(What’s Left of) Our Economy: The Latest Sign That Inflation is Here to Stay

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baseline effect, consumer price index, cost of living, CPI, Federal Reserve, inflation, monetary policy, PPI, Producer Price Index, recession, supply chains, wholesale inflation, wholesale prices, {What's Left of) Our Economy

If you follow the news about the U.S. economy, you know by now that the federal government’s Producer Price Index (PPI – its measure of wholesale price inflation), rose at a slightly slower annual rate in April (11.03 percent) than in March (11.18 percent).

Ditto for the core PPI, which omits not only food and energy but trade services – since supposedly they’re volatile for reasons having nothing to do with the economy’s fundamental vulnerability to out-of-the-ordinary price changes (decreases as well as increases).

Both PPIs measure how much businesses charge each other for the goods and services they turn into final products and sell to households and individuals. That’s why they’re naturally seen as precursors of future consumer inflation rates (measured by the Consumer Price Index, or CPI).

After all, as long as the economy’s overall demand levels (reflecting overall growth levels) remain healthy, these businesses mostly will be able to pass these cost increases on to customers and actually will. Higher consumer inflation follows. So anything like the opposite is happening, and if producer prices are easing at all (even from historic highs), that’s got to be encouraging news on the consumer and overall inflation fronts.

But did the April yearly rate of increase really slow down? Maybe not. That’s because it’s a preliminary reading and, as shown by the left-hand column in the table below, since last September, every revision of that first estimate went up.

Jan 2021: 1.60 percent now 1.59                                1.97 percent

Feb 2021: 2.96 percent now 2.95                               1.11 percent

March 2021: 4.15 percent now 4.06                           0.34 percent

April 2021: 6.51 percent now 6.43                  -1.52 percent now -1.44

May 2021: 6.99 percent now 6.91                   -1.10 percent now -1.01

June 2021: 7.56 percent now 7.49                   -0.68 percent now -0.59

July 2021: 7.96 percent now 7.83                    -0.25 percent now -0.17

Aug 2021: 8.65 percent now 8.58                    -0.25 percent now -0.17

Sept 2021: 8.78 percent now 8.82                             0.34 percent

Oct 2021:  8.87 percent now 8.90                             0.59 percent

Nov 2021: 9.88 percent now 9.94                     0.85 percent now 0.76

Dec 2021: 9.99 percent now 10.58                   0.84 percent now 0.76

Jan 2022: 10.08 percent now 10.17                  1.60 percent now 1.59

Feb 2022: 10.27 percent now 10.51                 2.96 percent now 2.95

March 2022: 11.18 percent now 11.54             4.15 percent now 4.06

April, 2022: 11.03 percent                                       6.43 percent

Sure, the April revision could be a downgrade – like those between January and August, 2021. But the odds of an upgrade look pretty good.

Moreover, the right-hand column in the table shows that the baseline effect, which was cause for some optimism that inflation might peak before too long, is more over than ever.

As known by RealityChek regulars, the unusually high and robustly rising annual CPI and PPI figures for last year stemmed largely from the change they represented from unusually low inflation rates the year before – which were driven down by the arrival of the CCP Virus and the sharp recession it induced by prompting on-and-off lockdowns of huge chunks of the economy, and major behavioral caution by businesses and individuals alike.

What that right-hand column shows is that these effects – even with the slightly better revisions displayed above – were profound enough to result in actual PPI annual decreases from April, 2019-2020 through August, 2019-2020. (The right-hand column also brings the story up to 2020-2021 for January through April – the baseline comparison year for the first four data months of 2021-2022.)

That is to say, the table reveals that the economy’s recovery in 2021 from virus-ridden and downturn-y 2020 amounted to a great catching up process that largely explains the bloated PPI figures. (The other major factor was supply chain disruption resulting from the stop-and-start nature of some of the virus waves and lockdowns, and therefore of the recovery itself.)

But the above table also shows that the baseline effect began fading significantly this past February. That month, the annual PPI rise of 10.27 percent came off a February, 2020-2021 increase of 2.95 percent. The similar January annual increase of 10.08 percent, by contrast, came off a 2020-2021 rise of a much lower 1.59 percent.

And just look at April! That 11.03 percent annual PPI jump has followed a 6.43 percent increase between the previous Aprils.

Moreover, the same kind of trend (at lower absolute levels) is evident from the core PPI data, as shown below. Again, the left-hand column displays the annual increases by month starting in January, 2021. The right-hand column shows the annual changes by month for the year before – the baseline. The only possible significant difference is that I haven’t tracked the revision record for this core PPI series, so I don’t know if the latest April result is likely to be upgraded or downgraded, or unrevised.

Jan 2021: 1.79 percent                                                    1.64 percent

Feb 2021: 2.33 percent                                                   1.36 percent

March 2021: 3.15 percent                                               1.00 percent

April 2021: 4.81 percent                                                -0.09 percent

May 2021: 5.25 percent                                                 -0.18 percent

June 2021: 5.60 percent                                                  0.09 percent

July 2021: 6.01 percent                                                   0.27 percent

Aug 2021: 6.19 percent                                                   0.36 percent

Sept 2021: 6.14 percent                                                  0.72 percent

Oct 2021: 6.26 percent                                                    0.90 percent

Nov 2021: 7.04 percent                                                   0.99 percent

Dec 2021: 7.18 percent                                                    1.17 percent

Jan 2022: 6.91 percent                                                     1.79 percent

Feb 2022: 6.76 percent                                                    2.33 percent

March 2022: 7.10 percent                                               3.15 percent

April, 2022: 6.92 percent                                                4.81 percent

The big takeaway here: Even more than yesterday’s April Consumer Price Index report, today’s release on the Producer Price Index is saying that alarmingly high inflation is here to stay for Americans for the forseeable future. It’s possible that the Federal Reserve, the U.S. government agency mainly responsible for handling inflation, can tighten monetary policy (to reduce that aforementioned consumer demand and in turn growth) skillfully enough to engineer a “soft landing” for the economy – i.e., bring price increases back to much less damaging levels while avoiding a recession. But keep in mind that the next time the central bank achieves this goal starting from inflation rates this hot will be the first.

(What’s Left of) Our Economy: U.S. Manufacturing Growth is Overcoming the Ukraine War, Too

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aerospace, aircraft, aircraft parts, appliances, automotive, electrical components, electrical equipment, Federal Reserve, furniture, inflation, logistics, machinery, manufacturing, medical devices, medical equipment, metals, monetary policy, non-metallic mineral products, pharmaceuticals, printing, semiconductors, supply chains, textiles, transportation, {What's Left of) Our Economy

My day got away from me yesterday, so I couldn’t finish up my report on that morning’s Federal Reserve’s newest U.S. manufacturing production figures (for March) till now. But they’re worth examining in detail because although they’re the first such data to be released since the Ukraine war broke out and began disrupting global supply chains for important goods, they strongly resembled last month’s statistics – which were the final pre-war figures.

And just as interesting: Many of the results for individual industries illustrated strikingly the roller coaster ride on which much of domestic industry remains, with multi-month bests in particular coming right on the heels of multi-month worsts. Moreover, underscoring much of the uncertainty created by Ukraine-related tumult coming on top of (and in China’s case, alongside) CCP Virus-related tumult, some revisions of previous months’ readings were unusually large.

In inflation-adjusted terms, American manufacturing output grew 0.87 percent sequentially in March. The increase was powered largely by a 7.80 percent monthly jump in real output in the exceptionally volatile automotive sector. But even stripping out vehicles and parts production, price-adjusted manufacturing production improved by 0.40 percent in March.

In addition, revisions were mildly positive. February’s initially reported 1.20 percent constant dollar month-on-month production increase – the best such performance since last October’s 1.71 percent – was upgraded to 1.22 percent. January’s downwardly revised 0.03 percent improvement is now estimated at 0.11 percent. And December’s small dip was revised up again – from -0.06 percent to -005 percent.

