(What’s Left of) Our Economy: Now That It’s a Real China Trade War….

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Apple Inc., Bob Woodward, China, consumer goods, Fear, foreign direct investment, Gary Cohn, intermediate goods, Jobs, manufacturing, national security, prices, producer goods, supply chains, tariffs, technology, Trade, trade war, Trump, {What's Left of) Our Economy

Now it’s a “trade war.” By slapping tariffs on $200 billion worth of imports from China, President Trump has now placed in harm’s way roughly half of all last year’s American purchases of goods from the PRC. So I’ll stop using quotes around the phrase, at least when it comes to China developments. And here are some points that deserve special emphasis:

>For many of the same reasons that the new tariffs on China or on steel haven’t shown any sign of increasing prices for the intermediate (or producer) goods that businesses buy (the focus of previous tranches, and of the Trump metals tariffs), this larger set of tariffs on consumer goods are unlikely to cause much pain for American shoppers.

As I’ve written, if businesses don’t believe that their markets can currently bear price increases, what it is about the tariffs that will change their assessment – especially in the next few weeks and even months? Put differently, if they’re likely to raise prices then, why haven’t they done so already? Are they really in the habit of giving their customers unsolicited and unnecessary price breaks at the expense of their revenues and profits?

In this vein, President Trump’s decision to exempt some prominent Apple products from the new levies suggests he’s been snookered by the tech giant – for fear of spoiling too many Americans’ Christmases. In fact, here’s an article that makes clear that Apple’s pricing policies have virtually nothing to do with the cost of the components it uses.

Of course, it seems logical to suppose that if consumer products companies won’t be raising their prices much because of the tariffs, then the supplier of those products – China – won’t be harmed either, because sales levels will remain generally unchanged. But actually, the tariffs will accomplish a somewhat related but highly worthwhile goal (that is, if you believe that China’s predatory trade practices pose a major problem for the American economy): They’ll make China a higher cost, and therefore less competitive supplier of these products.

As a result, the American companies they depend on will have further incentives to shift supply chains outside China. For most consumer goods, which are labor intensive, nearly all of the beneficiaries won’t be domestic U.S. competitors and their workers. Instead, they’ll be other very low-cost countries with natural comparative advantages in these industries.

But this result will definitely weaken employment in China and possibly the PRC’s politics – whose stability has long depended on the ability of China’s leaders to deliver rising living standards for a critical mass of China’s population. Both developments would unmistakably serve U.S. interests.

Electronics – both consumer and “higher tech” – look like a conspicuous exception, due to the sheer size of China’s industrial complex in these sectors and the scale advantages alone that they create. Few acceptable alternative production sites will be available for many years. Nonetheless, there’s much more potential for production and job shifts back to the United States for the large number of non-electronics advanced manufacturing industries where domestic American producers would boast considerable competitive advantage – especially if they didn’t need to worry about predatory Chinese competition.

>The President’s decision to limit the tariff on the new group of targeted Chinese products to ten percent (at least initially) strongly indicates his awareness that his trade policies could well provoke even greater opposition than has been expressed already. In other words, despite his professed confidence, trade wars aren’t always “easy to win.” But he needs to do much more to generate and even preserve needed public support. Specifically, Mr. Trump needs to make an address – or even a series of addresses – from the Oval Office, with all its trappings, explaining why the stakes of America’s economic conflict with China are so high, and therefore why some domestic sacrifice will be absolutely essential.

The President has spoken about the need for tariffs at numerous rallies and brief sessions with reporters. But his main points – that the Chinese have been ripping Americans off for decades, that basic fairness must be restored, and even that success will mean investment and jobs flooding back to U.S. shores – are sadly inadequate to the task. As widely observed, at risk from continued China policy failures are the nation’s security and future as global technology leader – which will undercut future U.S. prosperity in ways that dwarf even the employment and production damage suffered so far.

That such an address hasn’t been made – and by such an effective communicator – could be a sign that an overarching China strategy still hasn’t been developed. And although Mr. Trump’s initiatives so far show every sign of throwing Beijing off balance, they’ll fall way short of their (needed) potential unless carried out as part of an integrated strategy.

>My own candidate for such a strategy – economic disengagement from China. The main reasons?

First, the clearest lesson from decades of generally unfettered U.S.-China trade and investment is that the two countries’ economic systems are simply too incompatible to permit mutually beneficial commerce.

Second, as I’ve written, even full Chinese agreement to most American demands can’t be adequately verified by Washington. China’s manufacturing complex is too vast, and its government operates too secretively. In this vein, in particular, subsidies are way too fungible for outsiders to track.

