(What’s Left of) Our Economy: Without Supply Chain Transparency, There’s No Supply Chain Security

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Bureau of Economic Analusis, Defense Department, Defense Innovation Unit, defense manufacturing, election 2020, FDI, foreign direct investment, GAO, Government Accountability Office, health security, Joe Biden, medical equipment, national security, offshoring, Pentagon, supply chains, Trump, {What's Left of) Our Economy

Earlier this month, I criticized Joe Biden’s new plan to strengthen U.S. domestic manufacturing with a special eye toward boosting the security of key supply chains for holding out as a model the Pentagon’s work on defense-related manufacturing. Just this week, I found even more evidence to support the view that if the presumptive Democratic presidential nominee is really serious about achieving this goal (and given his longstanding record on trade and globalization issues, ample doubt is warranted) he’ll need a dramatically new model.

By the way, these findings show that the Trump administration also remains too far from getting its own supply chain act together.  And the main reason is a dangerous – and wholly unnecessary – lack of supply chain transparency.

The evidence comes from a September, 2019 report from the U.S. Government Accountability Office (an investigative arm of Congress) that summarizes the views of a panel of specialists convened to discuss foreign threats to the U.S. defense manufacturing base, and presents findings on the subject from various U.S. government agency, private sector, and university studies. The threats include the offshoring of the production of key defense-related goods; takeovers by foreign entities of U.S.-based facilities that supply these products, along with important services, or foreign acquisitions of significant stakes in these facilities; and the loss of U.S. competitiveness in these areas for market- and competition-related reasons and the resulting turns to foreign suppliers.

And crucially, the panelists consulted (listed on p. 40 of the report) include no notable supposed globalization alarmists or China hawks. In fact, one panelist was a senior executive of the U.S.-China Business Council, which has been a major pillar of what I call the nation’s Offshoring Lobby.

The report correctly noted that the use of foreign-origin goods and services can benefit U.S. national security interests. Specifically, it can “lower costs and provide better access to foreign workers and markets [which can help the companies in question gain the benefits of economies of scale by winning more customers].” Moreover, “When companies that offshore contract with DOD [the Departent of Defense], they can pass those benefits along. Foreign investment can help U.S. companies grow.”

So as in all areas of public policy, the key is finding the best balance, and reasonable people can always legitimately disagree on where it’s found. But here’s what’s really alarming about the message sent by the GAO report – and collectively by all the specialists and materials consulted: Neither the Defense Department nor any other branch of the U.S. government has the ability needed to achieve this goal partly because they lack the information needed to identify vulnerabilities, and partly because much helpful information is kept confidential at the request of private industry.

Here are the main relevant observations and conclusions presented in the report making emphatically clear that the nation lacks the supply chain transparency vital to improving supply chain security:

>”[T]he absence of a common definition of offshoring makes it difficult to analyze the extent to which offshoring is occurring in general as well as its effect on the defense supplier base. As such, the extent of offshoring and its effects are largely unknown.”

>”[P]ublicly available data do not provide granularity to analyze foreign direct investments in industry subsectors that comprise the defense supplier base.”

>”Pentagon “industrial policy officials told us that BEA’s [the Commerce Department’s Bureau of Economic Analysis] publicly available data are not complete enough to assess foreign investments in U.S. defense industrial subsectors. We also found that BEA does not disclose certain data for industry subsectors if the data would disclose the identity of individual companies, as these data are considered confidential. For example, BEA data on new foreign direct investment from China in the U.S. industry subsector “electrical equipment, appliances and component manufacturing” are not publicly available for 3 of the 5 years we reviewed.”

>”[A]ccording to BEA, new foreign direct investment data do not capture foreign investment transactions that involve less than 10 percent voting ownership in a U.S. enterprise. This may include data on venture capital investments in U.S. start-ups. According to a report by the Defense Innovation Unit (DIU) within DOD, there are an increasing number of investments in U.S. venture-backed startups from China-based investors that are not tracked by the U.S. government. This limits full visibility into foreign investors and the technologies they are investing in, as well as any increase or decrease in investment flows.”

>The DIU “echoed concerns about the limitations of U.S. government data and stated that the U.S. government does not comprehensively track all available data on investments, including those from private sources to assemble a complete picture of the level of foreign investment in U.S. companies.”