Consequently, since the last full data month before the CCP Virus began roiling the U.S. economy (February, 2020), domestic manufacturing has expanded by 4.42 percent – up from the 3.37 percent calculable last month.

At the same time, U.S.-based industry is still 2.91 percent smaller than at its all-time peak – reached just before the Great Recession in December, 2007 – although that’s up from the 3.88 percent deficit calculable last month.

March’s biggest manufacturing production winners were:

>automotive, as mentioned above. That was the biggest sequential gain since last October’s 10.64 percent, but it follows a February drop that’s been downgraded from 3.55 percent to 4.64 percent. And that was the worst monthly figure since last September’s 6.32 percent. All these (and previous) ups and downs left after-inflation vehicle and parts production 3.50 percent below their immediate pre-pandemic (February, 2020) levels;

>aerospace and miscellaneous transportation, where after-inflation production rose by 1.90 percent on month. The February advance, was downgraded substantially, from 3.22 percent to 1.64 percent, leaving the March increase the biggest since last July’s 4.21 percent. These industries are now 16.43 percent larger in real terms than in February, 2020;

>electrical equipment, appliances and components’ price-adjusted production climbed 1.03 percent sequentially and February’s increase was revised all the way up from 0.48 pecent to 1.95 percent– best since last July’s 3.24 percent. Inflation-adjusted output in these sectors is now 5.55 percent above thei February, 2020 levels; and

>plastics and rubber products, which displayed a similar pattern. Real output was up 1.14 percent sequentially in March, and February’s results were more than doubled – from +1.46 percent to +3.14 percent. That burst – the best since August, 2020’s 3.85 percent – left constant dollar production for these industries 3.56 percent greater than in immediate pre-pandemic-y February. 2020

In addition machinery, which is such a bellwether for both the rest of industry and the entire economy because of the widespread use of its products, price-adjusted output in March improved by 0.78 percent over February’s results. And although the February improvement was downgraded from 0.78 percent to 0.54 percent, after-inflation machinery production is still up 8.29 percent since February, 2020.

The biggest March manufacturing growth losers were:

>non-metallic mineral products, whose 1.15 percent March monthly decline was the worst such figure since last May’s 2.29 percent decrease. But this drop-off followed a February monthly surge that was upgraded from 3.46 percent to 3.94 percent – the .best such showing the 4.34 percent of June, 2020 – early in the recovery from the deep economic downturn triggered by the first wave of the CCP Virus and related lockdowns and behavioral curbs. Real output in this sector has now risen by 3.28 percent since February. 2020;

>primary metals, where similarly. March’s 1.69 percent fall was the biggest since January’s 2.46 percent drop – and followed a February 2.26 percent increase that was upgraded from the previously reported 2.10 percent and represented the best monthly performance last April’s 3.48 percent. Primary metals inflation-adjusted output is now 1.16 greater than in Februrary, 2020;

>furniture and related products’ after-inflation production sank by 1.51 percent from February to March – the worst such figure since February, 2021’s 3.21 drop. But March’s lousy results followed a February increase that was also more than doubled – from 2.52 percent to a 5.63 jump that was this sector’s best since June 2020’s 5.66 percent. These results brought real output in furniture and related products to within 0.80 percent of its immediate, February, 2020 pre-pndemic level;

>textiles’ 1.46 percent monthly March real output decrease was its worst monthly result since January’s 2.30 percent drop. But it, too, followed a strong February. That month’s improvement was upgraded from 0.03 percent to 0.97 percent – the biggest monthl increase since September’s 1.36 percent. Yet in real terms, the industry is still 5.84 percent smaller than in February. 2020;

>and printing and related support activities. It’s 1.10 percent March sequential after-inflation output retreat was also its worst since January’s 2.16 percent decrease. But it, too, followed a strong February. Indeed, that months’ inflation-adjusted production increase was revised up from 1.66 percent to 2.66 percent – its best such performance since last May’s 2.75 percent rise. This cluster, though, has still shrunk by 4.69 percent in constant dollar terms since February. 2020.

Growth was solid, too, in industries that consistently have made headlines during the pandemic.

In the aircraft and aircraft parts sector, real production increased in March by 2.31 percent. Because February’s initially reported 2.52 percent monthly rise was marked all the way down to 1.13 percent, the March figure became these industries’ best since last July’s 3.44 percent (which I mistakenly reported last month was an August total). January’s results were downgraded, too – and for a second time, to 0.91 percent. But the sector is still 15.86 percent bigger than it was after inflation than in February, 2020.

The big pharmaceuticals and medicines sector turned in a more mixed performance. March’s 1.17 percent price-adjusted monthly production increase was the best such total since last August’s 2.39 percent. But February’s initially reported 1.08 percent gain is now reported as a 1.15 percent loss. January’s constant dollar production change, however, was revised up from a 0.14 percent drop to a 0.45 percent increase. All told, pharamaceuticals and medicines production is 14.75 percent higher afte inflation than in February, 2020.

But the news was unambiguously good in the medical equipment and supplies sector that contains so many of the products needed to fight the pandemic. The March inflation-adjusted output improvement was 1.81 percent and February’s production growth was upgraded from 1.39 pecent to 1.73 percent. Further, the January after-inflation growth figures – which had already been revised up from 2.50 percent to 3.26 percent – was upgraded further to 3.28 percent. And a December result that was first reported as a decline of 2.75 percent is now estimated to be a dip of just 0.37 percent. All told, output in these sectors has increased by 10.80 percent since immediately pre-pandemic-y February, 2020.

And although the national and global semiconductor shortage persists, U.S. domestic production kept rising healthily. Output in March improved month-to-month by 1.99 percent adjusted for inflation, February’s initially reported rise of 1.96 percent was upgraded to 2.87 percent (the best such growth since April, 2017’s 3.78 percent), and January’s downwardly revised 0.37 percent sequential output decline was revised up to a 0.05 percent gain. As a result, semiconductor production is upfully 25.99 percent over its immediate pre-pandemic levels.

The March manufacturing production figures portray a domestic industry resilient enough to withstand not only pestilence but (so far) war and the beginnings of tighter Federal Reserve monetary policy aimed at slowing U.S. growth in the name of reducing  inflation. No one knows what catastrophes the future may hold, or how much more the aforementioned problems could worsen. But it’s looking like any force powerful enough to derail American manufacturing for long may need to be truly Biblical in its proportions.

(What’s Left of) Our Economy: A New Sign That Inflation Will Long Stay Lofty

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consumer inflation, consumer price index, cost of living, CPI, Federal Reserve, inflation, Labor Department, monetary policy, PPI, Producer Price Index, recession, wholesale inflation, {What's Left of) Our Economy

Yesterday’s RealityChek post showed that the baseline effect was no longer a prime driving force behind the historically high consumer inflation rates with which Americans have struggled. That is, the new Labor Department data for the Consumer Price Index (CPI) revealed that unlike its monthly predecessors, the March annual inflation rate wasn’t so strong largely because prices were catching up from having risen so weakly the year before. Instead, because March, 2020-21 CPI was already getting pretty warm – because the U.S. economy had continued recovering (unevenly) from the deep spring, 2020 downturn – the March, 2021-22 inflation result made clear that worrisome price increases had acquired a momentum of their own.

This morning came both another sign that the baseline excuse for high inflation has run its course, and that rapid price increases could well continue for many more months – the Labor Department’s March inflation report for wholesale prices. As opposed to the CPI, which measures what business charge consumers, the so-called Producer Price Index (PPI) gauges what businesses themselves pay for the goods and services they need in order to turn out whatever they sell to individuals and households.

