10.31%     -24.10%

Paper:                                                            -2.04%      -0.08%        -2.58%

Printing and related activities:                    -18.18%    -10.75%      -21.16%

Petroleum and coal products:                       -5.93%      -6.56%      -18.55%

Chemicals:                                                   -1.65%      -1.50%         -5.14%

Plastics and rubber products:                      -7.60%       -4.37%       -11.03%

Other mfg (different from misc above):     -5.37%       -4.29%       -10.37% 

The virus crisis contains so many moving parts (e.g., vaccine and therapeutics progress; infection, fatality, and testing data; uneven state reopening and national social distance practicing; consumer attitudes; second wave possibilities) that extrapolating the manufacturing trends to date seems foolhardy. But tracking industry’s winners and losers as the months pass could still provide important clues as to how much further the economic woes it’s caused will continue; and when, how quickly, and how completely recovery arrives.   

(What’s Left of) Our Economy: Inside April’s U.S. Manufacturing Crash I

Tags

aircraft, auto parts, automotive, Boeing, CCP Virus, coronavirus, COVID 19, durable goods, Federal Reserve, inflation-adjusted output, manufacturing, manufacturing output, manufacturing production, non-durable goods, real growth, vehicles, Wuhan virus, {What's Left of) Our Economy

There was never any point in expecting today’s Federal Reserve manufacturing production figures (for April) to change significantly what’s known about the CCP Virus’ body blow to the American economy overall, and to industry in particular. As with the case last month, however, the details reveal a great deal about how the pandemic is changing patterns of U.S. factory output – which in turn to some extent reflect changing patterns of the spending (by both consumers and businesses) that remains the main driver of the nation’s growth (or, nowadays, contraction).

The big takeaways are that:

>The March revisions show that the virus damage to manufacturing that month was a good deal less (with inflation-adjusted output falling by 5.53 percent on month) than the 6.27 percent drop initially reported.

>The April 13.78 percent month-to-month real production was by far the biggest such decrease on record (going back to 1972) – surpassing March’s previous record.

>As with March, the steepest fall-offs in price-adjusted output came in the durable goods sector – which consists of items whose active use or shelf life is expected to be three years or greater. In March, the sequential production decrease was revised from 9.14 percent to 8.23 percent. But in April, the plunge was more than twice as great: 19.27 percent.

>The March monthly shrinkage of non-durable goods production is also now judged to be smaller than first reported – 2.64 percent rather than 3.21 percent. But in April, the rate of sequential deterioration was even faster than for durable goods, speeding up to 8.23 percent.

>Within durable goods (e.g., steel, autos, computers, industrial machinery, furniture, appliances, aircraft), the automotive sector remained by far the weakest industry. It was bad enough that March’s horrific on-month after-inflation output crash dive was thought to be even greater than first estimated (29.96 percent rather than 28.04 percent). But in April, inflation-adjusted output was down by another 71.69 percent.

>And within the automotive sector, the big story was vehicles, not parts. The former’s constant dollar March production is now judged to have been 37.77 percent, not the originally reported 34.76 percent. But then in April, it careened down by 93.60 percent. That is, it nearly stopped.

>For an idea of how profoundly automotive’s tailspin has affected manufacturing’s performance, if it’s removed from the total, factory output’s April monthly contraction would have been 10.29 percent in real terms, not 13.78 percent. That is, still a terrible (and record) performance, but not quite so terrible.

>As for durable goods, its April sequential production drop would have been 12.65 percent in real terms, not 19.27 percent. Again, an awful performance, but much better than the numbers with automotive.

>Speaking of tailspins, Boeing’s troubles have continued to mount because the virus crisis has decimated U.S. travel and transportation, and they showed up in abundance in the April Fed manufacturing report. March’s monthly after-inflation output decrease for aircraft and parts was revised from 10.36 percent to 12.09 percent. And that rate more than doubled in April, hitting 28.88 percent.

I’ll be following up with more detailed April production data later this afternoon!

(What’s Left of) Our Economy: Good – & Promising – News on Manufacturing Reshoring

Tags

Canada, China, Commerce Department, East Asia, Forbes.com, GDP-by-industry, Kearney, Kenneth Rapoza, manufacturing, manufacturing production, manufacturing trade deficit, Mexico, North America, Trade, Trade Deficits, {What's Left of) Our Economy

When two separate sources of information agree on a conclusion, the conclusion obviously becomes a lot more important than if it’s got only a single supporter. That’s why I’m excited to report that a major economic consulting firm has just released data showing that American domestic manufacturing has been coping just fine with all the challenges it faces from Trump tariffs aimed at achieving the crucial goal of decoupling U.S. industry and the the broader economy from China.

I’m excited because these results track with my own analysis of U.S. trade and manufacturing output data – which I’ve been able to update because of a new Commerce Department release measuring manufacturing production through the end of last year. And you should be excited, too – because the more self-reliant U.S.-based industry becomes, the better able it will be to add to the nation’s growth without boosting its indebtedness. In addition, the more secure the country will be both in terms of traditional national security and America’s ability to provide all the military equipment it needs, and in terms of health security and its ability to provide all the drugs and medical equipment it needs to fight CCP Virus-like pandemics.

The consulting firm data comes from Kearney, and I need to tip my hat to Forbes.com contributor Kenneth Rapoza for initially spotlighting it. According to the company, its seventh annual Reshoring Index reveals that last year, imports from low-cost Asian countries like China (well, none are really “like China,” but you get it) as a percentage of U.S. industry’s output hit its lowest annual level since 2014. The decrease was the first since 2011, and the yearly drop was by far the biggest in percentage terms since 2008.

