(What’s Left of) Our Economy: More Evidence that U.S. Growth is Healthier Under Trump

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Barack Obama, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, real growth, recovery, toxic combination, Trump, {What's Left of) Our Economy

The current U.S. economic recovery has lasted so long (at more than ten years old, it’s already tied with the 1990s expansion as the longest on record), that anxiety about how long it might last, and when a new recession might begin, is entirely understandable. Yet what most economy watchers keep missing is what RealityChek regulars have understood for years – the quality of America’s growth matters at least as much as the quantity.

As a result, the latest government report shedding light on this growth – the preliminary look at the gross domestic product (GDP) for the first quarter of this year – was important not only for revealing that the economy expanded at a healthy 3.21 percent at an annual rate. It was also important for showing that by several crucial measures, the growth recipe was by far the healthiest since at least the period during which United States enjoyed its last period of robust expansion – back in 2014 and 2015.

The definition of healthy growth used by RealityChek is growth that depends relatively little on increases in personal consumption and housing investment. Those segments of the GDP and their bloat were most responsible for inflating the previous decades’ bubbles that burst so disastrously in 2007 and 2008, nearly blew up the entire global economy, and triggered the worst national economic downturn since the Great Depression of the 1930s. Fortunately, the GDP data compiled by the Commerce Department make it easy to calculate how their current growth contribution compares with their past record. And, as with the latest trade figures, they show that progress towards improving growth’s health has been dramatic so far during President Trump’s administration.

In particular, during that previous high growth period (under President Obama), the economy’s quarterly expansion ranged from 2.60 percent at an annual rate to 3.81 percent after inflation. But the growth contributions made by personal consumption and housing (which I’ve called a “toxic combination”) generally ranged from 62.86 percent to 79.70 percent (with one outlier quarter – the fourth of 2014 – coming in at nearly 187 percent, meaning that other elements of the GDP worked to shrink the economy).

During the high growth period under President Trump, which began in the first quarter of 2018, inflation-adjusted quarterly GDP has actually risen by a somewhat slower pace: between 2.58 percent annualized and that 3.21 percent rate of the first quarter of this year. But the contributions made by the toxic combination have ranged only from ten percent to 67.27 percent. And the figure for that high-growth first quarter of this year was only 22.19 percent.

Also worth noting are the growth rates during the Obama years when the role of the toxic combination was within that Trump range. They were somewhat lower.

Principally, in the second and third quarters of 2014, the toxic combination’s combined real growth contribution was 65.69 percent and 62.86 percent, respectively. Annualized constant dollar growth during those quarters was 2.60 percent and 3.04 percent. Those are solid results, but not quite as good as those from the second, third, and fourth quarters of 2018. Then, the toxic combination’s growth contribution ranged between 60 percent and 67.27 percent, and growth ranged from 2.87 percent to three percent.

As indicated above, these results can be pretty volatile from quarter to quarter. But smoothing them out by using annual figures tells a story even more favorable to the Trump record. Here are those annual figures starting with 2009-10, the first recovery year.

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

09-10:          1.20/2.60       -0.08/2.60         1.12/2.60         46.92%         2.56%

10-11:          1.29/1.60        0.00/1.60         1.29/1.60         80.63%         1.55%

11-12:          1.03/2.20        0.31/2.20         1.34/2.20         60.91%         2.25%

12-13:          0.99/1.80        0.34/1.80         1.33/1.80         73.89%         1.84%

13-14:          1.97/2.50        0.12/1.80         2.09/1.80       116.11%         2.45%

14-15:          2.50/2.90        0.33/2.90         2.83/2.90         97.59%        2.88%

15-16:          1.85/1.60        0.23/1.60         2.08/1.60      130.00%         1.57%

16-17:          1.73/2.20        0.13/2.20         1.86/2.20        84.55%         2.22%

17-18           1.80/2.90      -0.01/2.90         1.79/2.90        61.72%          2.86%

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

As with the quarterly figures, during the Obama years, when the growth contribution of the toxic combination was low, so was growth.  During the two full Trump data years, as growth itself sped up, the toxic combination’s contribution has plummeted to multi-year (at least) lows.