And because the new PPI makes clear that the baseline excuse can no longer be used for such wholesale inflation either, it augurs more torrid consumer price hikes, too – since businesses naturally try to pass on their higher costs to their final customers, and often succeed. Moreover, if you look at the annual inflation increases for recent months, you see that the baseline effect for the PPI ended in February.

The table below presents in the left column the annual PPI increases for each month from January, 2021 through this March, and in the right column, the same numbers for the previous year 2019-2020. As with the Consumer Price Index, the baseline year for the 2021-22 results is 2020-21.

Jan 2021:         1.60 percent            1.97 percent

Feb 2021:        2.96 percent            1.11 percent

March 2021:   4.15 percent            0.34 percent

April 2021:     6.51 percent           -1.52 percent

May 2021:      6.99 percent           -1.10 percent

June 2021:      7.56 percent            -0.68 percent

July 2021:       7.96 percent            -0.25 percent

Aug 2021:       8.65 percent            -0.25 percent

Sept 2021:       8.78 percent             0.34 percent

Oct 2021:        8.87 percent             0.59 percent

Nov 2021:       9.88 percent             0.85 percent

Dec 2021:       9.99 percent             0.84 percent

Jan 2022:      10.08 percent             1.60 percent

Feb 2022:     10.27 percent             2.96 percent

March 2022: 11.18 percent             4.15 percent

As the table indicates, the baseline effect for producer prices began earlier than that for consumer prices, was more dramatic, and lasted longer. Between January and August, 2020, such inflation plummeted from 1.97 percent to -0.25 percent. And yes, you read that last number right. Inflation became outright deflation, and producer prices actually fell on year for five straight months. The last time anything close to this happened was “never” (though, to be fair, the data for this measure of PPI, which is called final demand for both goods and servies, only go back to 2009).

So this dramatic descent into deflation deserves much of the blame for the surge in annual wholesale price inflation between January and August, 2021 – from 1.60 percent to 8.95 percent.

Moreover, 2019-20 annual PPI increases stayed below one percent through December. In January, 2021, the annual rate nearly doubled, to 1.60 percent – signaling that the baseline effect was ending. And its final (for now) demise came the following month, when it jumped to 2.96 percent. Yet during February, 2022, yearly wholesale inflation soared past ten percent. So these price increases obviously entailed much more than a return to normal from unusually low 2020-21 inflation (including those falling prices for nearly half the year). And the more so for this March, since its baseline comparison figure was a whopping 4.15 percent.

These PPI trends and the prolonged high consumer inflation they portend only sharpen the dilemma faced by the Federal Reserve – the only part of the federal government able to act relatively quickly to bring price increases under control. If it tightens monetary policy too dramatically, it could slow economic growth equally dramatically and even bring on a recession. If the central bank is too hesitant, it could still slow growth but leave inflation unacceptably high – a condition called “stagflation.” 

That is, there’s a real prospect that the economy could enter a state it last experienced during the era of disco, streaking, and shag haircuts. But as those of us who lived through it know, economically speaking, this “Seventies Show” was no comedy.        

(What’s Left of) Our Economy: Why Inflation Now Looks More Confounding Than Ever

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baseline effect, Commerce Department, consumer price index, CPI, Federal Reserve, global financial crisis, inflation, Labor Department, monetary policy, moral hazard, PCE, personal consumption expenditures index, recession, {What's Left of) Our Economy

Thanks to the Ukraine War, the challenge of figuring out whether and exactly how greatly inflation-prone the U.S. economy has become – and therefore what to do about it – has become more complicated than ever. In fact, it might have become impossible, at least for the foreseeable future. And the latest evidence comes from the most recent official report on the Federal Reserve’s preferred measure of price changes – the price indexes for personal consumption expenditures (PCE) put out by the Commerce Department.

This quandary matters decisively because the main conflicting views of today’s inflation support two equally conflicting policy responses by Congress and the administration, but mainly by the Fed — which has the authority to put anti-inflation measures into effect faster than the rest of the federal government.

Simply put, let’s suppose that current, and multi-decade record, inflation mainly stems from government policies that injected too much money into the economy, through massive spending, rock-bottom interest rates, or some combination of the two. Then the remedy is starting to “tighten” such policies by raising interest rates further and selling the bonds bought by the Fed through its quantitative easing program, or by cutting federal spending, or some combination of all these. Strengthening this case is the magnitude of this policy support for the economy – which ballooned due to the emergency created by the CCP Virus pandemic that finally seems on the wane for good.

But if today’s inflation stems mainly from one-time shocks to the economy that by definition don’t have staying power (which is why for quite a while, the Fed was calling elevated inflation “transitory”), then such tightening moves either could have little effect whatever on prices, and/or backfire by dramatically slowing growth and even causing a recession.

To date, that’s been my interpretation, with the main one-time shock being the pandemic. First the virus produced abnormally low inflation readings when its spread and the lockdowns and behavioral changes that resulted crashed the economy briefly. The rapid recovery that followed wound up producing abnormally high inflation readings as economic activity – choppily – returned to quasi-normal (the “baseline effect” I keep writing about).

Moreover, that stop-start nature of the recovery – which stemmed from the fluctuations in CCP Virus waves and consequent mandates and business curbs – fouled up global supply chains that led to widespread shortages, and therefore pushed up prices, as companies struggled to figure out future demand for the goods and services they supplied.

Last month, I wrote that the baseline effect seemed to be disappearing for the Labor Department’s inflation measure — the Consumer Price Index, or CPI), and a few weeks later, predicted that it fading for the overall PCE in March and for core PCE in April.

But of course, since then have come more outside shocks – Russia’s invasion of Ukraine, the unexpectedly long conflict that’s followed, and the sanctions- and war-related disruptions in global supplies of fossil fuels and grain from both countries. All these closely related developments are certain to send prices to yet another level, and the effects will be felt throughout the entire economy, since more expensive fuels affect any business that transports its products or uses oil or gas to power its operations. As a result, the distinction drawn by both inflation measures between overall inflation rates and “core” inflation rates (which leave out food and energy prices because they’re so vulnerable to outside shocks) will become inceasingly academic.

So where do the new PCE data fit in? In brief, they show that, only a monthly basis, overall inflation hit 0.6 percent in February, and core inflation came in at 0.4 percent. The former monthly inflation rate hasn’t risen since October, and January’s initially reported 0.6 percent result has been revised down to 0.5 percent. The latter figure, meanwhile, was the lowest since September. So no speed-up in inflation is apparent from these statistics.

The annual figures are where the acceleration can be seen. February’s year-on-year PCE inflation rate of 6.4 percent – the fastest rate since 1982, and a meaningful increase over January’s six percent. In fact, overall annual PCE inflation pierced the Fed’s two percent target last March and have risen every single month since.  Core PCE has followed an almost identical pattern, though at slightly lower absolute levels.

Yet as explained previously, both surging annual PCE inflation rates have much to do with the price increases of 2019-2020 that were pushed down so low by the virus’ arrival that they took more than a year to recover even as the economy bounced back (unevenly, to be sure).

Specifically, in February, 2021, the annual overall PCE inflation rate was only 1.6 percent, and the annual core rate was only 1.5 percent.

As mentioned above, the return of annual inflation rates above the Fed target – in March, 2021 for overall PCE and April for the core – meant that this baseline effect looked set to end soon. But the Ukraine war has upset these calculations.

As a result, the big question facing the Fed now is whether inflation – whatever its causes – has become so high, and could last so long, that it needs to be reduced significantly even at the risk of triggering recession. That seems to be the central bank’s stance right now, but color me skeptical. After all, slowing growth to a near-halt during an election year would look like an awfully political move, and one I have difficulty believing would be taken by an institution that touts itself as resolutely non-political.

