(What’s Left of) Our Economy: Will Americans Need “That Seventies Show” to Tame Inflation?

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consumer price index, consumers, CPI, demand, economics, elasticity, energy, Federal Reserve, food, inflation, interest rates, Jerome Powell, monetary policy, Paul A. Volcker, recession, retail sales, supply, {What's Left of) Our Economy

I haven’t commented much in detail on dccisions by the Federal Reserve to fight inflation, mainly because they’re so thooughly covered in the press. But yesterday’s announcement by the central bank that it would raise the short-term interest rate it controls by an amount not matched in nearly thirty years could loom especially large over the nation’s economic future, and some of its ramifications deserve more attention than they’ve received.

First, as widely noted, the Fed could be tightening monetary policy – in an effort to slow and eventually reverse price increases by slowing economic activity – even though a recession sooner rather than later looks likely. In fact, the timing of yesterday’s interest rate hike and seemingly solid assurances that increases will continue for the foreseeable future may be even stranger, because the recession may already be here.

Some important signs:  Yesterday also saw the release of a Census Bureau report indicating that U.S. retail sales dipped on a monthly basis in May.  If this result holds (and we’ll find out on July 15), that would mark the first such decrease since December, and the news would be ominous given the dominant role played by personal spending in the American economy. 

In addition, on top of the economy’s shrinkage during the first quarter of this year, a well regarded source of forecasts on the path of the gross domestic product (GDP – economist’s main measure of the economy’s size and how it changes) is predicting no growth whatever in the second quarter. That result would enable the nation to skirt a recession according to one popular definition of the term holding that such slumps only occur when GDP adjusted for inflation falls for two consecutive quarters.

At the same time, a flat-line real GDP for the second quarter would mean that, on a cumulative basis, the economy has contracted over a two-quarter stretch. That sounds like a pretty good approximation of a recession to me. In fact, this cumulative shrinkage could still take place even if after-inflation GDP eaks out a small gain between April and June. (We’ll get the first official read on the subject on July 28.)

And maybe more important, when it comes to the lives of most Americans, what’s the difference between a recession (especially if it’s modest) and very slow growth? Indeed, for the record, the Fed itself yesterday lowered its own projection for real U.S. growth for this entire year from 2.8 percent to 1.7 percent.

Second, examining the Fed’s inflation-fighting record during the late-1970s – which it’s also been widely noted bears some strong resemblances to the present – raises immense questions regarding the central bank’s chances of making major inflation progress without triggering a recession that would be anything but modest.

In case you’re not old enough to remember that historical episode, inflation was actually higher during the late-1970s, and also stemmed partly a combination of oil price shocks generated by overseas events plus a development that’s too often ignored nowadays – a substantial deterioration in the nation’s international financial position. Though this current account deficit back then was tiny by today’s standards, it had just become a noteworthy shortfall as a share of GDP after years of small surplus or balance, and was broadly interpreted as a sign that Americans’s spending was spinning out of control (You’ll find a great account of this period here.)

As current Fed Chair Jerome Powell is fond of recalling, that towering late-1970s inflation was broken mainly by the steadfastness of that period’s Chair, Paul A. Volcker – who raised interest rates to levels that were as astronomical as they were wholly unprecedented. But although Volcker took the helm of the Fed when inflation (as measured by the headline Consumer Price Index, or CPI) wasn’t that much higher than today’s rates, it took a near-doubling of these rates from levels that also were much higher than today’s to bring price increases down to acceptable levels, and even this effort took three and a half years and dragged the economy into not just one, but two recessions – and severe ones at that. (My sources for the interest rate infomation is here. For the inflation and growth data, I’ve relied on the official government data tables I always use.)

Specifically, on Volcker’s first day as Fed Chair (in August, 1979), the federal funds rate it controls stood at 11 percent – versus the 1.75 percent ceiling to which the Powell Fed just approved. The annual inflation rate was 11.84 percent – versus the 8.52 percent recorded last month. And the economy was growing by three percent annually – versus the current rate of probably one percent at best.

Volcker engineered rate hikes to the 20 percent neighborhood – three times! (as depicted in the chart below) – and recessions that produced real GDP nosedives of eight and 6.1 percent (in the second quarter of 1980 and the first quarter of 1982), but the CPI didn’t retreat back into the single digits until May, 1981, and it took until the end of 1982 for a read of 3.8 percent to be recorded.

