(What’s Left of) Our Economy: (Much) More Evidence That Tariffs Can Work

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aluminum, Biden administration, China, economics, free trade, inflation, mercantilism, metals, output, prices, protection, protectionism, steel, subsidies, tariffs, Trade, Trump administration, {What's Left of) Our Economy

An independent U.S. government agency that most of you have never heard of just issued a blockbuster report full of evidence that further lobotomizies the clearly brain-dead but longstanding and still-prevailing conventional wisdom on a major economic issue facing Americans – how to deal with the global economy.

The agency is the U.S. International Trade Commission (USITC) and the conventional wisdom is that the sweeping, often towering Trump (and now Biden) administration tariffs on metals and on imports from China have cost the American economy on net.

Just as important: The report’s findings also shred the equally enduring belief that such trade protection causes the beneficiary companies or industries to become fat and lazy – and in particular to stop investing in expansion – because it’s so much easier and lucrative to reap higher profits from the higher prices they can charge from their existing operation.

The tariffs most comprehensively examined were those imposed on steel and aluminum imports starting in early 2018. The USITC looked at both their impact on those metals producers themselves, and on the “downstream industries” that use steel and aluminum.

As might be expected, the study reported that the metals levies – imposed to counteract massive foreign subsidies and other predatory practices – reduced imports of the products they covered significantly between 2018 and 2021 (the last year for which full statistics were available). U.S. purchases of affected foreign steel products sank by an annual average of 24.0 percent, and of their aluminum counterparts by an annual average of 31.1 percent

Further, as might also be expected, users of these metals often had to turn to buying domestically produced steel and aluminum in many instances. (In others, where U.S,-made alternatives weren’t available, they needed to eat the increased prices of the imports.)

But here’s where the conventional wisdom starts breaking down. According to USITC researchers, the price of Made in America steel and aluminum barely budged as a result of the tariffs. For steel, it rose by an annual average of 0.74 percent between 2018 and 2021. For aluminum, these increases were 0.87 percent. That sure doesn’t sound like price-gouging.

And one big reason undermines another claim of the tariff conventional wisdom. These prices hikes were so modest due significantly to output increases of these metals. And the higher output wasn’t due simply to the (modestly) higher prices metals-makers could charge. It reflected greater quantities of steel and aluminum that were manufactured. Between 2018 and 2021, because of the tariffs alone, steel companies boosted production volume (not dollar value) by an annual average of 1.9 percent and aluminum companies by an annual average of 3.6 percent. (See the table on p. 21.)

In fact, as the report notes, “Many domestic steel producers announced plans to invest in and greatly expand domestic steel production in the coming years” and capacity utilization in the industry hit a 14-year high in 2021. That’s resting on their laurels?

But the worst blow delivered by the report to the conventional wisdom was to the claim that the metals tariffs damaged the U.S. economy overall because whatever benefits the metals sectors enjoyed were completely swamped by the harm done to much larger metals-using sectors. (Here’s a detailed version. Unlike the USITC study, it focuses on employment and not output impacts, but undoubtedly there’s a pretty close relationship between the two.) According to the USITC, nothing of the kind happened.

As stated in footnote 342 on p. 125, thanks to the tariffs, steel production climbed by $1.90 billion in 2018, by $1.86 billion in 2019, by $0.92 billion in 2020, and by $1.33 billion in 2021. That adds up to $6.01 billion.

Aluminum production was $1.74 billion higher in 2018, $1.72 billion in 2019, $0.88 billion in 2020, and $0.92 billion in 2021 (footnote 347 on p. 126). That adds up to $5.26 billion. Add these steel and aluminum totals, and you get $11.27 billion in production gains by value attributable to the tariffs.

On p. 132, the USITC estimates that the tariff-induced production decline of steel- and aluminum-using industries averaged $3.40 billion from 2018 through 2021 – or $13.60billion in toto. So American output did indeed fall overall?

Not so fast. As the authors note (p. 125), the annual impact of the tariffs decreased during these years because the percentage of metals imports covered by the tariffs shrank – in part due to deals struck by Washington with various foreign metals producers to end levies on their products in return for agreeing to end illegal practices like dumping and to work harder to prevent previously tariff-ed Chinese metals pass through their countries to America via customs fraud.

So it’s likely that the gap between the U.S. metals output increases generated by the tariffs and the users’ output losses generated by the levies – pretty measly to begin with – would have shrunk and even vanished completely had all the tariffs remained in place. And who can reasonably rule out the possibility that the tariffs would have wound up boosting more American manufacturing production than they reduced – especially if the metals users were able to increase their production despite higher costs by improving their productivity. (See this post for a fuller discussion of the relationship between import use and productivity.)