BTW, as if all this wasn’t bewildering enough, there’s a school of thought that supports major Fed tightening even if recession does result – and has supported it for many years. It holds that the super-low interest rates of recent decades have dangerously distorted the economy and indeed sapped its productivity by creating “moral hazard” – incentivizing foolish and indeed wasteful investments by reducing the costs of failure, and leaving less capital over for spending that fosters greater efficiency and technological progress.

I’ve long found these arguments compelling, especially since the global financial crisis of 2007-09 made the dangers of such moral hazard clear. But there’s no sign of concern about this problem anywhere in Washington. The focus there is — somehow — coping with inflation. The next statistics will be out on Tuesday, and the only certainty is that they won’t make the task look any easier.         

(What’s Left of) Our Economy: A February Reprieve from Lousy U.S. Trade News

Tags

CCP Virus, Census Bureau, China, coronavirus, COVID 19, Federal Reserve, goods trade, inflation, manufacturing, monetary policy, non-oil goods trade deficit, oil, services trade, trade deficit, Ukraine-Russia war, Wuhan virus, {What's Left of) Our Economy

It wouldn’t be accurate to start off this post with a statement on the order of “As bad as the full-year 2021 inflation-adjusted trade figures released last week were, the new pre-inflation data for February were good.” But a contrast was unmistakable, with yesterday’s latest monthly report from the Census Bureau containing some decidedly encouraging news – even though the numbers were pre-Ukraine war, and therefore pre- all the disruption to global supply chains – in particular in the food and energy sectors – that the conflict has already brought.

And the story even begins at the beginning. The combined goods and services trade deficit decreased sequentially for the first time since October. The slippage was only 0.05 percent, and the monthly total ($89.19 billion) was still the second highest ever (behind January’s $89.23 billion). But that January figure itself was revised down 0.52 percent.

Goods trade produced somewhat better results. February’s shortfall of $107.47 billion represented its first monthly drop since October, and the decrease was 1.04 percent. The February goods trade gap was the second biggest on record, too, but January’s $108.60 billion mark was downgraded by 0.24 percent.

When it comes to the broadest trade balance results, the only black mark was found in the service sector. In February, its long-time surplus shrank for the second straight month, decreasing by 5.62 percent, from $19.37 billion to $18.29 billion. That total was the smallest since November’s $18.30 billion. At least the January number was revised up by 1.05 percent.

More good news came on the export front. Total American sales abroad climbed 1.84 percent on month to $228.63 billion – a new record that nosed ahead of the previous all-time high (December’s $228.35 billion) by 0.12 percent.

Goods exports were up to on a monthly basis in February – by 1.79 percent, to $158.78 billion. That total was the second highest ever – 0.15 percent below October’s $159.02 billion.

Services exports improved, too in February. At $69.85 billion, they were 1.96 percent higher than January’s $68.51 billion. But reflecting the outsized hit this sector took from the CCP Virus and related lockdowns and behavioral changes, these totals remain below pre-pandemic levels.

Combined goods and services imports set their seventh straight monthly record in February, increasing 1.30 percent from $313.72 billion in January to $317.81 billion. The January total, however, was revised down by 0.12 percent.

Goods imports alone lengthened their string of monthly records, too, in February, with its $266.25 billion total topping January’s $264.59 billion by 0.63 percent. Their January total was downgraded fractionally.

The biggest relative imports increase came in services, where February’s $51.57 billion in purchases from abroad represented a 4.95 percent jump from January’s $49.13 billion. And the February total marked an all-time high – beating November’s $50.49 billion by 2.14 percent.

Oil was responsible for the overall February trade figures not being considerably better. The petroleum deficit soared by $2.67 billion on month, from a miniscule $115 million to $2.78 billion – the highest.monthly total since September’s $3.37 billion. And this surge was led by an 18.57 percent increase in oil imports. The monthly total of $23.11 billion, moreover, was the highest since December, 2014’s $25.01 billion.

Much higher prices per barrel of oil bought obviously deserve the blame for much of this news. But even adjusting for inflation, U.S. oil imports for February increased by 4.31 percent – the biggest relative rise since last May’s 6.47 percent.

In line with the improvement in the overall February trade deficit, the non-oil goods shortfall fell by 3.43 percent on month in February. At $103.56 billion, this deficit – which RealityChek regulars know covers the trade flows most affected by U.S. trade policy – was still the second highest on record, after January’s $107.24 billion. But the decrease was the first since October. And it resulted from the ideal combination of both a rise in exports and a decline in imports.

This ideal combination also encouragingly appeared in the February data for two long-term (and related) problem areas in U.S. trade flows – manufacturing and China.

The chronically huge American manufacturing trade gap shrank in February by 12.01 percent – from a record $121.03 billion to $106.49 billion. The decrease was the third straight and the biggest percentage-wise since the 12.70 percent plunge in November, 2019. In addition, the new level the lowest since April, 2021’s $103.60 billion.

As indicated, moreover, manufacturing exports were up on month in February – by 2.40 percent, from $92.33 billion to $94.55 billion. The increase, however, did follow a 7.80 percent sequential decrease in January that brought these foreign sales to their lowest level since last August.

Manufacturing imports, though, decreased for the third straight month – by 5.78 percent, from $213.36 billion to $201.03 billion. The monthly drop was the biggest in percentage terms since February, 2021’s 6.98 percent (amid the CCP Virus’ powerful second wave), and the new February total was the lowest since last April’s $198.06 billion.

America’s trade with China is dominated by manufactures, so it’s not surprising that its also chronically huge goods surplus with the United States plummeted by 15.69 percent sequentially in February, from $36.37 billion to $30.67 billion. This nosedive was the greatest in percentage terms since the 25.19 percent of February, 2020, when the Chinese economy was still seized up by sweeping CCP Virus-induced lockdowns.

Just as important, this monthly cratering was more than 4.5 times bigger than the monthly drop in the U.S. global non-oil goods deficit – the closest worldwide proxy for U.S.-China goods trade. It’s the latest evidence of the Trump tariffs’ effectivness at keeping enormous amounts of Chinese products out of the U.S. market.

As for the new February U.S.-China goods deficit’s level, it was the lowest since last July’s $28.65 billion.

And goods exports to and goods imports from China moved in exactly the right ways from an American standpoint. The former edged up 1.04 percent, from $11.48 billion to $11.59 billion – a performance that snapped a three-month losing streak. But the latter dropped for the second straight month, by 11.68 percent, from $47.85 billion to $42.26 billion. Decreases in imports from China are typical in post-holiday season February, and this latest drop-off was the biggest in percentage terms since last February’s 13 percent.

All the same, as promising as these February trade results are, one month’s worth of data alone reveal nothing about longer term trends and possibilities. And as mentioned at the outset, the Ukraine war impact is yet to be recorded. Further, more major changes may be in store in the U.S. and global economies, especially as the Federal Reserve is sounding more determined than ever to cool torrid inflation dramatically even if it means slowing growth dramatically. (Unless the central bank chickens out, if only because of the unmistakably political impact such tightening would have during an election year?) And as if all this uncertainty wasn’t enough, never forget that the trade figures are just about the most lagging-y set of indicators that the federal government releases.

So as with so many other dimensions of the U.S. economy, meaningful clarity on trade flows looks unlikely to emerge until the impacts of external shocks like the CCP Virus and the Ukraine war wear off.  That day will come at some point, won’t it?   

P.S. Yes, because my own schedule this past week has been disrupted nearly as much as the economy these last few years, this is my latest effort to catch up on reporting on recent economic releases.  More to come! 