Third, most forms of continued economic engagement with China will inevitably continue to strengthen directly or indirectly China’s ability to challenge U.S. national security interests. In macroeconomic terms, continuing huge Chinese trade surpluses with the United States will keep ensuring that Beijing will have the resources needed to continue its rapid military buildup while satisfying civilian needs satisfactorily. In more sector-specific terms, continued American manufacturing investment will continue bolstering China’s ability to turn out the advanced weapons and other defense-related goods to enable Beijing to narrow further America’s remaining military and underlying technology edges. (That’s one reason why the administration’s stated objective of making China an easier environment for American business is so dubious.)

The Trump administration has made good disengagement progress on the inbound foreign direct investment front. But even here, much more can and should be done. For how can any acquisitions of American businesses or other assets by a non-market economy like China reinforce the free market basis of the U.S. economy? Indeed, how can such transactions help but distort and ultimately weaken American capitalism?

But let’s end on an optimistic note: Assuming Fear, Bob Woodward’s new tell-all book about the Trump administration, is accurate, there’s no more Gary Cohn running around the White House taking advantage of his position as head of the National Economic Council to snatch needed proposals like these from the President’s desk.

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Following Up: Why Auto Tariff Alarmism Just Got (Even) Sillier

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automotive, autos, CNBC, consumers, Following Up, prices, Rick Santelli, tariffs, Trade, Trump

The claims just keep coming that President Trump’s threatened auto tariffs will cause vehicle makers to boost the prices paid by American consumers per vehicle by thousands of dollars. So does the evidence that such claims are “horse hockey” – to quote a memorable euphemism for “baloney” recently used by CNBC’s Rick Santelli (in a similar context).

As I noted in a post last Wednesday, this alarmism flies in the face of recent U.S. auto sales trends – which recently have been weak enough to force the companies to offer deep discounts to prop up their numbers and try to keep market share. As I’ve also noted, those trafficking in price hike fears either know nothing about business, or are trying to fool their audiences. For although producers’ costs of course influence consumer prices, the latter’s main determinant is what the former believe the market will bear. To believe otherwise is to believe that companies aren’t striving to maximize revenues and profits wherever and whenever possible. And by extension, it’s logically to believe that, although auto makers don’t believe their customers will pay those higher prices today, they’ll change their tunes as soon as vehicles become much more expensive.

Which brings us to the newest evidence – yesterday’s data on U.S. auto sales for June and for the first half of the year. Overall, they were up, and up nicely (especially for last month, when they rose year-on-year). But as always, you need to look under the hood. (Couldn’t resist!) And that’s when you encounter vital contrarian details provided by analysts at Cox Automotive.

According to the Associated Press’ coverage of their conclusions, the increases were driven by “low-profit sales to fleet buyers such as rental car companies, and retail sales to individual buyers were propped up by rising incentives such as rebates and subsidized leases.”

Indeed, said observed one Cox consultant, “Retail sales have been flat, and even those sales have been supported by incentives being up 6 percent.”

Does this sound like a market where big, sudden price increases have much chance of sticking? If you agree, I’d be happy to show you a bridge in Brooklyn that’s available for a song. And if you’re parroting this line, chances are you’d be a great used car salesman.

(What’s Left of) Our Economy: Trump Tariffs to Raise Washing Machine Prices? Good Luck with That!

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consumer price index, consumers, CPI, inflation, PCE, personal consumption expenditures index, prices, South Korea, tariffs, Trade, Trump, washing machines, {What's Left of) Our Economy

It’s painfully clear that none of the journalists and offshoring lobby-funded think tank hacks who have parroted the threats by South Korean washing machine makers to raise their U.S. retail prices to offset tariffs imposed by the Trump administration last month has shopped for a washing machine lately. Nor have they looked at the price data for home appliances in America. If they had, they’d recognize that the South Koreans seem to be blowing so much smoke. For no one could possibly look at the U.S. washing machine market either first hand or statistically and conclude that any producer thinks they have much pricing power.

The first-hand evidence? Just check the ads in your daily newspaper. Or take a look at this post from about a year ago offering tips to appliance shoppers. For example, consumers are told that: 

>in-store sales people and on-line shopping sites will often sell a machine for less (and “sometimes a lot less” than the advertised price;

>”If you’ve had your eye on an appliance but wish it were just a smidgen cheaper, try putting it in your cart. Then walk away (so to speak). If you leave it there for a few days, a retailer might send you a coupon to entice you to close the deal.”

