(What’s Left of) Our Economy: Worsening Automotive Recession Drives Down Manufacturing Output

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aluminum, automotive, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, manufacturing production, recession, steel, tariffs, Trade, Trump, vehicles, {What's Left of) Our Economy

According to the Federal Reserve’s new industrial production figures, a sharp automotive drop-off in July helped pull real U.S. domestic manufacturing output down on month (by 0.06 percent) for the third time this year. Since May, 2015, sector’s inflation-adjusted production is down 2.33 percent – a period much longer than the two-consecutive-quarter definition of recession. July’s annual automotive real output decrease (4.98 percent) was the biggest since September, 2009’s 7.21 percent. And the sector’s 3.64 percent sequential output fall was its biggest since August, 2015’s 3.82 percent.

The vehicle sector performed even worse. Its year-on-year July constant dollar production plunge (9.20 percent) was its greatest since August, 2009 (12.54 percent). And vehicles’ July monthly after-inflation production slide (5.92 percent) was the steepest since August, 2015’s 6.31 percent. Largely as a result, July’s real vehicles production was the lowest monthly total since October, 2014.

With President Trump postponing his decision on tariffs for the import-battered steel and aluminum sectors, their price-adjusted production remained weak in July. The former’s sequential real production slumped by 1.50 percent, and although the annual figure rose by a strong 5.50 percent, the sector is still nearly 20 percent smaller in real terms than at the last recession’s onset. The latter’s July monthly real output inched down while growing slightly on a year-on-year basis, but this industry remains less than half its size when the recession struck. Indeed, for the entire manufacturing sector, after-inflation production in July was down four percent from the level hit as the recession broke out – back at the end of 2007.

Here are the manufacturing highlights of the Federal Reserve’s new release on July industrial production:

>The worst U.S. real automotive production performance in many years – especially in vehicles – helped pull the nation’s after-inflation manufacturing output down 0.06 percent on month in July. Although small, the sequential decline was the third so far this year.

>Leading the way was an automotive sector that had led manufacturing’s strong rebound from a deep recessionary dive.

>Combined vehicles and parts output sank by 3.64 percent on month in July, its biggest such downturn since August, 2015’s 3.82 percent.

>Year-on-year, constant dollar total automotive output was down in July by 4.98 percent – the worst such deterioration since September, 2009’s 7.21 percent.

>Largely as a result, real automotive production in July hit its lowest level since June, 2015.

>The automotive output drop in turn was led by vehicles. Final price-adjusted production in this sector plunged by 5.92 percent sequentially in July – its worst output month since August, 2015 (6.31 percent).

>The year-on-year figures for vehicles were much worse. Compared with the previous July, they plummeted by 9.20 percent – the biggest such decline since August, 2009 (12.54 percent).

>Largely as a result, as of July, real vehicle output stood at its lowest level since October, 2014.

>The new Fed figures also show that the American steel and aluminum industries continue to pay a price for floods of imports widely thought to benefit from government subsidies – and from the Trump administration’s hesitation to impose tariffs.

>July iron and steel production decreased on month by 1.50 percent in real terms. The 5.50 percent year-on-year result was much better, but was helped by favorable comps.

>Moreover, the steel sector’s real output is still 19.70 percent smaller than at the last recession’s onset – more than eight years ago.

>July primary aluminum production declined on month by 1.02 percent, but advanced by 2.90 percent on year.

>Yet primary aluminum production is down 53.49 percent since the last recession began.

>In fact, since that December, 2007 watershed, U.S. manufacturing’s output is down by four percent – meaning that it still hasn’t recovered from the recession.

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(What’s Left of) Our Economy: Manufacturing Should Indeed be a US “Obsession”

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Binyamin Appelbaum, Donald Trump, Federal Reserve, innovation, manufacturing, manufacturing production, manufacturing wages, multi-factor productivity, multiplier, productivity, research and development, STEM workers, The New York Times, Trade, Trade Deficits, {What's Left of) Our Economy

You have to give New York Times economic correspondent Binyamin Appelbaum credit. He decided to go the flood of recent media attacks on trade policy critics one better by not only charging that Republican presidential candidate Donald Trump and others are economic know-nothings, but belittling them for an ignorantly nostalgic focus on American manufacturing. Less admirable – Appelbaum’s decision to broach the subject before learning anything important about it, or much of the broader economy.

In an October 4 Times Magazine article, Appelbaum repeated standard claims that American politicians’ “obsession” with manufacturing misses the mark because the sector is doing better than ever, and because its only major problem is actually a sign of progress – its falling payrolls reflect higher productivity, and thus outstanding technological progress. His new wrinkle: a contention that U.S. leaders should spend less time trying to revive manufacturing employment (and wages, which have lagged badly, too?), and more on turning the low-wage service sector jobs into family wage jobs.

But Appelbaum’s own assessment of manufacturing badly misses the mark. His claim of record output, for example, is belied by Federal Reserve data clearly showing that industry’s output is down 4.45 percent in real terms since the Great Recession started – more than eight years ago. Nor does Appelbaum seem familiar with the productivity figures. They show manufacturing’s performance stagnating recently by the broadest measure (multi-factor productivity).

Industry’s record in international trade is another flag that’s at least deep orange. Manufacturing keeps racking up record annual trade deficits, and yesterday’s U.S. government figures revealed that August saw the latest in a string of monthly record shortfalls. These trade balances matter because standard trade theory teaches that one of international commerce’s main virtues is fostering the best possible international division of labor. By its logic, America’s failure to produce anywhere near as many manufactures as it consumes – including in numerous high-value industries like semiconductors, advanced telecommunications gear, pharmaceuticals, construction equipment, machine tools, and ball bearings – unmistakably signals that such activity has a grim future in the United States.

And if such pessimism is warranted, the entire American economic picture will look grim as well. For no other sector appears poised to replace manufacturing as the nation’s productivity growth champ. And it’s hard to identify major new employment prospects for science and technology workers if manufacturing continues stagnating (at best). After all, the sector conducts 70 percent of the private sector’s research and development, and its STEM workers comprise 60 percent of the national total.

Moreover, this funding and these workers seem to be doing an awfully good job on the innovation front, as they generate nine out of every ten U.S. patents.

But perhaps strangest of all is Appelbaum’s call for downplaying efforts to foster manufacturing employment and dramatically raising the wages and improving the living standards of America’s fast-food workers, home healthcare aides and the like via government fiat. At least he recognizes that such steps will have nothing to do with the free market principles so widely used to justify laissez-faire approaches to manufacturing’s woes. But why does he evidently suppose that productivity improvements and especially technological innovation won’t displace many of these jobs, too, especially if employment costs get high enough? And what kind of formula for boosting national competitiveness – and therefore hopes for longer term, sustainable prosperity – would this be?

Ironically, promoting domestic manufacturing looks like the best, most market-friendly way to help these low-wage workers, too. For the sector boasts the economy’s greatest multiplier effect for overall economic activity (which by definition creates new jobs) and one of the largest for employment itself. In other words, manufacturing punches far above its weight in generating new jobs throughout the rest of the economy (e.g., in transportation, construction, retail, and wholesale). Even better, most of these sectors already pay considerably more than those singled out by Appelbaum – and without new government props.