 

That history doesn’t seem to warrant much optimism that the Powell Fed can cut headline inflation to 5.2 percent by year end while increasing rates only to 3.4 percent (as it’s now expecting).

Third, at his press conference following the rate hike announcement, Powell echoed the conventional wisdom: that although the Fed can cut excessive levels of economic demand enough to tame inflation, it can’t address inflation by affecting economy’s ability to create enough supply to meet that demand, and thereby restore a satisfactory inflationary balance between the two.

But supply and demand are actuallly very closely connected. As I’ve discussed when posting about possible tariff cuts on imports from China, when consumer demand is strong enough, companies can pass along increases in their prices because their customers literally are willing to pay. When consumers are cautious, however, such price hikes become much more difficult.

To be sure, these rules don’t always hold. The big exceptions are products on which consumers will cut spending only as a last resort – like food and energy. They’re (rightly) seen as so important that demand for them is called “inelastic” by economists.

Since food and energy prices have been so central to today’s inflation, it’s easy to see why the conventional wisdom on the Fed and the economy’s supply side is generally accepted. But it’s also true that if consumers become stressed enough (for example, by interest rate increases high enough to slash growth, employment, and income levels), they’ll cut their overall spending even if they keep paying higher prices for those staples. Further, they can in principle reduce their purchases on non-staples enough to bring demand down substantially, and with it, inflationary pressures.

No one could reasonably relish this kind of outcome. But if the 1970s experience teaches any lessons for today, it’s that serious hardship for much of the population can’t be avoided if the inflation war is to be won. In my view, Powell has rightly stated that this victory is essential for America’s long-term prosperity. And President Biden deserves credit for endorsing such priorities. But will the Fed Chair actually take the Volcker-like steps needed to beat down inflation? Will a U.S. President still declaring he wants to be reelected remain a fan if he does? Because I can’t yet bring myself to believe either proposition, I can’t yet bring myself to be optimistic that inflation will drop significantly any time soon.

Following Up: Back on National Radio Tonight & Podcast On-Line of Yesterday’s Appearance

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CBS Eye on the World with John Batchelor, China, Federal Reserve, Following Up, inflation, manufacturing, Market Wrap with Moe Ansari, monetary policy, recession, tariffs, Trade

I’m pleased to announce that the podcast is now on-line of my interview late last night on the nationally syndicated “Market Wrap with Moe Ansari.” Click here to and scroll down a bit till you see my name for a timely discussion about the Federal Reserve’s latest inflation-fighting moves, the odds that its tighter monetary policies will trigger a U.S. recession, and where President Biden’s trade policies toward China and the rest of the world may be heading.

In addition, as mentioned yesterday, I’m scheduled to return to the nationally syndicated “CBS Eye on the World with John Batchelor” to update the U.S. China policy story. The exact time for the segment hasn’t yet been set, but the show is broadcast weeknights between 9 PM and 1 AM EST, and is always worth tuning in.

If you can’t listen live on-line at websites like this one, as always, I’ll post a link to the podcast as soon as one’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments

Following Up: Podcast Now On-Line of TNT Radio Interview

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abortion, border security, Capitol riot, China, Following Up, Hvorje Moric, Immigration, inflation, January 6 committee, jihadists, Middle East, national security, partisanship, politics, recession, semiconductors, stagflation, Taiwan, terrorism, TNT Radio, tribalism, `

I’m pleased to announce that the podcast is now on-line of my interview last night on “The Hrjove Moric Show” on the internet radio network TNT Radio. Click here for a discussion on headline issues that ranged from the Ukraine war to the U.S. economy’s prospects to China’s future to U.S. immigation and anti-terrorism policies to the January 6^th Committee to growing tribalism in American politics.

And keep checking in with RealityChek for news of upcoming media appearances and other developments

(What’s Left of) Our Economy: America’s Now Definitely Inflation-Nation

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baseline effect, Biden administration, consumer price index, core inflation, CPI, energy, Federal Reserve, food, inflation, prices, recession, stimulus, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

Today’s official U.S. report on consumer inflation was so bad that even what ‘s being pitched (for example, to a limited extent by President Biden) as kind of goods news isn’t anything close. As has so often been the case in the last year, one big key is looking at the so-called baseline effect. But the new (May) results for the Consumer Price Index (CPI) also highlight a reality that I and many others have been noting – the less-than-meets-the-eye difference between the headline and “core” CPI numbers.