 

(What’s Left of) Our Economy: U.S. Manufacturing Employment Powers Through Ukraine Jitters, Too

Tags

aerospace, aircraft, aircraft engines, aircraft parts, appliances, automotive, CCP Virus, chemicals, China, coronavirus, COVID 19, electrical equipment, Employment, Federal Reserve, inflation, interest rates, Jobs, lockdowns, machinery, medicines, metals, monetary policy, non-farm employment, non-farm jobs, personal protective equipment, pharmaceuticals, PPE, recession, Russia, semiconductor shortage, semiconductors, supply chains, surgical equipment, tariffs, transportation equipment, Ukraine-Russia war, vaccines, Wuhan virus, {What's Left of) Our Economy

The Ukraine war looks like the latest disastrous development that’s failed to stop the impressive growth in U.S. domestic manufacturing employment – just as has been the case recently with the Omicron variant of the CCP Virus and surging inflation. And let’s not forget that the Federal Reserve has begun raising interest rates and signaled that steeper hikes are on the way – steps of course designed to cool off the economy, including the demand for manufactured goods.

U.S.-based industry added a strong 38,000 net new jobs on month in March, according to this morning’s monthly employment report from the Labor Department, and revisions were positive. February’s initially reported 36,000 sequential improvement was upgraded to 38,000, and January’s already upwardly revised 16,000 advance is now judged to have been 26,000.

In fact, domestic industry slightly outperformed the rest of the non-farm economy (the Labor Department’s definition of the U.S. jobs universe) job-wise in March, with its share of non-farm employment inching up from 8.38 percent to 8.39 percent. These results, moreover, show that manufacturing jobs have grown a bit faster than the overall economy’s throughout the pandemic period. In February, 2020, the last data month before the virus and related lockdowns and behavioral curbs began roiling and distorting the economy, manufacturing accounted for 8.38 percent of total non-farm jobs.

The comparison with the private sector isn’t quite as impressive, but satisfactory all the same. Manufacturing’s share of those jobs as of March was 9.83 percent – exactly the same as it was in February, 2020. And some context is essential here: U.S. manufacturing payrolls have held their own and then some even though the massive, sweeping Trump tariffs on imports from China – which were supposed to cripple domestic industry – are still almost entirely in place, as are many of the former president’s tariffs and other trade curbs on metals.

From another vantage point, manufacturing has now replaced 1.244 million (90.60 percent) of the 1.362 million jobs it shed in March and April, 2020 – the peak of the CCP Virus’ first wave.

That trails the 92.82 percent of non-farm workers and 95.46 percent of private sector workers hired back during this period. But the gap isn’t big at all, and manufacturers shrunk their headcounts proportionately less than the rest of the economy during that horrendous spring of 2020. So they didn’t have as much ground to make up.

February’s biggest manufacturing jobs winners among the major sectors tracked by the Labor Department were:

>transport equipment, where payrolls in March advances by 10,800 – their best such performance since last August’s 19,000. At the same time, this increase followed a 19,800 February jobs plunge that was the sector’s worst such performance since the automotive sub-sector’s semiconductor shortage woes led to a nosedive of 48,100 in April, 2021. All this volatility left this sector’s employment levels 4.05 percent below those in that final pre-pandemic data month of Februay, 2020 – versus the one percent decrease since then by manufacturing overall;

>chemicals, whose 7,200 monthly jobs jump was its best ever (or at least since figures began being tracked in 1990). The previous all-time high was the 6,600 gain of January, 2021. This huge industry’s headcount is now up 4.49 percent since February, 2020;

>electrical equipment and appliances, where employment rose sequentially by 3,800 for its strongest increase since March, 2021’s 4,200. Jobs-wise, these industries are now 2.82 percent larger than in Febuary, 2020;

>and automotive. This industry, a sub-sector of transportation equipment, boosted employment by 6,400 in March, the most in a month since last October’s 34,200 burst. But underscoring the volatility among vehicle and parts makers, This March increase followed a 16,000 drop-off in February that was the biggest decrease since the 49,100 jobs lost in April, 2021. These ups and downs still have left automotive employment 1.32 percent their February, 2020 levels.

Machinery’s 1,700 monthly jobs gain in March wasn’t exceptional by the above standards. But RealityChek regulars know it’s of special importance because its products are so widely used throughout manufacturing and the rest of the economy. And in a somewhat discouraging development, this sector’s initially reported 8,300 jobs growth was revised down to 6,600. And its payrolls are still 2.89 percent smaller than in February, 2020.

The only significant jobs loser in March was non-metallic mineral products, where employment sank by 4,500 on month. That was the sector’s worst such perforance since last May’s 5,300 decline, but the March downturn snapped a string of good gains for these companies, and their workforces are 2.81 percent above their February, 2020 levels.

As always, the most detailed employment data for pandemic-related industries are one month behind those in the broader categories, and as with the rest of domestic industry for February, their employment picture showed improvement overall.

In that shortages-plagued semiconductor and related devices sector, employment dipped by 100 on month, but January’s initially reported 200 increase was revised up to 300– its best such performance since October’s 1,000 advance. Since February, 2020, its headcount has climbed by only 0.86 percent, but these companies actually added jobs during the very steep CCP Virus-induced recession of spring, 2020.

Surgical appliances and supplies makers – whose products include personal protective equipment and similar medical goods – boosted employment by 800 in February. January’s initially reported 1,700 jobs increase was downgraded to 1,300, and December’s results were unrevised at 1,100. These health security-related companies have expanded their workforces by 3.79 percent since February, 2020.

The employment news was particularly good in the very big pharmaceuticals and medicines industry. Its February monthly employment increase of 1,300 was the best since September’s 1,600, and January’s initially reported dip of 100 now stands as an increase of 1,100. December’s downwardly revised 900 jobs gain remained the same, and these companies have now increased their employee numbers by 9.04 percent since February, 2020.

The medicines subsector containing vaccines didn’t perform nearly as robustly in February, but still grew jobs by 800. January’s initially reported 500 employment increase and December’s downwardly revised 2,000 expansion remained the same. The vaccine industry workforce is now 23.05 percent larger than in February, 2020.

The aviation cluster enjoyed a good hiring month in February, too. Jobs in the aircaft industry, dominated by Boeing and companies in its supply chain, rose by 500 – the best since the identical total in November. January’s initially reported downturn of 800 and December’s decrease of 400 remained unrevised. Aircraft employment is still off by 11.57 percent since February, 2020.

Makers of aircraft engines and engine parts expanded their workforces by 900 during February, and although January’s initially reported hiring figures were downgraded, the estimate went only from 1,000 to 900. December’s upwardly revised employment increase of 700 was unrevised, all of which helped these companies bring their payrolls to within 13.20 percent of their February, 2020 levels.

Jobs prospects in the deeply depressed non-engine aircraft parts and equipment sector keep looking up, too. Employment improved by 200 in February, and January’s initially reported job growth of 500 was revised all the way up to 1,500. December’s jobs losses stayed at 900, and although these industries’ headcounts are still 16.35 percent below February, 2020’s, that’s better than the 17.30 percent shortfall calculable last month.

Continuing headwinds are still imaginable for domestic manufacturing – like a dramatic escalation of the fighting in Ukraine (which could greatly heat up inflationary pressures and foster even greater Federal Reserve efforts to slow economic growth); a new CCP Virus variant that’s not only more infectious but more deadly; and more big China lockdowns that could further screw up global supply chains. But given the recent actual record, it’s even easier to imagine manufacturing employment continuing to improve.

(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: U.S. Inflation Still Looks Transitory and Baseline-y – For Now

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baseline effect, CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, Federal Reserve, inflation, monetary policy, PCE, personal consumption expenditures index, semiconductors, shortages, stagflation, stimulus, supply chain, Wuhan virus, {What's Left of) Our Economy

Earlier this month, we learned from the latest official U.S. jobs report how dramatically revisions can change the picture of the economy’s performance. Today’s official inflation numbers – presenting the Consumer Price Index (CPI) – contained some interesting revisions, too, and they’re enough to keep me in the “transitory” camp on the future of price increases at least a month more – and specifically, as long as the ”baseline effect” will remain in place.