But a big question remains unanswered: When, under the Obama administration, the economy did manage to grow satisfactorily with a relatively small contribution by the toxic combination, this health growth recipe didn’t last. Indeed, by the third quarter of 2015, growth itself began slowing markedly, until it bottomed at 1.30 annualized in the second quarter of 2016. And it never broke two percent again. But the toxic combination’s contributions during that decelerating growth period ranged from 91.05 percent to a stunning 430 percent (in the fourth quarter of 2015).

The Trump years’ much better performance in this respect has lasted only two years. Only if this strengthening proves to have legs will it be legitimate to start considering the economy genuinely Great Again.

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(What’s Left of) Our Economy: Could Main Street Have Done Better Than the Fed?

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Ben Bernanke, bubbles, Federal Reserve, Financial Crisis, Great Recession, Lawrence Summers, Leonard Vincent Gilleo, recovery, secular stagnation, Washington Post, {What's Left of) Our Economy

If you’re seeking major insights into America’s recent economic and financial history, a barber’s obituary probably wouldn’t be the place you’d start looking. But if you checked out the notice placed in the Washington Post yesterday for Leonard Vincent Gilleo, you might rethink your assumptions. Because Mr. Gilleo plied his trade at the Federal Reserve. For decades. And although the bio written (presumably by his family) might have gotten a little tongue-in-cheek, it’s arguable enough that the Fed has helped make such a hash of the nation’s economy, especially for the last two decades, that a tantalizing claim in the obit deserves to be taken seriously.

According to the notice, Gilleo’s “clients included former Fed Chairmen Arthur Burns, Paul Volker [sic], Alan Greenspan and Ben Bernanke, as well as US Ambassadors, Secret Service brass, White House Press Secretaries, and hundreds of PhD economists and State Department personnel.”

And his customers, we’re told, didn’t let him just stick to his scissors: “Standing behind his barber’s chair, Lenny served as the common man sounding board to many economic policy decisions made by the Fed.”

Now comes the kicker: “In fact, had his layman’s advice been taken seriously, Black Monday, the bursting of the dot-com bubble, and the financial crisis of 2008 could have all been avoided.”

At first, this might look nonsensical – or the kind of good-natured fun that’s common when we want to remember the deceased fondly. But think of the economic news since Black Monday – the stock market crash of October 19, 1987. The nation experienced a short and relatively shallow recession around the turn of the decade; a strong but initially jobless recovery that turned into a record expansion fueled largely by a technology-driven stock market bubble; another short, shallow recession; a recovery that turned out to be another, much bigger bubble inflated by record levels of easy money supplied by (Alan Greenspan’s) Fed; a terrifying global financial crisis resulting from that bubble’s inevitable bursting; and the recovery from the ensuing Great Recession that began in mid-2009 – the weakest on record.

It’s true that Fed Chair Ben Bernanke in particular is credited by many with preventing the most recent financial crisis from becoming a catastrophic global depression – and rejecting the advice of politicians and economists who argued that the central bank was preventing a restoration of genuine economic health by providing crutches that were too strong for too long.

But it’s also clear that Bernanke, his successor Janet Yellen, and her successor Jerome Powell have chosen the easy way to end the crisis – simply flooding the economy with as much cheap credit as necessary to keep it afloat – and that they have no viable exit plan. It’s clear as well that Bernanke and his mid-2000s colleagues missed the glaring warning signs that the growth of the 2000s was dangerously unhealthy growth.

Less clear, but most important, the Fed’s response to the last financial crisis continued a practice of fostering acceptable levels of growth and employment by showering the economy with levels of stimulus that have been so excessive as to be unsustainable, and bound to risk damaging collapses.

Economist Lawrence Summers was the first to identify this pattern, which he calls secular stagnation.

I’m not saying that I believe Gilleo had better answers. I am saying that it’s not completely crazy to recognize how dreadfully these most credentialed of our economic experts have performed, and to suspect that less technical, academicky mastery and more real-world experience and common sense (plus some backbone) would have left the economy considerably better off than at present. And P.S.: I can think of worse uses of my time than contacting Gilleo’s family to see if they were serious, and if so, what his advice actually was.