>”Never be afraid to ask salespeople, cashiers, and store managers if they can do a little better on the price. In fact, Consumer Reports says that nearly all people who haggle over appliances are successful at least once—and save an average $200.”

The statistics? They mock even more cruelly the idea that the tariffs will drive washing machine prices up. Let’s start off with the Federal Reserve’s favorite measure of inflation, the personal consumption expenditures (PCE) index. And as the broadest gauge, let’s use the “core” PCE numbers, which strip out food and energy prices because they’re considered volatile for reasons having little to do with the main determinants of price changes for the rest of the economy.

According to the Commerce Department, which tracks this data, between 2009 (when the current U.S. economic recovery began) and 2016 (the latest figures), core PCE rose by a cumulative 13.10 percent. But for durable goods (the category containing home appliances), prices during this period fell by 13.54 percent. And although there are no statistics for washing machines specifically, prices for “household appliances” plunged by 18 percent over those seven years. These trends don’t exactly scream “Pricing power!”

Moreover, let’s look at what happened with appliances prices after 2013, when the Obama administration imposed tariffs on subsidized and dumped South Korean-brand washing machines from South Korea and Mexico. After having fallen by 2.39 percent the previous year, they fell even faster – by 5.61 percent, 4.96 percent, and 5.03 percent annually over the next three years. And in each instance, the rate of decrease for appliance prices was much steeper than for prices for other durable goods.

The Labor Department’s different sets of inflation data do extend through 2017. They’re grouped under the heading “consumer price index” (CPI), and show that prices for major appliances decreased that year by 2.57 percent, and for appliances generally by 1.03 percent. That year, the CPI for urban consumers less food, energy, and shelter rose by 0.72 percent.  And according to this CPI, appliance and major appliance prices have been falling throughout the current recovery, too.  

There’s a first time for everything, and so it’s possible that Korean washing machine manufacturers really will carry through on their price increase vows. And of course, since it’s their business, they may know something I don’t. But the first-hand evidence and the data strongly indicate that the tariffs will simply require them to charge closer to fair market value for their goods, and that until much stronger pricing pressures emerge, this fair market value will remain pretty low and could well keep falling.

As a result, there’s a heavy burden of proof not only for taking them at their word, but for continuing to accept blithely the standard assumption that tariffs always hit consumers hardest – or will at all.

(What’s Left of) Our Economy: Can We Get Real About China’s Trade Dumping?

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China, consumers, dumping, free markets, Martin Feldstein, prices, steel, subsidies, Trade, Trump, {What's Left of) Our Economy

In the spirit of the holiday season, rather than slam noted economist Martin Feldstein for producing yet another stale though dangerously misleading blanket warning against the horrors of trade protectionism, I’ll note that he’s just (unwittingly, to be sure) created a teachable moment about instances in which erecting trade barriers is absolutely necessary. Those instances concern a practice called dumping, and in particular when the culprit is a country like China.

In U.S. and world trade law, dumping consists of selling a product or service in a foreign market at prices deemed to be excessively low. (Their specific definitions differ – see here and here for how.) For someone not steeped in these subjects, it’s entirely reasonable to ask, “What’s the problem?” After all, if a producer wants to provide a major price break for his or her foreign customers, why should those customers look a gift horse in the mouth? But for a leading economic light like Feldstein – who has been a top presidential economic adviser (in the Reagan years), it’s hard to excuse his use of the term.

The reason is that the decision to dump can result from dramatically different circumstances with dramatically different stakes for the future of the kind of U.S. economy most of us presumably want to ensure. Feldstein suggests that dumping is basically no different from the kind of price drops businesses can put in effect when they’re so technologically advanced or otherwise efficient that they can undersell less competent rivals. But this example is completely irrelevant to dumping law.  Neither the U.S. nor World Trade Organization versions penalizes this kind of progress.

Feldstein might have added a common claim that, even when these international price differentials do exist, they’re no different than when producers (or service providers) decide to put their wares on sale in certain parts of the United States but not others – maybe as a special deal to jump-start business in a region they’re entering, or to energize business in a region where they’re lagging.

But although this argument against sanctioning foreign producers for dumping is more on target, it still misses the mark in a crucial respect: The dumping engaged in by countries like China is fundamentally different. And the reason is that it’s typically subsidized by foreign governments.

Such subsidized dumping is objectionable, and downright dangerous to the American economy, for several reasons that have somehow eluded Feldstein – and most of his fellow economists. Principally, it forces companies that operate in a free market setting, with all the constraints that imposes on pricing policies, to compete against companies that face no such constraints – or tend to enjoy the freedom to under-price for long periods of time.