The bad news about inflation is clear enough from the rise in the headline number – which tracks price increases throughout the entire economy. The 0.97 percent monthly increase wasn’t as scary as the 1.24 percent jump between February and March t(he highest since July, 1980’s 1.33 percent), but it was still the biggest since June, 1982’s 1.15 percent price surge.

Similarly, on an annual basis, May’s 8.52 percent overall CPI increase was lower than March’s 8.56 percent. But for all intents and purposes, both months’ results were the worst since December, 1981’s 8.91 percent disaster.

The (modest) ray of light that supposedly shone from the new inflation report came in the core figure – which strips out food and energy prices because they’re supposedly volatile for reasons having nothing to do with the economy’s alleged fundamental vulnerability to inflation.

To be sure, the monthly numbers shouldn’t have been the source of any encouragement. The May 0.63 percent sequential increase in core inflation was the hottest number since last June’s 0.80 percent, and represented the third straight month of acceleration.

Instead, glass-half-full types were pointing to the latest annual core increase. At 6.01 percent, May’s was the lowest since December’s 5.48 percent, and represented the third straight month of deceleration.

But here’s where the glass-half-empty types gain the upper hand. First, as I and – again – many others have observed, although food and energy prices do often move (down as well as up) for reasons largely unrelated to how overheated or not the economy may be. But energy prices in particular profoundly affect the cost of everything Americans make, sell, and buy that needs to be transported. And that means pretty much everything, including services, which typically rely on goods to get to customers. So there’s often an incontrovertible link between headline and core inflation.

Second, both energy and food prices are also often closely related to the economy’s overall levels of demand. And nowadays, they’re bound to keep rising as long as producers can pass them on to their customers. This in turn is the case because the latter can afford to pay more thanks to the unprecedented stimulus funds they received even after the economy was recovering strongly from the 2020 CCP Virus-induced crash,.

Third, there’s that baseline effect. Especially if its monthly rate is slowing, annual core inflation in the six percent neighborhood could be reasonably applauded if the previous year’s rate (the baseline) had been unusually low, or even negative (as it was for most of 2020). But the baseline figure for the latest May annual core inflation rate was May, 2021’s 3.81 percent (according to the latest government figures). That’s nearly twice the rate considered desirable by the nation’s chief official designated inflation-fighter, the Federal Reserve.

None of the ways to reduce this inflation rate way down reasonably quickly is a mystery to anyone influencing U.S. economic policies. Raising interest rates can get rid of a lot of the bloated consumer demand that’s contributed so much to recent price rises. For those emphasizing the Ukraine war’s major role in boosting food and energy prices, there’s the option of pressing for an end to the war sooner rather than later – even if it produces a morally ugly compromise.

But dramatically reducing consumer and business spending power enough to matter inflation-wise could bring on a recession – which the Federal Reserve still apparently believes can be avoided, at least judging from the modest monetary tightening it’s approved so far. And the Biden administration seems wed to letting the shots on ending the conflict to be called by Ukraine — which is so far rejecting the idea of making territorial or any other kinds of significant concessions.

So unless these situations change, the most reasonable conclusion is that inflation will keep raging until soaring prices finally tap consumers out by themselves. As an old adage goes, the likeliest cure for high prices may simply be high prices.

Making News: Podcast Now On-Line of Ohio Radio Interview on China Policy & the U.S. Economy — & More!

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Akron, Biden, China, Gordon G. Chang, IndustryToday.com, inflation, Making News, manufacturing, manufacturing jobs, Ohio, Ray Horner, recession, tariffs, The Hill, WAKR-AM

I’m pleased to announce that the podcast of my latest radio appearance is now on-line. Click here to listen to a wide-ranging conversation last Friday between me and WAKR-AM (Akron, Ohio)’s Ray Horner.  The subjects: President Biden’s suggestion that he might unilaterally lift some of the Trump administration’s tariffs on imports from China in order to fight inflation; China’s recent devaluation of its currency; and the chances that the U.S. economy will tip into recession.