(What’s Left of) Our Economy: Private Sector U.S. Jobs Increasingly Really Deserve the Name

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Barack Obama, Employment, healthcare, Jobs, private sector jobs, recession, recovery, subsidized private sector, Trump, {What's Left of) Our Economy

Although unemployment in America has hovered near multi-decade lows for most of the last year, concerns about job quality rightly persist – largely because wage gains have only recently showed signs of recovering to historically normal levels for a recovery. But the latest official data from the Labor Department demonstrate that the makeup of the country’s employment picture and how it’s changed make clear continued improvement in one key measure: Growing private sector employment increasingly reflects gains in what I’ve called the real private sector, as opposed to the subsidized private sector.

Also apparent from the employment figures: The resurgence of the real private sector in relative terms as well as in absolute terms has been a Trump era phenomenon.

As known by RealityChek regulars, this trend is encouraging because the subsidized private sector consists of parts of the economy that are often (and even officially) viewed as parts of the private sector, but whose health depends largely on government largesse. That is, its total employment and its employment gains would be much smaller without huge government payouts – i.e., politicians’ decisions. The healthcare services industry is the main example.

By contrast, the real private sector consists of parts of the economy whose health flows largely from free market forces. So without getting involved in the debate over whether the United States supports too many subsidized private sector jobs or not, it should be clear that they have little to do with the state and health of the economy as a whole – unlike real private sector jobs.

According to the Labor Department’s Bureau of Labor Statistics, from 2013 through 2016, the subsidized private sector’s share of total annual employment increases more than doubled: from 11.34 percent to 25.99 percent. And its share of annual total private sector jobs gains (that is, employment increases by the private sector as conventionally defined), soared from 11.02 percent to 28.59 percent.

During 2017 and 2018 (and the data for late 2018 is still preliminary), the subsidized private sector’s share of total annual U.S. jobs gains dropped to 21.04 percent and then to 19.90 percent. And its share of the growth of total private sector jobs fell to 21.91 percent and then to 20.74 percent.

Another way to look at the Obama-era growth of subsidized private sector employment is to examine its growth as a share of the growth of real private sector jobs. In 2013, this figure stood at 12.38 percent. In 2016? Just over 40 percent. In other words, in the last year of Barack Obama’s presidency, some four in ten of the net new jobs created in the private sector came in the subsidized private sector – meaning that they were heavily dependent on government largesse.

In 2017 and 2018, subsidized private sector jobs growth as a share of total private sector jobs growth sank all the way to 28.05 percent, and then to 26.16 percent.

Looking at the economy from a static standpoint – i.e., through snapshots taken at crucial dates – illustrates these trends, too, although less dramatically. After all, even major relative changes can take many years to show up as major absolute changes in a supertanker as big as the U.S. economy.

At the outset of the last recession the subsidized private sector represented 13.67 percent of all U.S. jobs and the real private sector’s share was 70.16 percent. And the subsidized private sector’s share of the total (conventionally defined) private sector was 19.49 percent.

By the time the recovery began, in mid-2009, these figures stood at 14.97 percent and 67.80 percent – showing that during an economic downturn that decimated the overall American jobs market, subsidized private sector employment rose not only in relative terms but in absolute terms (from 18.92 million to 19.61 million. Meanwhile, the subsidized private sector’s share of the total private sector employment had risen to 22.07 percent.

By January, 2017 – the final month of the Obama administration and eight and a half years into the recovery – the subsidized private sector comprised 15.75 percent of all American jobs, and the real private sector was back up to 68.94 percent. Subsidized private sector employment had grown to 22.84 percent of total private sector jobs.

By December, 2018 (results that are still preliminary) the subsidized private sector’s share of all American employment had kept increasing – to 15.91 percent. And the real private sector’s share grew modestly, too – to 69.11 percent, as did the subsidized private sector’s share of the total private sector (to 23.02 percent).