In plain English, this means that I still believe that inflation nowadays– which is unmistakably high by historic standards and painful for so many Americans – results mainly from major distortions in the economy created by the CCP Virus and related regulatory and behavioral curbs. Also affecting inflation’s annual rates of change throughout 2021 and into early 2022: the fact that the previous year’s inflation – the baseline – was so abnormally low. In fact, one of the key revelations of the revisions is that the baseline effect for “headline inflation” (the figure that tries to cover everything) has increased some in recent months, and therefore has played a moderately larger role in pushing up the latest numbers.

First, though, let’s look at the monthly changes in the overall inflation rate going back to January, 2021, along with the revisions (the number furthest to the right):

Dec-Jan:                          0.26 percent  now 0.24 percent

Jan-Feb:                          0.35 percent  now 0.44 percent

Feb-March:                     0.62 percent   now 0.64 percent

March-April:                  0.77 percent   now 0.64 percent

April-May:                     0.64 percent   now 0.70 percent

May-June:                      0.90 percent   now 0.88 percent

June-July:                      0.47 percent    now 0.45 percent

July-Aug:                      0.27 percent    now 0.33 percent

Aug-Sept:                      0.41 percent   unrevised

Sept-Oct:                       0.94 percent    now 0.87 percent

Oct-Nov:                       0.78 percent    now 0.69 percent

Nov-Dec:                      0.47 percent     now 0.58 percent

Dec-Jan:                        0.65 percent

There’s no doubt that a sequential speed-up took place between December and January. But even with the revisions, decelerations took place between October and November, and November and December. In fact, October remains the peak month for sequential inflation.

It’s important to note that these slowdowns in the inflation rate don’t mean that prices are actually falling. Instead, they mean that they’re not rising as quickly. And although that may sound like a pretty weak reason for encouragement, it counts for more because a major reason that inflation is considered so dangerous is that it tends to feed on itself – and actually grow at increasing rates.

So slowdowns are good news, even if they’re not good enough news. Moreover, the revisions for two of the last three months have been downgrades; in other words, since October, on net, headline inflation has been weaker than originally estimated.

Revisions haven’t had the same effect on so-called “core inflation” (which strips out food and energy prices because they’re viewed as unusually volatile for reasons having little or nothing to do with the economy’s supposed susceptability to inflation). But the absolute rates have been lower than those of headline inflation, and the rates of change have fallen on net since October, too.

Dec-Jan:                        0.03 percent   now 0.05 percent

Jan-Feb:                        0.10 percent    now 0.15 percent

Feb-March:                   0.34 percent    now 0.30 percent

March-April:                 0.92 percent    now 0.86 percent

April-May:                    0.74 percent    now 0.75 percent

May-June:                     0.88 percent    now 0.80 percent

June-July:                     0.33 percent     now 0.31 percent

July-Aug:                      0.10 percent    now 0.18 percent

Aug-Sept:                     0.24 percent     now 0.25 percent

Sept-Oct:                      0.60 percent     unrevised

Oct-Nov:                      0.53 percent     now 0.52 percent

Nov-Dec:                     0.55 percent     now 0.56 percent

Dec.-Jan:                     0.58 percent

But the real importance of those baseline effects and revisions come through in the annual inflation data. The table below shows the annual rates of change by month starting again in January, 2021. The left and center columns show the previous estimates and the revisions, and the right column shows the revisions of these rates for the last few months of baseline year 2019-2020:

Jan:                             1.37 percent    now 1.36 percent

Feb:                            1.68 percent    unrevised

March:                       2.64 percent     now 2.66 percent

April:                        4.16 percent      now 4.15 percent

May:                         4.93 percent      now 4.94 percent

June:                        5.32 percent       now 5.34 percent

July:                         5.28 percent      unrevised

Aug:                        5.20 percent       now 5.21 percent

Sept:                        5.38 percent      now 5.39 percent

Oct:                         6.24 percent      unrevised               2019-20 from 1.19 to 1.18

Nov:                        6.88 percent      now 6.83 percent  2019-20 still 1.14

Dec:                        7.12 percent      now 7.10 percent   2019-20 from 1.31 to 1.28

Jan:                         7.53 percent                                     2019-20 from 1.37 to 1.36

The big takeaway: The November and December annual inflation rates were both revised down by non-trivial degrees, and the baseline effects for October, December, and January have gotten bigger (because the annual inflation rates for 2019-2020 for these months have been revised down, too.

As with their monthly counterparts, the absolute annual core inflation rates are lower, the baseline effects aren’t quite as great, but they’re present anyway:

Jan:                        1.40 percent      now 1.39 percent

Feb:                       1.28 percent       now 1.29 percent

March:                   1.65 percent      now 1.66 percent

April:                     2.96 percent      now 2.97 percent

May:                      3.80 percent      now 3.81 percent

June:                      4.45 percent      unrevised

July:                       4.24 percent      now 4.20 percent

Aug:                      3.98 percent      now 3.96 percent

Sept:                      4.04 percent      unrevised

Oct:                       4.58 percent      now 4.59 percent

Nov:                      4.96 percent      now 4.95 percent    2019-20 from 1.63 to 1.64

Dec:                      5.49 percent      now 5.48 percent     2019-20 from 1.61 to 1.60

Jan:                       6.04 percent                                       2019-20 from 1.40 to 1.39

The baseline effect distortion of both sets of inflation figures should end when the February statistics come out (next month). Unless new revisions change the picture? But there are several other reasons inflation may moderate further going forward.

The economy’s widely predicted growth rate for the first quarter of this year is predicted to be wheezing and even negligible. As long as it lasts, much more sluggish economic activity should undercut price increases. (At the same time, what may be in store is stagflation – a punishing combination of weak growth and strong inflation.) The new CPI figures may well persuade the Federal Reserve to tighten monetary policy earlier and more vigorously than currently expected, which should also slow growth. (The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, or PCE, will be updated later this month. It usually tracks the CPI pretty closely.) And rising prices seem to have put further economic stimulus off the table in Congress. 

Another (and maybe final?) V-shaped pandemic recovery, prompted by the fading of the Omicron CCP Virus variant, could always overcome all these growth obstacles. So could continuing supply chain snags and shortages – especially in industries like semiconductors, whose products are used in so many products. Or all these uncertainties and wildcards could keep the economy and inflation in a turbulent state, and keep complicating policymakers’ challenges in simultaneously fostering adequate growth and acceptable inflation.       

(What’s Left of) Our Economy: A Record Number of Records in U.S. Trade II

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Advanced Technology Products, ATP, Biden, CCP Virus, China, coronavirus, COVID 19, Donald Trump, Federal Reserve, goods trade, interest rates, Made in Washington trade deficit, manufacturing, monetary policy, non-oil goods trade deficit, services trade, tariffs, Trade, trade deficit, trade war, Wuhan virus, {What's Left of) Our Economy

Just because yesterday’s first RealityChek post on the U.S. government’s latest official trade data focused on all the monthly records set by the December monthly results doesn’t mean that the annual figures for 2021 were lacking in all-time highs and lows – and for the same CCP Virus-related reasons.

So let’s get to them – and conclude with some needed context. For as known by RealityChek readers, isolated data don’t tell all the story, or even the most important part of the story. And the big takeaway from examining the context is that in a surprising number of ways, 2021 looked pretty ordinary trade-wise.   

For now, though, let’s start by noting that last year’s combined goods and services trade deficit hit a record $859.13 billion – the second straight all-time high, and a 26.96 percent jump from 2020’s $676.68 billion.

But don’t think that annual increase was in a class by itself. Far from it. Here are the first bits of context: As recently as 1998 and 1999, the total trade gap widened by 53.45 percent and 53.97 percent, respectively. In 1984 and 1993, the figures were 88.82 percent and 79.31 percent, respectively.