If you’re fine (like Feldstein and other conventional wisdom-mongers?) with government-dependent entities (I hesitate to call them “businesses”) gaining the upper hand in the United States, then logically this isn’t a problem. If you believe that the American economy works best for all concerned when free market principles and practices are encouraged to the greatest extent possible, then you should be deeply concerned.

As a result, it should be easy to distinguish between bargain-basement pricing from companies that have either very patient founders or other shareholders, or lots of cash on their balance sheets, or both, from such pricing from entities that can keep drawing on foreign treasuries. The former, after all, stems from actors that are trying to judge the fundamentals of a market place, that “put their money where their mouths are,” and who will eventually be rewarded for being correct or punished for getting it wrong. The latter is a function of the decisions and priorities of foreign governments. And with a country like China, where the government maintains a whip hand over the economy, there can be no reasonable doubt which kind of pricing we’re dealing with.

All believers in free markets by definition agree on the superiority of the free market incentive system. But as often seems to be the case, they easily forget free market values, and the need to safeguard them, when it comes to international trade. (Monopoly and competition issues represent another example of this selective capitalism syndrome.)

That’s not to say that all government subsidies should be opposed. Many (like America’s minority- and women-owned business “set asides”) seek to promote important goals that societies have every right to prize. Others seek to promote important goals that societies literally can’t do without (like government support for defense industries). And even these wrinkles can have wrinkles. For example, many manufactured goods can be crucial for national defense even though they’re not weapons themselves, or even though they have many uses other than military. Steel, to which the Trump administration is considering extending major protection for just these reasons, is a newsy example.

So many dumping allegations and cases can be genuinely complicated, and understandably controversial. But even if you believe that systems of trade law can ultimately resolve these disputes in acceptable ways (I don’t), it should be clear that government-fostered dumping simply doesn’t belong in this category, and that government-run economies like China’s don’t deserve the standard legal protections (like presumption of innocence) when put in the dock.

What should be even clearer: Anyone not recognizing this basic dumping distinction should never gain the ear of those officially responsible for America’s well-being. But because it’s the holiday season, I won’t specifically recommend blackballing Martin Feldstein. At least not right now.

(What’s Left of) Our Economy: Let’s Get Real About Tariffs and Consumer Prices

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Arthur Taylor, automotive, Black Dog Manufacturing, Carlos Ghosn, consumers, economists, Fox Business, Maria Bartiromo, markets, Mitsubishi, Nissan, prices, Renault, tariffs, Trade, Trump, {What's Left of) Our Economy

Surely the most politically powerful argument against any American trade policies that involve tariff-ing imports holds that such moves will raise the prices consumers pay for goods and services directly and indirectly, imported and U.S.-made alike. That’s why the claim is made constantly both by domestic interests who favor the trade status quo (like offshoring-happy multinationals and retailers), and by American trade partners whose growth heavily depends on exporting to the United States. And let’s not forget most of the world’s economists. 

But now an admission has just come from a major multinational manufacturer that the real pricing impact of tariffs would surely be much less dramatic – to say the least.

The source is no less than Carlos Ghosn, who chairs both Japan’s Mitsubishi Motors and Nissan Motor Co., as well as France’s Renault. On a Fox Business program last Friday, Ghosn expressed his expectation that the global automotive sector would “adjust” to any new trade restrictions put in place by President Trump.

That’s not terribly newsworthy. After all, per the tariff critics, that could simply mean that Ghosn’s companies will raise consumer prices in order to compensate. Nor, given the corporate rush to curry favor with Mr. Trump, was it particularly newsworthy that Ghosn told anchor Maria Bartiromo that “All car makers today are paying attention to what the president is saying” (his words) and that “companies are looking at adding capacity and hiring more workers in the U.S. as a result of Trump’s plans” (as an accompanying Fox Business post put it).

What was terribly newsworthy was Ghosn’s prediction that “I don’t think anybody can sit comfortably with a price hike.” In other words, the head of an enormous worldwide automotive “alliance” has just made clear that new tariffs probably won’t lead to higher consumer prices – at least not on any sustained basis.

Ghosn didn’t specify why the industry would likely hold the line, but leading reasons aren’t tough to imagine. In particular, the U.S. automotive playing field would remain filled with players and therefore highly competitive, and American consumers these days don’t have access to infinite amounts of money, either in the form of paychecks or credit. If he’s right, then there’s no reason to suspect that these limits on pricing power are restricted to the auto industry.