One big takeaway from the above is that the Defense Department is far from the only culprit here. Much more important, though, nothing could be clearer from this list of information gaps than that the Pentagon that Biden would rely on hasn’t made much of an effort to close them. And although the Trump administration has rhetorically prioritized reshoring manufacturing back to the United States in part for national security-related reasons, and can boast noteworthy progress in changing the U.S. trade policies that have encouraged so much defense-related offshoring, it’s clearly made little progress in making sure that it has the most fundamental information it needs to make sound decisions.

Also critical to recognize: It’s not that this information doesn’t exist. As I’ve previously noted, the companies that produce these goods and provide these services know exactly they, and most of their own contractors and subcontractors, are doing. Fully understanding and optimizing their own operations, after all, is one of the main ways they make money.

And the best way to extract what the government needs is to require legally what I’ve described as “Truth in Globalization” – and require it fast. Otherwise, no matter who wins the Presidency in November, the U.S. government will needlessly keep flying blind on supply chain security.

(What’s Left of) Our Economy: New Fed Manufacturing Figures Show No Burst So Far in Anti-CCP Virus Goods Output

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(What' Left of) Our Economy, CCP Virus, coronavirus, COVID 19, facemasks, Fed, Federal Reserve, healthcare goods, industrial production, inflation-adjusted growth, manufacturing, manufacturing output, medical devices, medical equipment, PPE, protective gear, ventilators, Wuhan virus

No one should have been surprised by this morning’s manufacturing output report from the Federal Reserve, which judged that industry’s inflation-adjusted production tumbled by 6.27 percent in March from February’s levels – which was revised downward slightly from a 0.12 percent gain from a 0.02 percent dip. In other words, “Thanks, China!” for the CCP Virus that’s caused an unprecedented shutdown of huge sections of the U.S. economy.

Lately, however, some manufacturing sectors of special concern have emerged – the healthcare goods sectors. And the results are below.

Unfortunately, the statistics in the relevant sectors aren’t very granular. In particular, they don’t enable us to distinguish between, say, masks and ventilators, or between final pharmaceutical products and vaccines, or between CAT-scan and MRI machines and non-medical high tech instruments. Still, the following sequential results must have some significance, given the overall skid in after-inflation manufacturing production. And for February-March, they are:

soaps, cleaning compound, & toilet preparation:      +1.85 percent

pharmaceuticals & medicines:                                  +0.50 percent

  (includes vaccines)

medical equipment & supplies:                                 -1.55 percent

  (includes everything from ventilators to facemasks)

Less helpful is learning that constant dollar output in a category called “navigational, measuring, electromedical and control instruments” decreased by 2.39 percent on month.

Keep in mind that since these data were compiled, all manner of manufacturing companies have volunteered, or been officially pressured, either to ramp up their existing healthcare goods production greatly, or to enter the field. So next month’s Fed industrial production report – for April – should be more revealing. For now, however, the March numbers don’t show much in the way of surge production.

Nor should anyone expect the Fed’s figures on manufacturing capacity and capacity utilization to shed much light on healthcare-related surge performance and surge capacity. The categories simply aren’t this detailed.

Maybe one of the CCP Virus-induced changes in government will be involve tracking healthcare-related manufacturing data in more detailed? Stay tuned. And send all such suggestions to

Jerome Powell, Chair, Board of Governors of the Federal Reserve System, 20th St. and Constitution Ave. NW, Washington, D.C.  20551

 

(What’s Left of) Our Economy: Private Sector Employment Increasingly Depends on Public Spending

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defense manufacturing, healthcare, innovation, Jobs, medical equipment, non-farm jobs, pharmaceuticals, private sector, productivity, subsidized private sector, {What's Left of) Our Economy

If you’re a real data geek, you’re giddy over the prospect of a new year not just (or even mainly!) because great parties or possibly new beginnings are on the way. You’re (maybe mainly!) giddy because you’ll soon be getting full-year economic statistics!

This morning, as reported in this morning’s post, we got a big batch – from the Labor Department in the form of its release on the American employment scene for December. The numbers will be revised at least twice more, but they’re a decent marker, and certainly didn’t disappoint in terms of at least one important development I’ve been following – the burgeoning importance of job-creation in parts of the economy that are commonly defined as “private sector,” but that depend heavily on government spending.