In addition, it was great to be quoted on Mr. Biden’s China trade policy in Gordon G. Chang’s May 11 op-ed for The Hill. Here’s the link.

Finally, IndustryToday.com reprinted (with permission!) two recent posts of mine – on why cutting the China tariffs is such a lousy idea (on May 10) , and on the latest (strong) official U.S. manufacturing jobs figures (on May 9).

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(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: The Baseline Effect’s Gone and U.S. Inflation is Settling In

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baseline effect, consumer price index, consumers, cost of living, CPI, Federal Reserve, inflation, PPI, Producer Price Index, recession, {What's Left of) Our Economy

Sorry to be the bearer of bad news on the U.S. inflation front, especially considering even the modest cheers (at least in early Wall Street trading) that greeted this morning’s official data on rising prices. But I see the new figures confirming that inflation has entered a worrisome new phase, and mainly because they show that annual living costs are no longer soaring largely because they increased so feebly the year before. Instead, that “baseline effect” is unmistakably gone, and inflation has acquired its own momentum.

The yearly inflation figures by month are the strongest evidence. As noted last month, the baseline effect was most prominent from March through July of last year. During that stretch, the annual headline growth in the overall (or “headline”) Consumer Price Index (CPI) sped up from 2.64 percent to 5.28 percent. But this acceleration owed much to the fast (but choppy) economic recovery from the deep CCP Virus-induced recession of mid-2020, when the annual inflation rate actually fell fom 1.51 percent to 1.05 percent. That’s considerably below the two percent inflation target set by the Federal Reserve, the U.S. government agency with the greatest responsibility for keeping prices stable.

Moreover, from September, 2021 at least through January, 2022, the baseline effect made a major comeback. During those months, the annual inflation rates increased from 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent – still below the Fed target.

As I also wrote in March, the February CPI report contained signs that the baseline effect was fading, and today’s April numbers leave no doubt that it’s gone. Headline CPI that month worsened on year much faster than the comparable January rate, and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 annual increase in prices that was significantly higher than the Fed target.

It’s true that April’s 8.22 annual overall inflation rate was a little slower than that March figure of 8.56 percent. But the March cost surge came off a 2.66 percent annual increase for March, 2021. The April result is coming off an April, 2020-2021 jump of 4.15 percent. That was more than twice the Fed target.

In other words, inflation was already hitting disturbing levels last year, and now it’s advancing nearly twice as fast.

Much the same story emerges from the so-called core inflation rate, which strips out food and energy prices supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying vulnerability to high inflation. Since energy prices in particular affect the cost of everything whose production requires energy (i.e., everything) the distinction tends to become pretty artificial after a while. But even playing along with this claim reveals grounds for concern.

As with the headline rate, April’s annual core CPI inflation of 6.13 percent was a moderation from March’s 6.44 percent. But the March result was coming off a March, 2020-2021 period when core inflation rose by 1.66 percent – again, well below the Fed’s two percent target. April’s number followed annual core inflation for the previous April of 2.97 percent – again, much higher than the Fed target.

Meanwhile, the month-to-month CPI data released today don’t bolster the case for inflation optimism emphatically, either. Glass-half-full types will correctly point out that the 0.33 percent sequential rise in the headline April CPI was the lowest since last August, and shrank dramatically from March’s 1.24 percent.

But in April, core CPI advanced on-month by 0.57 percent, a noteworthy increase from March’s 0.32 percent. And the recent rise in gasoline prices will surely push the May headline CPI back up.

Tomorrow, Washington will provide another clue on inflation’s future – the report for the Producer Price Index (PPI) for April.  Unlike the CPI, which measures the prices of what businesses sell to consumers, the PPI tracks what businesses themselves pay for the goods and services they need in order to turn out their whatever they sell to consumers.  Think of it as gauging wholesale inflation versus measuring retail inflation.

The March PPI hit a new record high, and since in a U.S. economy like this one, where consumer demand remains strong, businesses generally can pass on rising costs to consumers, this result made today’s hot CPI almost inevitable.  Unless tomorrow’s April PPI comes way down (which may happen soon since growth looks to be decelerating markedly — ironically because some indications of consumer inflation fatigue are appearing), the CPI will stay far too strong in May  And that news would surely boost the odds that the Fed sees no choice but to tame inflation by crippling demand further — possibly enough to induce a recession.     