Another business voice has just offered some other insights into why automatic price hikes can’t be assumed to result from tariff hikes. Arthur Taylor founded and runs Black Dog Manufacturing in Hyde Park, Utah, a producer of custom wood and metal fixtures and other products used by retailers and other vendors in malls and stores. He’s also one of the sharpest observers of the globalization and manufacturing scene I’ve met.

As Taylor reminded me in a Facebook message over the weekend, automatic price hikes can’t be assumed after tariffs because, contrary to what’s apparently believed by most economists (and argued by those business and other interests with big stakes in preserving the trade status quo), there is no pat formula businesses employ to determine the prices they charge. More specifically, they don’t use any of their costs – whether of labor, or of any domestic or foreign inputs – in any predetermined way to calculate what they charge to customers (whether individual consumers or other businesses).

Instead, “price is determined by what the buyer will pay and in business, the majority of our efforts are dedicated to getting the highest price we can for the volume we’ll accept.” In this vein, “Businesses always start with ‘how much can we get for this?’”

Of course, costs always factor significantly into pricing decisions. But they generally are not seen or treated by producers as considerations that either justify giving customers a break when they are low or falling, or entitle them to pass-throughs when they are high or rising. Rather, sellers make judgments about what buyers will pay. If necessary, they try to make the adjustments needed to produce revenues and profits that they and/or their investors consider acceptable. If their performance is unsatisfactory, sellers either try to make further changes in pricing or production techniques, or in their sales and promotional efforts; or they modify their revenue and profit expectations; or they conclude that their business is not viable and abandon the venture.

In other words, prices are produced by the functioning of an ultimately psychological system of value identification by both buyers and sellers that’s called a market. And one of the key elements of value identification for a seller has always been what a market will bear. Executives like Ghosn and Taylor recognize markets’ complexity and subjectivity, as well as their inescapability (that is, if markets are indeed viewed as the best basis for organizing economic activity).  Is it too much to ask that economists – and the politicians, journalists, and think tank hacks they influence – develop and/or purvey equally realistic views?

(What’s Left of) Our Economy: Why America’s Trade Problems with China are Much Bigger than the Yuan

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broad dollar index, China, currency, currency float, currency manipulation, currency peg, devaluation, dollar, exchange rates, import prices, manufacturing, prices, Trade, yuan, {What's Left of) Our Economy

So much has been written about China’s devaluation of its currency last week that it’s hard to believe that all the major angles haven’t been covered. In fact, they’ve been generally neglected, and none more so than what matters most to the U.S. economy – how the yuan’s government-controlled movement affects the prices, and therefore the competitiveness, of Chinese imports that compete with American counterparts in the American market.

The big takeaway is that although of course China’s policy of artificially manipulating the yuan’s value versus the U.S. dollar has a lot to do with whether American customers buy Chinese- or U.S.-made goods – with big effects on American growth and employment levels – currency movements are far from the only determinant. As a result, U.S. policymakers need to keep in mind all the other measures China uses to gain trade advantages for reasons having nothing to do with free trade or free markets.

Let’s start to show why by looking at where the yuan stood on July, 2005. That month, a dollar bought about 8.28 yuan, an exchange rate that had stayed constant since the fall of 1998, thanks to Beijing’s determination to peg its currency to the dollar even though economic conditions signaled the yuan should have been getting much stronger. But on July 21, China began letting the yuan float versus the dollar to a limited extent – that is, allowing market forces to play a limited role in setting the exchange rate.

This tightly circumscribed “float” continued through July, 2008, when the weakening global economy persuaded China to reestablish the peg. During those three years, the yuan strengthened versus the dollar by more than 16 percent – which should have provided a major competitive boost for American goods and services competing against Chinese imports (as well as against Chinese rivals in China’s own market).

But U.S. Labor Department data on import prices shows that those from China rose by only 5.18 percent during that period. Clearly, something else was influencing Chinese cost levels – notably a wide range of state-provided subsidies. But largely because Washington ignored all these Chinese government props, those three years were a time of huge American manufacturing trade deficits with China, which translated into major production loss and even worse job destruction.

More evidence that Chinese price levels were huge outliers: During this period, the dollar weakened by 14.94 percent versus a statistical basket consisting of most other foreign currencies (the Federal Reserve’s “Broad” index). That’s slightly less than it weakened versus the yuan. Yet the prices of U.S manufacturing imports overall (a good point of comparison since manufactures dominate what America buys from China), rose by 15.90 percent – more than three times faster than the prices of China’s imports.

These divergent relationships have persisted through the various ups and downs experienced by the dollar, the yuan, and other foreign currencies since then. To some extent, that’s not terribly surprising, given all the other factors that affect the prices of traded goods, and given that prices never change in lockstep with exchange rates. But what is surprising – and disturbing – is how consistent China’s outlier behavior has remained over the decade since that first July, 2005 loosening.