As I’ve written repeatedly, drawing this distinction isn’t important because government spending is either good or bad. It’s important because in terms of generating sustainable prosperity, innovation and productivity growth are crucial. The lion’s share of both still comes from the private sector, and ultimately from the market forces that in turn overwhelmingly shape it. If ever more hiring is taking place in parts of the economy (notably healthcare services) reliant on the budgetary decisions of relatively un-innovative, un-productive politicians, America’s economic prospects could be dimmer than widely thought. And that’s precisely one of the main messages being sent by the new jobs report and the January-December figures.

For the record, Labor Department preliminarily estimated that 59,000 net new jobs were created in this subsidized private sector in December. That’s a little over a fifth of all the hiring gains on month attributed to the entire non-farm sector (Labor’s American employment universe), and a slightly larger percentage of increased employment in the private sector as conventionally defined.

But much more revealing are the full-year 2015 numbers and how they compare with those of other recent years. From last January through December, non-farm jobs on net rose by 2.650 million, and employment in the conventional private sector rose by 2.551 million. (Government hiring accounted for the rest.) The subsidized private sector gained 655,000 net new jobs – 24.72 percent of the total new jobs and 25.68 percent of the conventional private sector jobs.

It’s clear that something special is going on in the subsidized private sector just from looking at its share of employment on a stand-still basis. As of December, it accounted for 15.62 percent of all non-farm jobs and 18.45 percent of all conventional private sector jobs – considerably lower than its share of employment gains.

And indeed, the subsidized private sector’s role in total hiring has grown dramatically. In 2014, it generated 15.66 percent of the increase in non-farm employment and 16.04 percent of the improvement in conventionally defined private sector employment. In 2013, those figures were just 13.57 percent and 13.21 percent, respectively. In other words, in terms of total employment advances, the subsidized private sector’s role has jumped by 82.17 percent, and in terms of conventional private sector job-creation, it’s up by 94.40 percent – a near doubling.

As a result, job-creation in that part of the private sector that doesn’t benefit from major government largesse hasn’t been firing on nearly as many cylinders are often portrayed. Rather than creating 96.26 percent of all of 2015’s net new jobs, it was only responsible for 71.55 percent. Moreover, the gap has been widening. In 2014, the “real” private sector accounted for 81.96 percent of overall employment, not the 97.63 percent indicated by the standard classification. In 2013, the Labor Department actually reported that private sector job creation exceeded total job creation because government employment shrank. But more accurately defined, the private sector’s share of new jobs was just 89.11 percent.

And the farther back you go, the more impressive the subsidized private sector’s employment performance looks and the less impressive its market-driven counterpart appears. Since the recovery technically began, in mid-2009, the total non-farm economy has created 12.298 million jobs. If the private sector is conventionally defined, it’s accounted for even more net new jobs: 12.873 million. But strip out the 2.836 million private sector jobs in subsidized industries, and that number falls to 10.037 million – or 81.61 percent of total hiring.

Another way to look at the situation: During the recovery, total non-farm employment is up by 9.39 percent and private sector jobs conventionally defined have grown by 11.88 percent. But without the subsidized private sector’s jobs boom, the private sector increase falls to 11.30 percent. The growth rate of subsidized private sector jobs? Much faster, at 14.52 percent.

And here’s how all these new subsidized private sector jobs have changed the U.S. employment landscape. At the start of the last recession, in December, 2007, this portion of the economy accounted for 13.63 percent of all American non-farm jobs. By the time the recovery began, in June, 2009, its employment share was up to 14.92 percent. And last month, it hit that aforementioned 15.62 percent level.

Conversely, the real private sector stood at 70.19 percent of the non-farm workforce when the recession struck. It share fell to 67.84 percent by the time the recovery began eighteen months later, and at the end of last year, had recovered to only 69.02 percent – below pre-recession levels.

In fact, however, the subsidized private sector’s share of the American employment is surely greater than indicated above. For shouldn’t we include all the employees of the pharmaceutical and medical equipment industries? Along with defense manufacturers? Data for the former aren’t hard to track down but figures for the latter can be pretty elusive – and aren’t officially kept by Washington.

For all the problems associated with a public sector-dominated employment scene, it’s surely better for Americans who can work to hold some kind of job than none. But just as subsidized economic growth is no substitute for the real thing, subsidized employment looks like a poor candidate for delivering the living standards and healthy economy the nation still so urgently needs.