Nevertheless, this examination of the changing dimensions of subsidized private sector employment also reveals that the national jobs market still hasn’t returned to pre-recession normality. In particular, even though the current recovery is nearing it’s tenth anniversary, that real private sector share of total employment (69.11 percent) is still below where it stood at the downturn’s onset (70.16 percent).

(What’s Left of) Our Economy: Don’t Forget About the Quality of U.S. Growth

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business spending, Financial Crisis, GDP, Great Recession, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, recovery, Trump, {What's Left of) Our Economy

One of the biggest economic questions facing Americans this holiday season – whether they’re heavily into the roller-coaster stock market or not – is whether the nation will slide into recession. I’m skeptical on that score, but I’m still wondering more about what I’ve long regarded as an even more important question: Will the quality of America’s growth start improving meaningfully?

As I’ve often explained, I prioritize this issue because, as significant as maintaining economic growth is, not all growth is created equal. In particular, unhealthy growth eventually tends to produce terrible results – the prime lesson Americans should have learned since the bubble-ized expansion of the previous decade collapsed into a terrifying financial crisis and the worst recession since the Great Depression.

So this looks like a good time once again to check into whether the U.S. growth recipe has changed since then, and if so, how much. As known by RealityChek regulars, the main indicator is how heavily increases in the inflation-adjusted gross domestic product (the growth measure most widely followed by knowledgeable students of the economy) depend on personal consumption and housing. For these are the parts of the economy whose bubble-decade bloat directly sparked the crisis. And the big takeaway as of last week’s release of the final (for now) figures on third quarter GDP? The situation is turning around, but at supertanker-like (i.e., painfully slow) speed.

Specifically, what I’ve called the toxic combination of personal consumption and housing (parts of the economy dominated by spending and borrowing, rather than saving and investing) came in at 72.66 percent of real GDP in the third quarter. This means that it’s decreased consistently since the first quarter of 2017 – the first quarter of the Trump administration’s stewardship of the economy – when it stood at 73.01 percent. For the record, as of the last quarter of the Obama economy (the fourth quarter of 2016), this figure stood at 72.93 percent

So that’s cause for encouragement. It’s also crucial, however, to recall that at the start of the last recession – at the end of 2007 – personal consumption plus housing as a share of real GDP was 71.49 percent. As a result, over that key time-span, the economy has evolved exactly the way we shouldn’t want. But at least by this measure the economy isn’t nearly as bubbly as at its peak during that bubble decade – when the toxic combination reached 73.74 percent of after-inflation GDP.

Another measure of America’s progress toward recreating an “economy built to last” (a wonderfully on-target phrase used by former President Obama) is the share of real GDP devoted business spending. Here, however, the trends show some troubling recent signs of backsliding.

At the start of the current economic recovery, in the middle of 2009, such spending represented 11.19 percent of price-adjusted GDP. The annual numbers since then, through 2017, are presented below:

2010: 11.42 percent

2011: 12.22 percent

2012: 13.08 percent

2013: 13.37 percent

2014: 13.95 percent

2015: 13.80 percent

2016: 13.65 percent

2017: 14.06 percent

Through 2014, in other words, business spending (or investment, if you prefer) as a share of the economy rose healthily. But this growth shifted into reverse in 2015 and 2016, before rebounding in 2017.

For the third quarter of 2018, business investment as a share of real GDP reached 14.61 percent – which represents further improvement. But the quarterly story isn’t as positive:

1Q 18 14.48 percent

2Q 18 14.64 percent

3Q 18 14.61 percent

That is, business investment as a share of inflation-adjusted GDP dipped between the second and third quarters. Is this dip a blip? Or the start of a longer-term decline? I’m not in the crystal ball business; that’s why I’ll be watching these numbers closely going forward – and why I believe you should, too.

(What’s Left of) Our Economy: Tariff-Spurred Front-Running Still Clear from New U.S. GDP Figures

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exports, GDP, gross domestic product, growth, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real GDP, real imports, real trade deficit, recovery, Trade, trade deficit, {What's Left of) Our Economy

This morning came the government’s second read on U.S. economic growth in the third quarter of this year, and the trade results were virtually identical with those of the first report – including on the short-term noise created by President Trump’s tariff-centric policies and foreign retaliation. (The final set of three – for now – third quarter figures will come out toward the end of next month.)