During this period, until the Chinese devalued on August 11, the yuan became 25.10 percent stronger versus the dollar, while the dollar became 4.46 percent stronger than that Broad index of foreign currencies. Yet import prices from China rose by less than half the amount that overall U.S. manufacturing import prices (4.26 percent versus 11.50 percent). And not surprisingly, despite widespread claims that China is steadily losing competitiveness versus rivals both from the United States and from other developing countries, China’s merchandise trade surplus with the United States is still rising strongly – though its latest 9.80 percent year-to-date increase through June lags the growth of the world’s manufacturing trade surplus with America (15.85 percent).

Asking Washington to focus on that full range of artificial Chinese competitiveness supports seems pretty unrealistic given the bipartisan, decade-long failure to do anything about currency manipulation. Unfortunately, that’s also largely why a return to full health for the U.S. economy, fueled by investment and production rather than borrowing and spending, seems pretty unrealistic, too.

Following Up: Obama’s Dangerous Switch on Trade Policy

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bubbles, consumption, consumption-led growth, debt, exports, Financial Crisis, Following Up, free trade agreements, growth, imports, Jobs, Nike, Obama, Oregon, prices, recovery, supply chains, TPP, Trade, Trade Deficits, Trans-Pacific Partnership

Although he didn’t make the point in his speech yesterday on trade at Nike’s Oregon headquarters, President Obama’s choice of that venue to tout his proposed Pacific Rim trade deal symbolized a recent change in his approach to globalization generally that’s as stunning as it is economically perverse. A chief executive who entered office correctly identifying the main mistakes leading to the last, devastating financial crisis has become a president apparently determined to duplicate them.

At a March, 2009 press conference, just after his inauguration, Mr. Obama gave one of the plainest indications possible that he correctly understood both the fundamental problems besetting the economy and the essentials of the solution. He emphasized that his highest priority was ensuring “that we do not return to an economic cycle of bubble and bust in this country. We know that an economy built on reckless speculation, inflated home prices and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all.” Thus the nation needed to move “from an era of borrow-and-spend to one where we save and invest.”

The following year, Mr. Obama’s leading economic advisors made the trade policy connection explicitly. An export increase they identified that narrowed the nation’s broadest international deficits (but not its trade deficit) would help replace “growth…fueled by unsustainable borrowing [with] growth that is based on productive investments [which is] more stable.” So although the president’s stimulus program and other recovery measures can be faulted for ignoring these imperatives or poorly executing them, he and his staff unmistakably recognized them.

As many remarked this week, Nike is anything but a significant exporter – in fact, quite the opposite. Because it manufactures almost nothing in this country, it’s a major corporate engine of net imports – and therefore debt. But as The Wall Street Journal noted leading up to Mr. Obama’s trip, the company’s offshoring- and importing-friendly business model squares quite nicely with a new White House argument for initiatives like the Trans-Pacific Partnership (TPP). In the president’s words, “Over the course of 20, 25 years, what you saw was trade benefit the U.S. economy in the aggregate with cheaper prices, inflation low, the creation of a global supply chain that was good for U.S. companies.”

It’s true that Mr. Obama has continued to portray the TPP as an boon for American exports. But his claim that the last decades of U.S. trade flows have strengthened the economy on net by fostering production and job offshoring (what else could he have meant with his supply chain reference?), while enabling imports to prop up consumption, in effect endorses the borrow-and-spend economic strategy he had once correctly condemned. Worse, this statement signals that the president doesn’t even recognize the dangers created by his pursuit of trade agreements modeled on predecessors that have greatly worsened America’s trade deficits – and thus are dragging on currently subpar growth and job creation. It’s obviously supercharging the odds of a financial crisis rerun.

All of which makes pretty ironic Mr. Obama’s claim that critics of his trade policy are “wrong” on the facts. Once he was indeed right. Now he’s clearly forgotten.

(What’s Left of) Our Economy: Why Claims of Record U.S. Manufacturing Output are Bogus

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Bureau of Labor Statistics, deflation, Federal Reserve, high tech goods, inflation, manufacturing, prices, production, value added, {What's Left of) Our Economy

I’ve been so preoccupied lately with reporting on the Federal Reserve’s manufacturing production figures each month that I’ve forgotten to point out a big data problem that they’ve been suffering for a long time, and that still distort output levels – to the upside.