The report didn’t look at the downstream effects of the much greater tariffs on Chinese goods, but presented evidence that they’ve been economic winners for the United States as well. As the study concluded, the China tariffs per se – also imposed to offset systemic economic predation by the People’s Republic – cut the value of Chinese imports by an annual average of 13 percent, and increased the price of domestically produced competitor products and the value of domestic competitor production by an annual average of 0.2 percent and 0.4 percent, respectively. between 2018 and 2021.

In other words, the China tariffs raised domestic production twice as much as domestic prices. And the problem is….?

The USITC authors admit that their model for evaluating the tariffs can’t capture all their effects. And their conclusions certainly don’t mean that all tariffs will work splendidly all of the time. But it’s arguable that for all the trade liberalization achieved since the end of World War II, protectionism and mercantilism by foreign governments remains widespread.  The USITC report strengthens the case that comparable U.S. responses should be used much more often.     

P.S. I published a detailed look at the impact of the 1970s and 1980s tariffs (including those imposed during the Reagan years) back in 1994 in Foreign Affairs and reported similar conventional wisdom-debunking findings.          

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(What’s Left of) Our Economy: Today’s Really Recession-y U.S. Manufacturing Production Report

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aircraft, aircraft parts, Federal Reserve, machinery, manufacturing, medical devices, medical equipment, miscellaneous transportation equipment, nonmetallic mineral products, output, petroleum and coal products, pharmaceuticals, primary metals, printing, production, real output, recession, semiconductors, soft landing, {What's Left of) Our Economy

A U.S. recession is either imminent or already here – that’s the main message being strongly suggested by today’s release by the Federal Reserve on inflation-adjusted manufacturing production (for December).

Not only did industry’s real output sink by 1.30 percent sequentially – the worst such result since February, 2021’s 3.64 percent weather-affected plunge. But November’s initially reported 0.62 percent retreat was revised down to one of 1.10 percent.

Two straight monthly drops of one percent or more each haven’t been recorded by U.S.-based manufacturers since the February through April, 2020 period – when the arrival of the CCP Virus began roiling American life and the national economy, and indeed threw the latter into a deep downturn.

The new figures pushed price-adjusted U.S. manufacturing production into contraction for full-year 2022 – by 0.41 percent. That’s a major deterioration from the 4.19 percent constant dollar gain in 2021 – the strongest such showing since the 6.48 percent achieved in 2010, during the recovery from the Global Financial Crisis and ensuing Great Recession.

Moreover, since just before the pandemic arrived in force in the United States (February, 2020), after-inflation manufactuing has now grown by just 1.21 percent. As of last month’s industrial production release, this figure stood at 3.07 percent.

Of the twenty broadest manufacturing sub-sectors tracked by the Fed, only three boosted monthly inflation-adjusted production in December: aeropace and miscellaneous transportation equipment (0.96 percent), primary metals (0.84 percent), and nononmetallic mineral products (0.65 percent).

The biggest losers among their 17 other counterparts were machinery and printing and related support activities (3.37 percent each), and petroleum and coal products (3.13 percent).

Especially concerning, and continuing a pattern identified last month – for machinery and printing, these results were the worst since April, 2020, at the peak of the CCP Virus’ devastating first wave, when their real output collapsed month-to-month by 18.64 percent and 23.10 percent, respectively. Meanwhile, the monthly decrease in petroleum and coal products was its biggest since weather-affected February, 2021.

And as known by RealityChek regulars, machinery’s tumble last month is a particularly bright red flag. Because its products are used so widely in sectors inside and outside of manufacturing – including by growing companies or firms counting on continued or faster growth – its fortunes are seen as a good predictor of the economy’s future. Therefore, a big machinery production decrease (the second in a row) could well mean that business activity across the national board is at least slowing markedly and won’t be reviving any time soon.

The December numbers were only somewhat better for sectors of special interest since the CCP Virus’ arrival stateside. Sequential increases were registered in pharmaceuticals and medicine (by 1.10 percent) and aircraft and parts (by 1.49 percent). But price-adjusted output fell in automotive (by 1.03 percent), the shortage-plagued semiconductor industry (by 1.20 percent), and the medical equipment and supplies sector that encompasses products heavily used to fight the pandemic (by 2.50 percent).

In addition, the slippage in medical equipment and supplies was one of those that was the greatest since the peak of the CCP Virus’ first wave (when it nosedived by 17.76 percent).

Since manufacturing is only about fifteen or sixteen percent of the total U.S. economy (depending on how you count output), a downturn in industry doesn’t necessarily presage an overall recession. But the new industrial production statistics aren’t the only signs of shrinkage. Consumer spending comprises nearly 71 percent of the economy according to the latest (third quarter, 2021) data, and today’s advance official retail sales report (for December) indicates that they’ve now fallen consecutively for two months. Possibly weaker inflation (indicated most recently by today’s wholesale price report, which I’ll post about tomorrow), also signals gloomy times ahead.