In other words, the new statistics confirmed that, earlier this year, both American exporters and importers had been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. The biggest new wrinkle is that the resulting boost to the inflation-adjusted U.S. trade deficit, and the resulting trade bite from real growth taken by the trade shortfall’s quarterly increase, was a bit larger than previously estimated.

According to the new release, the price-adjusted U.S. trade deficit hit $945.8 billion on an annual basis the third quarter – 0.72 percent greater than the $939.0 billion reported in the first read on the quarter’s real gross domestic product (GDP). That means that record level reached by the deficit in the third quarter has climbed higher. The previous all-time annualized high for a quarterly constant dollar trade deficit was $932.5 billion, attained in the third quarter of 2006 – shortly before the financial crisis broke out.

Consequently, a conspicuous sign of trade-related front-running – the increase in the real trade deficit between the second and third quarters – grew as well. Pegged last month at 11.65 percent, this sequential rise now stands at 12.46 percent. Nonetheless, it remains only the second biggest such increase on record (behind the 13.18 percent trade deficit widening during the second quarter of 2010, during the current economic recovery’s early stages).

Another sign of front-running (re)appeared in the goods exports numbers. During the second quarter, these exports jumped sequentially by 3.21 percent sequentially on an annual basis – the biggest such increase since the fourth quarter of 2013’s 3.93 percent annualized surge.

In the initial read on third quarter GDP, after-inflation goods exports were judged to have dropped by 1.79 percent – the worst such performance since the 2.44 percent decrease in the first quarter of 2015. Largely as a result, the real third quarter trade deficit ballooned. This morning, this decrease was upgraded – to 2.09 percent. Hence the even larger constant dollar trade deficit number.

The pattern for merchandise imports was similar, though not identical. During the second quarter, they were essentially unchanged sequentially, but as of the third quarter’s initial read, they increased by 2.48 percent – the biggest such increase since the 3.37 percent of the fourth quarter, 2017.

This morning, that increase was revised up slightly, to 2.49 percent.

Because the third quarter price-adjusted trade deficit was revised slightly higher in this latest third quarter GDP report while the growth rate remained at 3.46 percent annualized, the trade bite from growth was revised higher, too. Estimated last month as a 1.78 percentage point subtraction from the overall real economic growth rate, it’s now judged to be 1.91 percentage points. The last time the trade bite was that size in absolute terms was the third quarter of 1985.

In relative terms, the trade bite from growth increased as well – from 51.44 percent of such growth to 55.20 percent. But that remained only its highest level since the fourth quarter of 2016. Then, a growing real trade deficit subtracted 1.32 percentage points from that period’s much slower 1.75 percent annualized inflation-adjusted growth rate (or 75.43 percent of such growth).

With a higher third quarter constant dollar trade deficit came a bigger trade drag on America’s real growth during the current, still far-from-robust economic recovery. As of the initial third quarter GDP report, the real trade deficit’s increase since the recovery began in mid-2009 subtracted $461.7 billion from cumulative economic growth. That was a 13.05 percent hit. This morning’s results, however, pushed up those figures to $468.5 billion – translating into a 13.24 percent hit. As of the final second quarter data, trade had sliced $363.7 billion from cumulative recovery growth, 10.77 percent of the total at that time.

Importantly, though, the growth lost due to the expansion of the price-adjusted Made in Washington trade deficit continues to be much greater. That’s the trade gap calculable from trade flows minus sectors not greatly affected by American trade policy or related decisions – that is, energy and services – and adjusted for inflation.

As of the second quarter, the widening of the Made in Washington deficit resulted in cumulative recovery-era growth being $502.92 percent less than it otherwise would have been had it not grown at all. That’s 14.89 percent less growth.