The problem: the Fed figures, which are inflation-adjusted, overstate output in the information technology hardware (computers, semiconductors, telecoms equipment, and the like). And these high tech products for many years have accounted for all the real growth registered by U.S. manufacturing.

Just one figure is needed to show how important they are. Since the December, 2007 beginning of the last recession (which was a humdinger for manufacturing), overall after-inflation manufacturing production is up by 3.43 percent. But if you take away the high tech hardware sector, it’s down by 1.34 percent. And this means that all those manufacturing cheerleaders who keep claiming that the sector’s output has never been higher are peddling fakeonomics.

What exactly is the problem with the infotech hardware data? It has to do with strong deflationary trends in these products. When prices are rising (inflation), and we want to know what output levels are independent of these price increases (which according to most economists provides the most accurate picture of growth), the adjustment process brings the output level down. That is, the inflation-adjusted output level is lower than the pre-inflation level. But when prices are falling (deflation), and we want to strip out price effects, the adjustment process brings the output level up. That is, the deflation-adjusted output level is higher than the pre-deflation level.

Now it starts getting tricky, but if you want to understand the real state of domestic U.S. manufacturing, ya gotta bear down! If inflation is actually higher than the official estimates, then the actual inflation (price)-adjusted output levels published by official sources are going to be too high. That’s because by definition there’s inflation that isn’t getting recognized and plugged into the inflation-adjusted data. But if deflation is actually stronger than the official estimates, then the same price-adjusted output levels are going to be too low.

And here it gets tricker still! Some very careful studies claim that prices for high tech hardware products are falling faster than the official score-keepers can record them. But doesn’t that then mean that the price-adjusted, real U.S. output figures that are published for these sectors are too low? No. And the reason has to do with something we all know about these products but that we all seem to forget when judging manufacturing output: They’re largely made from parts and components produced overseas. That is, they’re made up of lots of what economists call “imported inputs.”

And it’s the prices of imported inputs – mainly from East Asia, which produces so many manufactures to the point of glut – that have been falling fastest of all. And if the prices of those foreign-made parts and components are falling especially fast, then it means that their price-adjusted share of the final “Made in America” high tech products is larger than the official data recognize. And therefore the price-adjusted share of the American-made content of these products – which is what the Fed figures measure – must be lower. Therefore, since the infotech products have monopolized recent manufacturing growth – and then some – overall American manufacturing output is considerably lower than the officially reported levels.

To get incredibly (but importantly) technical about the issue, the exact data affected by these pricing problems are not the production data published by the Federal Reserve, but a data category that’s called “real value-added.” I used the Fed figures because the real value-added numbers put out by the federal government aren’t detailed enough to show what share is accounted for by high tech goods.

At the same time, the feds do recognize the problem, as indicated by a statement here from a senior official from the Bureau of Labor Statistics (which tracks price trends for the U.S. government). Don’t, however, expect a more accurate picture of manufacturing any time soon, for Congress has so far refused to fund the data gathering effort requested by BLS. Because its estimated cost is all of $11 million.

FYI, if you’d like to read more from the economists who have done the pioneering work on this issue, click on this link.  It takes you to the papers written for a recent conference on the subject. I attended and it was absolutely terrific.

Following Up: How Falling Energy Prices Could Undercut America’s Productive Economy

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cheap oil, energy, Following Up, industrial production, manufacturing, prices, recovery, Wall Street Examiner

Here’s some more data reminding that much cheaper gasoline and overall energy prices could well be a decidedly mixed blessing for the U.S. economy.

As I pointed out last Friday, the recent energy price crash could well boost economic growth, at least over the short term, if Americans take the money saved on filling up at the gas station and heating their homes and spend it on goods and services that have originated in the United States. Given how imports dominate the U.S. consumer goods market, however, that prospect seems pretty far-fetched.

Moreover, the slightly-less-recent energy boom has spearheaded the rebound of the nation’s productive economy. As I also pointed out, relying more on production rather than consumption to generate growth is critical to achieving President Obama’s worthy goal of creating “an economy that’s built to last,” in which prosperity rests on a firmer foundation.

You can see how crucial energy output has been to the productive economy’s revival by looking at the Federal Reserve’s industrial production index, which gauges inflation-adjusted output for energy, manufacturing, and mining. Tables 1 and 2 of its historical data section show that, from 2007 (the year the Great Recession began) through 2011, energy increased from 24.52 percent of the total index to 27.70 percent. Manufacturing decreased from 73.88 percent to 71.31 percent.

These percentages have yet to be updated, but there’s no doubt that, through the latest (November, 2014) figures, this trend has continued. As made clear in the raw output data, since December, 2011, energy production after inflation has risen by 14.19 percent – faster than the 12.16 percent real output growth registered by manufacturing.