(What’s Left of) Our Economy: Expect Imports to Keep Preventing Lift-Off

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consumer spending, consumers, demographics, Employment Cost Index, health care, imports, manufacturing, medical equipment, National Institutes of Health, personal income, pharmaceuticals, recovery, retirement, savings, subsidies, Trade, Trade Deficits, wages, {What's Left of) Our Economy

Three new government reports have put the spotlight back on American consumers, and especially on whether they can quicken a U.S. recovery that continues to disappoint the conventional wisdom (though not me!). I’m no expert on consumer trends. But I do feel confident that whatever new vigor American shoppers start showing will provide only a limited growth boost – because so much of what they buy will continue to come from abroad.  As a result, this spending will generate more production and job creation overseas than at home.

The three reports I’m talking about were:

(a) yesterday’s preliminary reading on first quarter gross domestic product, which showed the economy slogging along at a pathetic 0.25 percent real annual rate;

(b) today’s reading on first quarter employment costs, which showed a decent (at least by recent standards) gain in wages and salaries (numbers that aren’t adjusted for inflation); and

(c) today’s report on March consumer spending and incomes, which showed the former up and the latter flat month-to-month. That made for the first monthly fall in the personal savings rate since November.

These results all reinforce a picture of the economy that’s gained traction in recent months – of workers doing somewhat better after years of stagnant, at best, incomes, and in fact getting a nice filip from falling energy prices but remaining cautious shoppers nonetheless. As a result, most analysts foresee a solid increase in spending and therefore growth for the rest of the year, as Americans open their wallets wide again.

As ever, though, and especially in recent years, the fly in the lift-off ointment is imports, whose scale and robust growth has greatly weakened the longstanding relationship between what Americans consume and how fast the economy grows. For despite the endless talk of the United States being a “consumer-driven economy,” it’s production that fuels GDP growth, not shopping.

As I wrote yesterday, the trade shortfall has grown fast enough to take a big bite out of growth since the last recession ended, in the middle of 2009. But yet another news item today helps illustrate how the process works. It’s a Fiscal Times piece claiming that fully 20 percent of U.S. household spending now goes to health care services and medicines – up from six percent in 1960. According to another calculation, that works out to more than $8,000 for every man, woman, and child in the country.

Since most health care spending winds up on the services side, that’s actually good news as far as growth itself is concerned, since nearly all of these services are supplied domestically. Yet when it comes to health care products, it’s another story entirely – as can be demonstrated by looking at trade balances in these sectors.

In a phrase, they’ve worsened greatly since 2000. In fact, a $9.71 billion deficit more than quadrupled to $46.78 billion by the end of last year. Some health care-related products have excelled – e.g., surgical and medical equipment and laboratory instruments, which improved on smallish surpluses. But others, often thought to be among the nation’s technological and industrial crown jewels, have fallen flat on their faces – notably electro-medical equipment. At the beginning of the millennium, America ran a $1.21 billion trade surplus in devices like CAT-scan and MRI machines. But by 2014, this trade had turned into a $2.03 billion deficit. And the 800-pound gorilla in the health care manufacturing category is the pharmaceutical sector, which saw a $955 million trade shortfall balloon to $31.52 million during this period.

Even worse, demand for all these health care products is heavily subsidized by government. And the nation wouldn’t even boast a world-class pharmaceutical industry without the research and development performed by the federal government’s National Institutes of Health. So increasingly, Americans’ tax dollars are being used to create and expand markets for products supplied by foreign factories and workers, and in many cases to create products themselves whose manufacture is offshored by U.S.-owned firms.

To add insult to this injury, thanks to a combination of those government subsidies and an aging population (in many foreign countries, too), health care is among the most promising future manufacturing growth markets. If the vast majority of these products were made in America, the employment, wages, and output would stay in the United States, and fuel more growth that’s healthy. On top of a recovery that’s faster and more sustainable, the resulting health care manufacturing boom could take some of the expected economic and financial sting out of the nation’s looming demographic crisis.

But because of Washington’s indifference to where goods are produced, and widespread ignorance over what really fuels prosperity, much of this golden opportunity will be squandered, and health care will be yet another sector where America’s spending bucks keep generating less and less vital growth bang.