Further, in 1983, the trade shortfall more than doubled (surging by 139.14 percent), and in1972 and 1977, it more than quadrupled. In addition, three times during the 1970s, the trade balance switched from surplus to deficit, and in the 1960s, major drops in the surplus occurred.

Even so, it’s crucial to remember that during these periods, oil and its price changes were major chunks of U.S. trade flows and deficits. Big rises in the dollar’s value have also often contributed substantially to big past increases in the trade shortfall. And never forget that the absolute numbers were much smaller then, so large percentage changes were much easier to generate.

Still, the trade deficit’s growth last year ranks as pretty impressive. Ditto for the fact that unlike was the case for decades, it’s largely unrelated to oil (although the small $13.98 billion surplus in this sector turned into an $8.44 billion deficit).

Speaking of oil’s role in U.S. trade, as known by RealityChek regulars, it matters in part because it’s rarely the subject of trade deals and other trade policy decisions. In fact, stripping out from U.S. trade flows oil and services (where liberalization efforts have made relatively little progress) yields the statistics for non-oil goods – the trade flows that are heavily influenced by U.S. trade policy.

And 2021 represented the seventh straight year of record deficits in this “Made in Washington” trade account. Moreover, the $1.06993 trillion level topped 2020’s by 15.66 percent. This increase, though, impressive as it was, was well short of the biggest in history, too (in a series going back to 1992). That dubious distinction goes to 1993’s 76.63 percent, but as recently as 2015, the Made in Washington deficit was climbing at a 21.23 percent annual rate.

Last year’s goods trade gap of $1.09068 trillion was the second straight all-time high and an 18.29 percent widening from 2020’s $922.03 billion. Again, however, the all-time worst is orders of magnitude higher (227.86 percent in 1977), and all the aforementioned influences and qualifiers apply. But as recently as 2010 (another first year of recovery following a steep economic downturn), the goods deficit was up 27.27 percent on year.

The $231.55 billion surplus in U.S. services trade was no record, either, but it was the lowest annual total since 2012’s $215.21 billion, reflecting how hard this sector has been hammered by the pandemic and the economic policy and behavior curbs it’s spawned.

In terms of trade flows closely followed by RealityChek, the huge and chronic deficit in manufacturing soared by 19.23 percent year-on-year in 2021, from $1.11527 trillion to $1.32977 trillion. The shortfall was an eleventh straight annual record and the fourth consecutive year it topped the trillion-dollar mark. The annual increase was high by recent standards, but smaller than 2010’s 27.90 percent.

The Advanced Technology Products (ATP) category saw its fifth straight record annual deficit, and the $197.16 billion total was 3.13 percent above 2020’s $191.18 billion.

The also huge and chronic U.S. goods trade deficit with China was up 14.52 percent on year in 2021, from $310.26 billion to $355.30 billion. Not only was this figure well below the record $418.23 billion set in 2018, but the annual increase was slower than in the non-oil goods deficit – which indicates that the sweeping and often steep Trump administration tariffs on imports from the People’s Republic have been having their intended effects.

Total U.S. exports grew by a healthy 18.46 percent on year in 2021, from $2.13444 trillion to $2.52854 trillion. But they’re still below the all-time high of $2.53864 trillion, set in 2018.

Goods exports were up on year in 2021, too – by 23.32 percent, from $1.42880 trillion to $1.76197 trillion, but also remain lower than their peak – the $1.67691 trillion also achieved in 2018.

The hard hit services industries managed an 8.63 percent annual improvement in exports in 2021, from $705.64 billion to $766.50 billion. But they still remain 12.52 percent shy of their record of $876.30 billion, set in 2019.

Non-oil goods exports rose to an all-time annual high of $1.55849 trillion in 2021 – a figure 20.42 percent higher than 2020’s $1.29421 trillion. But they’re also short of a 2018 record ($1.49101 trillion).

Domestic manufacturing boosted its exports even faster last year – by 18.91 percent, from $953.02 billion to $1.13325 trillion. But it’s all-time high of $1.19227 trillion dates from way back in 2014!

Despite ATP overseas sales advancing by a nearly as strong 18.57 percent, in 2021, from $300.78 billion to $356.62 billion, they’re still below their record, too – 2018’s $368.63 billion.

U.S. goods exports to China were 21.35 percent higher in 2021 than in 2020 – rising from $124.49 billion to $151.07 billion. The growth rate of 21.35 percent was slightly higher than that for global proxy non-oil goods – a likely result of former President Trump’s 2020 Phase One trade deal.

Arguably more impressive, it was the fastest such growth since the 32.25 percent hit in 2010, when the United States was recovering from the Great Recession. (The best performance in U.S. goods exports to China came way back in 1988 – 43.59 percent – when the absolute numbers of course were tiny.)

The nation’s import figures continued the string of trade flow records. Combined goods and services imports of $3.38767 trillion were an all-time high, and grew 20.51 percent over 2020’s $2.81113 trillion. They also blew past the previous peak of $3.11959 trillion, set in 2018.

Stronger growth (21.35 percent) was registered by goods imports, which expanded from $2.53083 trillion to $2.82565 trillion. The previous high – which also came in 2018 – was $2.55566 trillion.

In services, annual import growth was just 16.23 percent in 2021 – rising from $460.30 billion to $535.02 billion. The yearly record for these purchases was 2019’s $591.12 billion,

The record story remained intact in non-oil goods imports. These increased from $2.21934 trillion to $2.62842 trillion – an 18.43 percent growth rate. The previous all-time high for these imports was 2018’s $2.31086 trillion.

Imports in manufacturing reached their own record in 2021 – $2.64303 trillion. That surpassed 2018’s previous all-time high of $2.17711 trillion and topped 2020’s $2.06829 trillion level by 19.09 percent.

For ATP, annual imports advanced by 12.52 percent in 2021 – from $491.96 billion in 2020 to $553.78 billion. The previous record was just $496.06 billion, also set in 2018.

And Americans bought $506.37 billion worth of goods from China in 2021. That topped 2020’s $434.75 billion total by 16.47 percent, but was considerably short of 2018’s record $538.51 billion and the growth rate was slower than that for global proxy non-oil goods – likely another effect of the Trump tariffs that have been largely maintained by President Biden.

But true to the truth that context is crucial, let’s return to that methodology. The main context for last year’s record trade deficits is their size compared with that of the entire economy. And here, in particular, 2021 doesn’t look like such a trade disaster.

Specifically, the combined goods and services deficit as a share of total gross domestic product (GDP) in pre-inflation dollars (to produce apples-to-apples results) came to 3.74 percent in 2021. That’s a big jump from 2020’s 3.24 percent. But it’s not only lower than the record 5.53 percent of 2006, but than the 5.50 percent of 2005, the five percent of 2004, the 4.91 percent of 2007, the 4.82 percent of 2008, and the 3.85 percent of 2002.

Nor is the 2021 growth rate of 15.43 percent in this share unheard of – or even close. For example, during the first calendar year of the economy’s recovery from the Great Recession, in 2010, it was up by 22.34 percent. And between 1999 and 2000, it soared by 35.71 percent. (The growth rate was twenty percent in also pandemic distorted 2020.)

The same goes for the goods deficit as a share of GDP. Last year it was 4.74 percent – a 7.48 percent increase from 2020’s 4.41 percent. But the 4.74 percent figure has been exceeded no fewer than six times going back to 1999 alone. And the growth rate has been topped by 2011’s 10.21 percent, 2010’s 22.44 percent, 2005’s 10.29 percent, 2004’s 15.01 percent, 2003’s 8.74 percent, 2002’s 9.02 percent, and 2000’s 24.57 percent (the 21^st century record), along with 9.43 percent in pandemic-distorted 2020.