Since the new Fed manufacturing production results will be revised several times over the next few months, it’s possible that the real picture in industry could brighten somewhat. But likelier, in my view (as I wrote yesterday), is for a recession-averse Washington to move to stimulate consumer spending without seeking similar results for production – in other words, a time-tested formula for stagflation at best for the foreseeable future.

P.S. As alert readers may have noticed, this post contains many fewer manufacturing production details than its recent predecessors. My aim is to ensure that I can get this info to you on a same-day basis. Do you like this simpler format better? Or should I return to going deeper into the weeds? Please let me know if you get a chance.         

        

(What’s Left of) Our Economy: How Big a China Virus Hit?

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China virus, coronavirus, COVID 19, Economic Policy Institute, Employment, employment multiplier, Jobs, output, output multiplier, production, {What's Left of) Our Economy

The short answer to the headline’s question? “Really big.” Which is kind of obvious. So today I thought I’d present some information on techniques economists use to come up with a somewhat more specific idea.

First let’s look at jobs – because jobs obviously affect people and their ability to provide for themselves. Economists taking a “put people first” approach would start by looking at the official federal government data on how many Americans are employed by those parts of the economy that clearly will be most seriously affected. Those numbers look like this as of last month’s preliminary figures, in millions of employees:

retail trade:                                                            15.659           1.22

educational services:                                               3.838           1.94

  (includes public & private institutions)

leisure & hospitality:                                            16.873

arts, entertainment, & recreation:                           2.494          3.79

  performing arts & spectator sports:                     0.516

  spectator sports*:                                                 0.146

accommodation & food services:                        14.379          1.61

  accommodation:                                                  2.092

  restaurants & other eating places:                     11.103

*January figure

The indented categories are industries of special interest that are sub-sectors of the larger categories below which they appear. And if you add up the major categories, you come up with 54.193 million workers – nearly 42 percent of the total U.S. private sector workforce.

Sharp-eyed readers will notice a number to the right of the worker figures – that number shows what’s called the employment multiplier for the sector in question. Simply put, it means how many jobs in other parts of the economy the maintenance, creation, or loss of a single job in the first sector affects. In other words, every job in American retail companies and stores affects 1.22 jobs elsewhere (e.g., from suppliers that furnish that industry with the inputs it needs to function, and from the purchases its own workers make from other industries).

Employment multipliers aren’t easy to find – these come from a Washington, D.C. think tank called the Economic Policy Institute, and don’t cover all the initially affected sectors. But from these data alone, it’s obvious that the total number of U.S. jobs that could be lost, or see a cutback in hours, is much greater than the employment damage done, for example, by the simple closing of a single restaurant or sports stadium.

Most economists would also look at how much output the most seriously affected industries contribute to the gross domestic product (GDP – the total sum of all the goods and services Americans turn out during a given time period). GDP and output matter, of course, because if businesses aren’t producing goods and services, they won’t need employees. Here how they look, according to a measure called “value-added” – which seeks to eliminate various forms of double-counting that result when trying to gauge production in sectors that make final products, and sectors that make their parts, components, materials, ingredients, and other inputs. Also important – these figures are not adjusted for inflation.

Percent of total U.S. value-added

retail trade:                                                            5.50           0.66

healthcare services & social assistance:               7.60

educational services:                                            1.20           0.72

performance arts, spectator sports, museums &

  related activities:                                               0.70            0.81

accommodation & food services:                       3.10

  accommodation:                                               0.80

  food services:                                                   2.30

Again, the sub-categories are indented. Here the total percent figure is much smaller than the employment figure. But at 21.20 percent, it’s not bupkis, either.

And as with employment, don’t forget those multipliers (also presented to the right)! Here, the readily available data is scantier, and those I use are from 2012. But clearly the indirect output (and growth) impact will be non-trivial. (These output multipliers come from the Manufacturing Institute of the National Association of Manufacturers.)

Even if the China Virus situation wasn’t still evolving – and possibly dramatically, no one should take these numbers to the bank. Especially important is remembering that none of them take into account the danger that all these jobs and output and income and related business revenue losses bring about the kind of financial system seize-up seen during the financial crisis of 2007-2008. Moreover, although business and entire industry shutdowns will be extensive in the above and other sectors, they won’t be total, or (usually) anywhere close. And the damage will not last forever, or anywhere close.

All the same, we’re talking major drops in employment, incomes, and production – which is exactly why the economic response from Washington needs to focus on getting and guaranteeing money and credit where it’s needed pronto.