The latest third quarter figures? Foregone after-inflation growth worth $587.2 billion, or 16.60 percent less growth. Sobering numbers for an economy that’s pulled out most of the available conventional growth-promoting stops (years of super-easy monetary policy being followed by super-easy fiscal policy) with so-far mediocre and likely bubbly results

(What’s Left of) Our Economy: Manufacturing’s Real Wage Recession Keeps Lengthening

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inflation-adjusted wages, manufacturing, private sector, real wages, recovery, wages, {What's Left of) Our Economy

Whether it’s because of unskilled, unproductive newbies or continuing jobs offshoring or (as likely) some combination of these and other trends, today’s real wages figures from the Bureau of Labor Statistics can’t be read as good news for American manufacturing workers. For it means that the lengthy technical real wage depression they’ve been suffering on average just got longer.

Because of a 0.37 percent monthly drop in October – the biggest such falloff since August, 2017 (0.64 percent) – inflation-adjusted hourly pay in manufacturing is now down on net since December, 2015 (by 0.19 percent). That’s one month longer than this slump had lasted as of the previous data in this series, and a decline that’s lasted far longer than the definition of a technical recession: a cumulative decline over at least two consecutive quarters.

Another measure of manufacturing’s pay doldrums: After-inflation hourly wages are now back to exactly their level in June, 2009 ($10.72), when the current recovery began. That is, they’ve made absolutely no progress over a more than nine-year period.

Moreover, the October figures indicate that current-dollar manufacturing wages will weaken further before they start strengthening. In particular, the 1.11 percent annual decrease was the biggest such deterioration on a relative basis since October, 2012’s 2.09 percent nosedive. By contrast, between October, 2016 and October, 2017, real manufacturing wages dipped by only 0.28 percent.

The real wage news for all private sector workers was better – but not by much. On month in October they were down 0.09 percent (their first such drop since February). On an annual basis, though, they rose by 0.65 percent. And meager as that is, it was the best yearly performance since January (0.66 percent), as well as a substantial improvement over the previous October’s 0.19 percent.

As a result, though, inflation-adjusted private sector wages still have advanced by only 4.75 percent since the current economic recovery began in mid-2009. And whether justified by inadequate skills levels or not, for an economy that remains strongly dependent on consumption for its growth, that doesn’t sound like a formula for lasting prosperity.

(What’s Left of) Our Economy: The New U.S. Trade Figures are (Nearly) All About China

Tags

China, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, manufacturing, merchandise trade, recovery, Trade, trade deficit, {What's Left of) Our Economy

Today was one of those days when the U.S. government treated us with both the jobs numbers (for October) and the trade numbers (for September). But just because I posted on the former first doesn’t mean that the latter were humdrum – far from it. And the big story in so many ways was China – along with an important black mark revealed when trade flows are adjusted for inflation.

Specifically, the combined American goods and services trade deficit hit $54.02 billion – just 1.33 percent higher than August’s upwardly revised $53.31 billion, but the second highest monthly total during the current economic recovery. (The highest was February’s $54.96 billion.)

And the prime culprit was the 4.34 percent sequential increase in the immense, chronic U.S. merchandise trade gap with China – to a record $40.24 billion level that represented the third straight monthly all-time high.

This growth means that as of September, this trade shortfall is running 9.91 percent ahead of last year’s annual total – $375.58 billion, which so far has been the record. Also at all-time highs as of September: American goods imports from the People’s Republic. They topped the $50 billion monthly mark for the first time, and were up by 4.32 percent sequentially – possibly because many American companies were rushing their purchases from China ahead of tariffs.

U.S. merchandise exports to China were of course much lower – $9.79 billion in September. The figure was the year’s second lowest (after August’s $9.29 billion) and might have reflected some Chinese front-running of their own government’s retaliatory levies against the United States – although September’s 5.32 percent monthly increase followed a 9.43 percent sequential drop in August.

Contrasting with these China numbers were the September goods trade results with other U.S. trade partners. Specifically, the shortfalls with the European Union, the Eurozone, Germany, Japan, South Korea, Mexico, and Canada all narrowed, and by substantial percentages. Moreover, the China-heavy American manufacturing trade deficit declined as well – by 6.13 percent (albeit from a $92.51 billion August total that was a monthly record).