(What’s Left of) Our Economy: More Evidence that Pay Really is Worsening U.S. Inflation

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ECI, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor productivity, multifactor productivity, productivity, recession, wages, workers, {What's Left of) Our Economy

Back in February, I wrote that although U.S. workers’ hourly wages were rising more slowly than the standard measure of consumer prices (the Consumer Price Index, or CPI), and therefore on that basis couldn’t be blamed for the recent, historically high inflation, there was one reason to be worried about the last few years’ healthy pay hikes: Such pay was rising faster than worker productivity.

I explained that this trend inevitably fueled inflation because “when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.”

And more important than my views on the subject, these concerns have been expressed by Jerome Powell, Chairman of the Federal Reserve, the U.S. central bank that has the federal government’s main inflation-fighting responsibilities.

So it’s discouraging to report that new government data on both pay and productivity have come out in the last two weeks, and they make clear that the pay-productivity gap has just been widening faster than ever.

The pay data come from the Labor Department’s latest Employment Cost Index (ECI), which tracks not only hourly wages but salaries and benefits, while the productivity figures come from Labor’s new release on labor productivity, which measures how much output a single worker turns out in a single hour. And conveniently, both releases take the story through the first quarter of this year.

The results? From the fourth quarter of last year through this year’s first quarter, total compensation for all private sector workers, the ECI increased by 1.42 percent, while labor productivity for non-farm businesses (the category most closely followed, and basically identical with the private sector) fell by 1.93 percent. That last number was labor productivity’s worst such performance since the third quarter of 1947. (As RealityChek regulars know, I focus on private sector workers because their pay levels largely reflect market forces, not politicians’ decisions, and consequently reveal more about the labor picture’s fundamentals.)  

The year-on-year statistics aren’t much better – if at all. Between the first quarter of last year and the first quarter of this year, the ECI for the private sector grew by 4.75 percent, but labor productivity dipped by 0.62 percent.

And since the U.S. economy began recovering from the first wave of the CCP Virus pandemic, during the third quarter of 2020, the private sector ECI is up by 6.61 percent, while labor productivity is down by 0.78 percent.

As also known by RealityChek readers, labor productivity isn’t the economy’s only measure of efficiency. Multifactor productivity is a broader, and therefore presumably more useful gauge. It’s not as easy to work with because its results only come out annually, and the latest only take the story up to the end of last year.

The picture is decidedly more encouraging – at least recently. From 2020-2021, multifactor productivity for non-farm businesses improved by 3.17 percent. But it still wasn’t good relatively speaking, since from the fourth quarter of 2020 through the fourth quarter of 2021, the private sector ECI increased by 4.38 percent.

Worse, from 2001 (when the Labor Department began the ECI) to last year, pay b that gauge was up 74 percent while non-farm business multifactor productivity had advanced by a mere 16.46 percent.  Therefore, clearly the recent pay and productivity numbers don’t simply stem from pandemic-related distortions of the economy. 

To repeat important points from last February’s post, the productivity lag doesn’t mean that U.S. workers overall don’t deserve nice-sized raises and better benefits, and it certainly doesn’t mean that they’re solely or largely to blame even for poor labor productivity growth. After all, managers are paid as handsomely as they are fundamentally to figure out how to make their employees more productive. Also, productivity is a barometer of economic performance that’s unusually difficult to determine precisely.

But the new figures do strengthen the case that labor costs bear significant responsibility for boosting inflation, and that a major fear surrounding overheated price increases – that inflation acquires powerful momentum as surging prices lead to big wage hike demands and vice versa, and create a spiralling effect that’s excuciatingly difficult to end without the Fed throwing the economy into recession. Just as depressingly, the new pay and productivity figures also strengthen the case that, unless the economy becomes a lot more productive very quickly, the sooner this harsh medicine is administered, the better for everyone in the long run.