What’s especially interesting is that the Kearney figures show that manufacturing imports from Asia made inroads even during much of the Great Recession. Last year, their prominence dwindled notably even though the American economy as a whole was growing solidly. And although domestic manufacturing output slowed annually last year – due partly to the inevitable short-term disruptions and uncertainties created by major policy shifts, and partly due to the safety problems of aerospace giant Boeing – the Kearney report noted, it “held its ground.”

Kearney reported even better news on the “trade shifting” front, and its findings also track with mine. One major criticism of the Trump China tariffs in particular entails the claim that they won’t aid American domestic manufacturing because they’ll simply result in the U.S. customers of tariff-ed Chinese products buying the same goods from elsewhere – especially from Asian sources.

The Kearney study refutes that claim, reporting that not only did the role of Asian imports decrease in 2019, but that due to the tariffs, this decrease was led by a China fall-off, that production reshoring rose “substantially,”and that a major import shifting beneficiary was Mexico – which is good news for Americans since it means that the globalization of industry is now doing more to help a next-door neighbor whose problems do indeed tend to spill across the border. (I’ve also found important trade shifting away from East Asia as a whole and toward North America – meaning both Canada and Mexico.) 

As for my own research, the release Monday of the Commerce Department’s latest Gross Domestic Product by Industry report, combined with the monthly trade statistics, these data also shed light on the relationship between U.S.-based manufacturing’s growth, and the economy’s purchases of manufactured goods from abroad.

The big takeaway, as shown by the table below: The relationship has continued its pattern of weakening – suggesting less import dependence – during the Trump years, although production growth did indeed slow because of that aforementioned tariff-related disruption and the Boeing mess.

The figure in the left-hand column represents U.S.-based manufacturing’s growth during the year in question (according to a gauge called “value added), the middle column represents the growth that year of the manufacturing trade deficit, and the right-hand column shows the ratio between the two growth rates (with the trade gap’s growth coming first). The higher the ratio, more closely linked manufacturing output growth is to the expansion of the manufacturing trade deficit. All figures are in pre-inflation dollars.

2011:             +3.93 percent              +8.21 percent                2.09:1

2012:             +3.19 percent              +6.27 percent               1.97:1

2013:             +3.36 percent              +0.77 percent               0.23:1

2014:             +2.93 percent            +12.39 percent               4.23:1

2015:             +3.72 percent            +13.22 percent               3.55:1

2016:              -1.19 percent              +3.07 percent                 n/a

2017:             +3.99 percent              +7.22 percent              1.81:1

2018              +6.23 percent            +10.68 percent              1.71:1

2019              +1.67 percent              +1.09 percent              0.65:1

Domestic manufacturers obviously haven’t completed their adjustments to the new Trump era trade environment, and the CCP Virus crisis clearly won’t make this task any easier. But Kearney expects that the pandemic will wind up moving more U.S.-owned or -related manufacturing out of China, and so do I. And although the Kearney authors don’t say so explicitly, it’s easy to read their report and conclude that the crisis and the resulting national health security needs will help ensure that the domestic U.S. economy will keep getting a healthy share.

(What’s Left of) Our Economy: A Winning Trade War Message from the Last Pre-China Virus Manufacturing Figures

Tags

aerospace, aircraft, Boeing, China, China virus, coronavirus, inflation-adjusted output, manufacturing, manufacturing production, metals, supply chains, tariffs, Trade, trade wars, {What's Left of) Our Economy

The new Federal Reserve industrial production figures are now out, and although they only bring the story up through February, they contain two vital messages: First, taking into account ongoing safety problems with aerospace giant Boeing (and its vast domestic supply chain), they’re very solid – and reinforce the case that the pre-China Virus manufacturing and overall U.S. economies were faring well despite widespread slowdown fears. Second, they also show that, despite the equally widespread tariff alarmism being mongered throughout the Trump years, domestic manufacturing wound up handling the so-called trade wars just fine.

According to the Fed, inflation-adjusted manufacturing output increased by 0.12 percent month-to-month and remained down on a year-on-year basis (by 0.18 percent). January’s monthly constant dollar production dip was revised down from 0.09 percent to 0.23 percent. Yet this real output is up on net by 1.33 percent since its last low point (last October) and by 0.36 percent since the first full month of significant Trump tariffs (April, 2018).

At the same time, these production levels remain 1.28 percent below those of manufacturing’s last peak – in December, 2018. So these are by no means salad days for domestic industry.

Take a look, however, at the main Boeing-related figures. Aircraft production and parts sank by 5.12 percent sequentially in February. It reached its lowest level since October, 2011 and this drop followed January’s 11.36 percent monthly nosedive.

Moreover, although impossible from the Fed figures to quantify precisely, the production halt of Boeing’s popular 737 Max model that began in January is clearly dragging down output in sectors ranging from metals to industrial machinery to plastics to electronics and instruments.

The rapid recent spread of the coronavirus throughout the United States will start generating very different and much worse manufacturing production and other data going forward. But these latest data show domestic industry’s performance even as tariffs on literally hundreds of billions of dollars worth of tariff on Chinese and metals inputs used by manufacturers remained firmly in place. And if that doesn’t signal loud and clear that both American producers and consumers were withstanding the Trump trade wars – a New Normal that’s likely to survive the passing of COVID 19 – quite nicely, and in fact that the entire economy had been winning it, what could?