The lesson here isn’t that the American energy revolution shouldn’t have been encouraged, or that it’s a flash in the pan. Rather, it’s that the nation’s prosperity requires the broadest possible world-class productive base. Unfortunately, the near future is likeliest to show that that goal hasn’t been achieved yet.

Incidentally, similar data has been analyzed for quite a while by Lee Adler on his excellent Wall Street Examiner site, too. Click on this link for an example.

(What’s Left of) Our Economy: About Cheap Oil as a Christmas Present

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consumers, GDP, growth, holiday shopping, imports, oil, prices, production, spending, {What's Left of) Our Economy

The economics, business, and media worlds are gushing (couldn’t resist the pun!) with predictions that dramatic recent cuts in oil prices will give American consumers and the economy as a whole a big Christmas present. The reasoning: With lots of money freed up to spend on other goods, the nation will be handed the equivalent of a big tax cut, and the resulting higher consumption will boost the gross domestic product (GDP).

A Scrooge-like “Bah, humbug!” is too strong a reaction to these claims. But a quick review of how spending affects growth, and a look at the actual numbers, show that lots of skepticism is in order.

The notion that spending creates output (and therefore growth) seems as obvious as it is appealing – especially in the consumption-heavy U.S. economy. But it’s woefully incomplete. What’s important for Americans is that what creates output (and therefore jobs) in the United States is spending on goods and services originating in the United States. Spending on imports creates output, too – but in the country they come from, not in America.

(Some analysts claim that imports create U.S. output and employment, too, because they generate activity in transportation, warehousing, wholesaling, and retailing. But that’s a bogus argument because domestically produced goods and services generate this activity, too – and it comes on top of the production-generated output that imports can’t provide.)

So it should start getting obvious why the oil price bonanza’s effects are likely to be a significant disappointment. Let’s take the impact on holiday shopping. Although I haven’t looked at the data in recent years, I have found lots of evidence supporting what most of us know intuitively – that the overwhelming share of the Christmas and Hannukah presents we buy are made overseas. While researching this article for The Christian Science Monitor, I discovered that in 2009, between 95 percent and 99 percent of all American purchases of such popular gift items as most games and toys, gloves and mittens, athletic wear, and women’s and girls’ coats were imported. Import shares were somewhat lower, but still dominant, for products like men’s and boy’s coats, neckties and scarves, and power-driven hand-tools.

Those calculations couldn’t be performed for 2011, when the article was published, but data was available showing that imports as such for Christmas goods categories had risen 5.8 percent that year – considerably faster than overall economic growth. Similarly, I don’t yet have the Christmas goods-specific numbers for this year so far, but all consumer goods imports (and this category excludes food) are up 3.94 percent this year.

That’s actually slightly slower than the 4.08 percent gross domestic product growth registered so far this year (all these figures are pre-inflation). But it’s still inconceivable that American-made gift items have boosted their market share much – even with the kind of manufacturing renaissance that manifestly has not taken place. Bottom line: An oil-produced windfall for holiday shoppers as such won’t redound much to America’s benefit.

But there’s one more short-term complication. Lots of the petroleum used in the United States is imported, too – 33 percent last year, according to the U.S. Energy Information Administration. So far this year, oil imports are down 8.36 percent, which is great from both an economic growth and a national security standpoint. This development, too, however, muddies the economy bonanza story. For it means that, whereas in years past, fewer consumer dollars spent on imported oil could have mainly translated into more dollars spent on other imports (Christmas gifts), now fewer dollars spent on oil will mean fewer dollars spent on something that is increasingly Made in America. So in this sense, the oil price windfall could in theory actually subtract from the economy.

Not that the effects of lower oil prices on the American economy will be confined to the trade-off with other consumer spending, even beyond the holidays. Oil powers much of the country’s industry and provides vast quantities of chemical feedstocks, too.  The energy revolution is also responsible for a growing share of production growth itself (which means that workers in the energy complex itself may take a job or wage hit, too). At the same time, simply by reducing imports and therefore the nation’s trade deficit, cheaper oil has already juiced growth and should continue curbing the shortfall.  Moreover, the price of oil, its inevitable fluctuations, and the equally inevitable lag in their impact, mean that the story will play out with plenty of ups and downs over time.

It’s not even clear that consumers will spend all or even most of their oil windfall, as opposed to saving it – over any timeframe. What does seem clear is that believing in oil to supercharge the holiday shopping season is about as reasonable as believing in Santa Claus.