(What’s Left of) Our Economy: U.S. Manufacturing Job Creation Gains More Momentum

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aircraft, aircraft engines, aircraft parts, automotive, CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, furniture, inflation, Jobs, machinery, manufacturing, miscellaneous durable goods, non-farm payrolls, personal protective equipment, pharmaceuticals, plastics and rubber products, PPE, recession, semiconductor shortage, semiconductors, supply chains, transportation equipment, Ukraine-Russia war, vaccines, {What's Left of) Our Economy

Today’s official April U.S. jobs report featured such a strong showing by U.S.-based manufacturers that, by one measure, they reclaimed title of America’s best job-creating sector during the CCP Virus era (and its aftermath?).

Domestic industry boosted its payrolls sequentially last month by 55,000 workers, its best such performance since July’s 62,000 gain. In addition, revisions were excellent. March’s initially reported 38,000 increase is now pegged at 43,000, and February’s upgraded 38,000 rise is now judged to have been 50,000.

As a result, manufacturing’s share of U.S. non-farm employment (the federal government’s definition of the American jobs universe), has improved from 8.38 percent in February, 2020 – the last full data month before the virus began roiling the national economy – to 8.41 percent as of last month.

And during this period, manufacturing’s share of America’s private sector jobs is up from 9.83 percent to 9.86 percent.

Domestic industry has recovered a slightly smaller share of the jobs it lost during the sharp pandemic-induced downturn of spring, 2020 (95.89 percent) than the private sector (97.62 percent). But it also shed fewer jobs proportionately than the rest of the private sector during that terrible March and April. (For the record, because of a drag created by public sector hiring, the share of all non-farm jobs regaine d now stands at 94.59 percent.

In all, U.S.-based manufacturing employment is now down a mere 0.44 percent from immediate pre-pandemic-y February, 2020.

April’s manufacturing jobs winners were broad-based, but the biggest among the major sectors tracked by the Labor Department were:

>transportation equipment, whose 13,700 employment improvement was its best such performance since last October’s 28,200. (Last month I erroneously reported that the sector’s best recent monthly performance was last August’s 19,000.) Unfortunately, March’s initially reported employment advance of 10,800 was revised down to 8,800, and February’s previously estimated 19,800 jobs plunge (the worst monthly performance since April, 2021’s automotive shutdown-produced nosedive of 48,100) is now judged to be 19,900. Bottom line: This sector’s employment levels are still 3.38 percent below those of that last full pre-pandemic data month of February, 2020;

>machinery, where 7,400 jobs were added on month – an especially encouraging result since its products are so widely used throughout the rest of manufacturing and the entire economy. Even better, March’s initially reported 1,700 employment increase was revised all the way up to 6,700, and February’s perfomance – which had been revised down from an 8,300 rise to one of 6,600, recovered a bit to 6,700. As a result, machinery employment is off just 1.55 percent from its February, 2020 levels;

>automotive, which boosted headcounts by 6,400 – its best monthly gain since last October’s 34,200 plant reopening-driven burst. But March’s initially reported 6,400 jobs rise was downgraded to 3,600, and even though February’s major job losses were revised for the better again, they’re still pegged at 14,000 – the worst since the 49,100 employees shed during the shutdowns last April. These gyrations have left the combined vehicles and parts workforce 0.78 pecent smaller than in February, 2020;

>plastics and rubber products, which upped employmment by 5,700 sequentially in April, the best such performance since last August’s 7,800. Job-wise, these sectors are now 3.38 percent larger than in February, 2020.

The only significant jobs losers in April were furniture and related products and miscellaneous durable goods. The former lost 1,100 positions in April, but employment has still inched up by 0.57 percent since pre-pandemic-y February, 2020. The latter – which includes much of the protective gear needed to fight and contain the CCP Virus – reduced employment by 1,400 sequentially last month. But this decrease was the first since last August’s 600 loss, and followed a strong 3,100 jobs gain in March. This catch-all category’s employment is now 1.54 percent higher than in February, 2020.

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 March, their employment picture showed improvement overall.

The semiconductor and related devices sector is still struggling to meet demand, but hiring continued its slow-but-steady pandemic-era increase in March with job gains of 700. February’s initially reported 100 employment loss now stands at a 100 employment gain, and January’s numbers stayed at plus-300 – the best monthly performance since last October’s 1,000. This sector now employs 1.34 percent more workers than in February, 2020 – impressive since during the sharp spring, 2020 economic downturn, it kept adding jobs.