(What’s Left of) Our Economy: U.S. Manufacturing’s Not Only Decoupling from China

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737 Max, aircraft, Boeing, China, Commerce Department, decoupling, GDP-by-industry, manufacturing, output, Trade, Trade Deficits, {What's Left of) Our Economy

The Commerce Department’s GDP-by-Industry series is almost always overlooked by followers of the economy, and partly that’s the Commerce Department’s fault. Its updates are invariably a quarter behind, so it’s what analysts call a (seriously) lagging indicator that says relatively little about the more important question of what’s in store.

Nonetheless, even when they’re lagging, distinctive and detailed indicators can clarify long-term trends considerably, and that’s why I like GDP-by-Industry and track it so closely. Because it sheds lots of light on some of the most important economic and trade-related issues of the day – and especially on the impact of President Trump’s tariff-heavy policies. Specifically, the latest set of figures, which were issued January 9, reveal that during the Trump administration, the United States has continued to progress toward the worthy goal of reducing domestic manufacturing’s dependence on imports (and especially imports from increasingly hostile countries like China) for acceptable levels of growth. 

In other words, the People’s Republic isn’t the only country from which American manufacturing is decoupling. 

According to the new data, the latest year-on-quarter results show that between the third quarter of 2018 and the third quarter of 2019, U.S. manufacturing output (measured according to a gauge called gross value added) increased by 1.21 percent. That’s not much. But the manufacturing trade deficit during this period rose by only 2.55 percent. (Both figures are in pre-inflation dollars, because inflation-adjusted manufacturing trade figures aren’t available.)

Although this growth rate is lower than that achieved between the second quarter of 2018 and the second quarter of 2019 (2.03 percent), that figure was accompanied by a much faster increase in the manufacturing trade deficit (7.83 percent). The first quarter to first quarter results? Manufacturing production growth of 2.76 percent, and manufacturing trade deficit increase of 1.29 percent. That is, manufacturing output actually grew faster than the trade deficit. So from that standpoint, the third quarter result are disappointing.

They look even more disappointing when compared with the results from the first two years of the Trump administration. In 2017, manufacturing production also grew somewhat faster (3.99 percent) than the increase in manufacturing’s trade gap (3.16 percent), and in 2018, output grew much faster (6.23 percent to 3.96 percent).

These Trump presidency figures, in turn, have been much better than those reported for President Obama’s administration. Once the current economic recovery entered a normal phase (2011), the manufacturing trade deficit grew much faster than output ever year except for 2013.

So what’s the case for the latest third quarter 2018-third quarter 2019 figures representing continued progress? And why should anyone be happy with 1.21 percent annual manufacturing output growth no matter what’s happening on the trade deficit side?

Two answers suggest themselves. First, since the President began imposing tariffs in earnest (essentially, in April, 2018), importers have been “front-running” their purchases from abroad.  Their efforts to secure these deals before various sets of tariffs kicked in has produced several short-term distortions in the trade deficit in particular. Second, since the spring, Boeing’s safety woes have exerted a major drag both on domestic manufacturing output and on industry’s trade performance – since the aircraft giant has long been America’s leading exporting company.

Just one example of the difference Boeing has made: Between the third quarters of 2018 and 2019, the U.S. civilian aircraft trade surplus dropped from just under $10 billion to just under $6.5 billion. Civilian aircraft is of course the product category containing Boeing’s troubled 737 Max jet, and the plane was grounded worldwide, or banned from many national airspaces, starting in March.

The relationship between trade balances and production is never one-to-one, especially over relatively short time frames. And the matter becomes more complicated in sectors like aircraft, with its long lead times and generally large backlogs. But it’s difficult to believe that the 737 Max crisis and the narrowing of the aircraft trade surplus hasn’t impacted American civilian aircraft production and exports at all. (In fact, between those two quarters civilian aircraft exports, which are strongly related to output levels, sank by $2.75 billion, or nearly 22 percent.)

Moreover, for the purposes of comparing manufacturing output growth and the manufacturing’s trade deficit growth, the aircraft troubles are significant. Had the category’s trade performance simply remained the same between the third quarters of 2018 and 2019, the trade shortfall would have increased not by 2.55 percent, but 1.25 percent – less than half the rate. As result, during that period, manufacturing’s output (1.21 percent) and trade deficit would have grown at very nearly the same pace.

What does the future hold for this key ratio? On the one hand, civilian aircraft production is bound to decrease for the foreseeable future due to the 737 Max production halt announced by Boeing in mid-December. On the other, numerous signs indicate that industry overall has come out of the recession that dogged it for much of the last year and a half (and that by some output measures, never happened at all). Moreover, the Phase One trade deal signed by the United States and China last week could well reduce at least some of the tariff-related uncertainty that’s clearly slowed manufacturing-heavy capital spending decisions by American business in general, and certainly in manufacturing itself.

That looks like a modest case for domestic manufacturing continuing its longer term trend of becoming more self-sufficient while growing adequately – a development that makes major sense in a world that’s far more uncertain.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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