The Made in Washington trade deficit as a share of GDP did hit a 21^st century record in 2021 – 4.65 percent. And before 2020’s 4.43 percent, the next highest such figure was 2005’s 4.17 percent. But here, too, the 2021 growth rate in the deficit as a share of GDP of 4.97 percent is ordinary. Leaving aside 2020’s 13.30 percent, it’s been bested no fewer than nine times since 2000, including the record 18.84 percent in 2010.

As a result, it’s not entirely unreasonable to approach 2022 with some trade optimism. Big wild cards remain – mainly how the CCP Virus evolves, how effective the U.S. and global responses become, the future of those China tariffs, and Federal Reserve’s upcoming decisions on interest rates and bond-buying – which could greatly influence the economy’s growth rate.

But if there’s a case that even with all the virus-related distortion and massive government stimulus, the U.S. trade numbers were held in check last year, there’s one that even better results may soon start appearing.        

(What’s Left of) Our Economy: An Omicron Bump in the US Manufacturing Recovery

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aircraft, aircraft parts, automotive, CCP Virus, chemicals, coronavirus, COVID 19, facemasks, Federal Reserve, machinery, manufacturing, masks, medical devices, miscellaneous durable goods, monetary policy, non-metallic mineral products, Omicron variant, personal protective equipment, petroleum and coal products, pharmaceuticals, plastics and rubber products, PPE, printing, semiconductor shortage, semiconductors, stimulus, ventilators, wood products, Wuhan virus, {What's Left of) Our Economy

The big takeaway from today’s Federal Reserve after-inflation U.S. manufacturing data (for December) is that it may show domestic starting to suffer from the arrival into America of the super-infectious Omicron strain of the CCP Virus and the renewed economic curbs and behavioral changes it’s spurring, along with the spread of vaccine mandates in the ranks of U.S. businesses (of course, before yesterday’s Supreme Court decision striking down such policies for the private sector).

And especially discouraging: Just as Omicron began taking off, inflation-adjusted domestic output of medical equipment and supplies – including all the protective gear and treatment devices needed to fight the virus – fell sequentially at its fastest rate since the worst of the spring, 2020 pandemic-induced depression. Indeed, monthly real production in this category is now lower than in February, 2020 – the last full data month before the virus’ first variant began distorting the U.S. economy.

December’s 0.28 percent monthly decline in price-adjusted American manufacturing output represented industry’s first sequential retreat since September’s (hurricanes-affected) 0.52 percent drop. But the solid growth of recent months stayed largely unrevised.

The December results (which will remain preliminary for several more months) brought 2021’s yearly improvement in inflation-adjusted manufacturing output to 3.71 percent. That’s the best growth since 2011’s 6.48 percent, but as known by RealityChek regulars, it’s important to look at possible baseline effects nowadays. And this strong performance in part reflected the virus-fostered 1.94 percent fall-off in such growth in 2020.

The December downturn stemmed in part from problems (like the global semiconductor shortage) in the automotive sector, which shrank on month by 1.29 percent – following sequential expansion in November of a downwardly revised 1.69 percent. But even without the drag from vehicles and parts, domestic industry’s constant dollar production would still have been off by 0.22 percent.

Aside from automotive, the most important December real manufacturing growth loser by far was miscellaneous durable goods – a category that includes those pandemic-fighting essential medical devices and equipment industries. Its price-adjusted output slumped by 2.68 percent – the biggest downturn since April, 2020’s18.43 percent, during the worst of the CCP Virus’ first wave. Even so, measured by real production, the sector is 2.49 percent larger than in February, 2020, right before the pandemic’s initial major economic impact.

Other big December losers included:

>printing and related support activities, whose 1.82 percent slide was also the worst since April, 2020 (23.94 percent), and whose real output is now down by 5.14 percent since February, 2020;

>plastics and rubber products, whose 1.78 percent decrease was the worst since April, 2020 as well (19.12 percent), but that also followed seven months of strong gains. As a result, its real production is off just 1.08 percent since February, 2020; and

>petroleum and coal products, whose 1.58 percent fall-off was its worst since February’s seven percent, and whose after-inflation production is 4.49 percent lower than in February, 2020.

The biggest December winners were:

>non-metallic mineral products, which not only generated a 1.49 percent increase, but whose November inflation-adjusted output advance was revised all the way up from 1.25 percent to 3.03 percent. All the same, this sector’s constant-dollar production is still 1.32 percent lower than in February, 2020;

>wood products, whose 1.18 percent real increase in production was its best since March’s 4.05 percent, and which is now 3.03 percent bigger by this measure since February, 2020;

>the big chemicals sector, where real growth hit 0.69 percent following an upwardly revised 0.65 percent in November (from 0.50 percent), and which has grown by 7.93 percent in real terms since just before the pandemic; and – most encouragingly –

>machinery, a manufacturing bellwether because its products are so widely used throughout both industry and big non-manufacturing sectors like construction and agriculture – not to mention many services sectors. Its price-adjusted output increased by 0.68 percent sequentially in December – its best such result since July’s 2.85 percent, and revisions were unchanged on balance. Machinery production is now 5.20 percent higher than in February, 2020.

As for manufacturing industries that have been prominent in the news during the pandemic, they had a lousy December generally.

Aircraft and parts saw its monthly output down by 0.38 percent, and in stunning news, November’s initially reported 1.90 percent increase is now judged to be a 1.04 percent decrease. With October’s after-inflation production rise downgraded, too, aircraft and parts output is now just 10.71 percent higher than in February, 2020. As of last month’s Fed manufacturing data, this figure was a much higher 15.86 percent.

In pharmaceuticals and medicines, December’s 0.13 percent real output dip was the third straight monthly decline, and November and October revisions were fractionally negative on balance. Consequently, in price-adjusted production terms, these sectors were 13.42 percent larger than in February, 2020 – as opposd to the 13.54 percent calculable from last month’s industrial production report.

And as mentioned at the outset, the December results for medical equipment and supplies sector were awful – especially considering that for the next few months at least, Omicron’s metastasis will greatly increase demand for face masks, protective gowns, ventilators, and the like.

Real production of these products tumbled seqentially by 2.75 percent – the worst such performance since April, 2020’s 15.97 percent, during that first CCP Virus wave. Revisions for November and October were mildly positive, but whereas last month’s report revealed that inflation-adjusted production in these sectors was up since just before the first wave struck in force (though by a bare 0.65 percent), it’s now down by 1.50 percent. 

And let’s add another sector to the pandemic industries list – semiconductors and related devices. As implied by the category name, the numbers include more than the microchips that have been in such global short supply in recent months – and whose U.S. production revival has been such a high stated Washington, D.C. policy priority.

Still, it’s noteworthy that constant dollar output in this grouping rose a mere 0.12 percent on month in December, But it is up 16.86 percent since the pre-pandemicky February, 2020.

So far, betting against domestic manufacturing during the virus era has been a losing bet, But the headwinds for the near future at least look especially strong, topped of course by the spread of Omicron not only in the United States but in all the countries to which its manufacturers sell exports. Add to the list the apparent death of President Biden’s Build Back Better bill – which whatever its long-term economic wisdom and other effects, will certainly reduce government support for domestic economic activity – what seems like greater odds of more monetary policy tightening by the Federal Reserve sooner rather than later; and inflation that might be getting high enough to dampen U.S. consumer outlays.  

Tailwinds are by no means absent – like the beginning of spending made possible by the infrastructure bill, the still considerable amount of stimulus being provided by the Fed, and the easing of global supply chain knots. But even this last depends heavily on the medical, regulatory, and behavioral effects of Omicron in the United States and, perhaps even more important, in China, where the regime’s Zero Covid policy looks like a formula for ever broader lockdowns that will paralyze its ports and other infrastructure systems. 

Domestic manufacturers keep telling major surveys that they remain optimistic about the future.  (See here and here for the latest soundings.)  If anything’s certain about the circumstances they’re heading into, it’s that they’ll need every bit of this optimism to keep succeeding.