The latest employment results were mixed for surgical appliances and supplies makers – a category within the aforementioned miscellaneous durable goods sector, and one in which personal protective equipment and similar medical goods abound. In March, the industry added 1,100 workers, but revisions completely wiped out February’s initially reported 800 jobs gain. The January hiring increase stayed at a downwardly revised 1,300. Even so, since just beforet the pandemic’s arrival in force in the United States, these companies have increased payrolls by 4.07 percent.

The very big pharmaceuticals and medicines industry continued to be a moderate employment winner in March. It hired an additional 900 workers on month, and though its February improvement was downgraded (from 1,300 to 1,000), the number was solid. Moreover, January’s hugely upgraded 1,100 employment rise stayed intact. Since February, 2020, this sector’s headcount is up fully 9.23 percent.

March jobs gains were more subdued in the medicines subsector containing vaccines, but they still totaled 400. February’s initially reported employment increase of 800 is estimated at just 500 now, and January’s identical increase stayed the same. But over time, this industry’s jobs growth has been impressive – 23.15 percent since the last pre-pandemic data month of February, 2020.

Good job gains continued in March in the aviation cluster as well. Aircraft manufacturers (including still-troubled industry giant Boeing) rose by 1,100 sequentially – the best monthly gain since last June’s 4,400. February’s increase was upgraded from 500 to 600, but January’s sequential job loss stayed unrevised at 800. This net increase brought aircraft employment to within 11.08 percent of its February, 2020 level.

The aircraft engines and engine parts industry followed February’s unrevised 900 hiring increase by adding 500 more workers in March. January’s results, however, stayed at a slightly downgraded 900 loss. And these companies’ still employ 12.65 percent fewer workers than in February, 2020.

The deep jobs depression in the non-engine aircraft parts and equipment sector remained deep in March, but a little less so. Jobs gains for the month totaled 700, February’s initially reported 200 increase was unrevised, and January’s way upwardly revised job rise was downgraded only from 1,500 to 1,400. But since just before the pandemic, the non-engine aircraft parts and equipment sector has still shrunk by 15.74 percent.

Having recently navigated its way skillfully through a once-in-a-century pandemic, a virtual shutdown of the entire U.S. economy, continuing supply chain disruption, multi-decade high inflation, a major war in Europe (so far), former export champ Boeing’s woes, and sluggish-at-best growth in much of the foreign markets it relies on heavily, it’s tempting to say that U.S-based manufacturing will have finally met its match if the Federal Reserve’s inflation-fighting campaign dramatically slows growth domestically — or worse.  But since the pandemic began, the next time the manufacturing pessimists are right will be the first.       

 

Following Up: Podcasts of National and New York City Radio Interviews Now On-Line

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American politics, Bernie Sanders, Biden, Biden administration, China, decoupling, Democrats, Donald Trump, election 2022, election 2024, Following Up, Frank Morano, inflation, Market Wrap with Moe Ansari, midterms 2022, Moe Ansari, prices, recession, Republicans, Ron DeSantis, tariffs, The Other Side of Midnight, trade policy, trade war, Ukraine, Ukraine-Russia war

I’m pleased to announce that the podcasts are now on-line of my two radio interviews yesterday (and one technically this morning) on a wide range of foreign policy, economic, and U.S. political topics.

Click here to listen to my appearance on Moe Ansari’s nationally syndicated “Market Wrap” show, where we did a deep dive into the questions of whether or not President Biden’s thinking seriously of cutting some of the Trump tariffs on imports from China, and the likelihood and wisdom of America pulling off any kind of significant divorce from the Chinese economy. The segment starts at about the 21:40 mark.

At this link, you can access my conversation with host Frank Morano on his late-night WABC-AM (New York City) show “The Other Side of Midnight.” It covered the impact of tariffs on consumer prices, the outlook for America’s inflation-ridden economy, the chances that the Ukraine war goes nuclear, and the odds of (figurative) earthquakes down the road for American presidential politics – for starters!

In addition, click here for the second half of my interview on the U.S. government-run Voice of America – which zeroes in on Ukraine war-related global economic disruptions. (Yes, the segment was pre-my latest haircut!)

And keep checking in with RealityChek for news of upcoming media appearances and other developments.