Moving up to the 30,000-foot level, combined U.S. goods and services exports rose by 1.49 percent, to $212.57 billion, from an August figure of $209.46 billion that was revised upward fractionally. That September total was the third highest ever – after the May and June levels of $214.67 billion and $213.20 billion, respectively.

The much greater amount of overall imports was up 1.46 percent on month in September, with the $266.58 billion figure marking a second straight all-time high. (The previous month’s record of $262.75 billion was revised fractionally higher as well.) So some pre-tariff front-running of purchases from abroad looks like it was at work here, too.  

Some other all-time monthly highs achieved in September: services exports ($70.71 billion – a second straight record as well) and services imports ($47.50 billion).

That black mark? The Made in Washington trade deficit. This is the trade shortfall comprised of flow heavily influenced by U.S. Trade agreements and related policy decisions. As such, it leaves out oil and services – since trade in those sectors is in only a very early stage of liberalization. And adjusting it for inflation enables calculating how much trade has been either contributing to or subtracting from after-inflation growth – the measure of the gross domestic product (GDP) that’s most widely followed.

From the start of the current economic recovery, in mid-2009, through the second quarter of this year, the increase in the price-adjusted Made in Washington trade deficit subtracted 14.89 percent from the period’s cumulative real economic growth of $3.3775 trillion. That’s a trade drag of $502.92 billion.

As of the third quarter, the drag increased to 16.60 percent of cumulative recovery inflation-adjusted growth of $3.5374 trillion. That amounts to $587.23 billion worth of lost growth.

(What’s Left of) Our Economy: So How Loud was That Trade Noise in the U.S. Growth Figures?

Tags

exports, GDP, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, real GDP, real trade deficit, recovery, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

With all the other news of the last few days, it’s been easy to overlook the release last Friday of the first read (of three soundings that will be released in the near term) the nation got on U.S. economic growth in the third quarter. That’s unfortunate because these data on the gross domestic product (GDP) continued to be distorted by sizable fluctuations generated by President Trump’s recent trade policy moves. As a result, the outlook for future growth looks especially cloudy, and that goes double for the odds that its recent acceleration from the crummy rates so far during the current economic recovery can continue. 

The impact of trade-generated short-term noise is clear from the change seen in the U.S. trade deficit between the second and third quarters. In inflation-adjusted terms (the GDP measure that’s most widely followed) during that period, the shortfall dropped by 6.80 percent, from $902.4 billion on an annualized basis to $841.0 billion. That was the biggest sequential decrease since the fourth quarter of 2013 (9.24 percent).

But in the third quarter, the real trade gap rebounded to $939.0 billion – its all-time highest (besting the previous record of $932.5 billion in the third quarter of 2006, during pre-financial crisis days). In addition, the quarterly increase of 11.65 percent was the biggest since the 13.18 percent during the second quarter of 2010 – during the early stages of the current economic recovery.

What’s been going on? As widely reported, both American exporters and importers have been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. During the second quarter, the biggest rush was made by U.S. exporters – their shipments overseas jumped by 3.21 percent quarter-to-quarter on an annualized basis. That was the biggest surge since the 3.93 percent annualized rise in the fourth quarter of 2013. That’s largely why the trade deficit narrowed.

During the third quarter, at least according to these preliminary figures, goods exports fell back by 1.79 percent – their worst performance since the 2.44 percent decline registered in the first quarter of 2015. Hence, in part, the rebound in the trade deficit. (Again, all these numbers and those in the next paragraph are annualized.)

On the merchandise import front, U.S. purchases of foreign goods in the second quarter stayed pretty flat sequentially – which also contributed to the trade shortfall’s improvement. But in the third quarter, goods imports advanced by 2.48 percent – the biggest such rise since the fourth quarter of 2017 (3.37 percent).

At the same time, as just indicated, these fluctuations have been multi-year highs, not multi-decade highs. So even though the data were noisy, they weren’t epic-ally noisy, or even close.

More epic was the bite from after-inflation growth taken by the higher trade deficit in the third quarter. It chopped fully 1.78 percent points off the 3.46 percent annualized increase. That’s the highest such toll in absolute terms since the 1.91 percentage points taken from growth in the third quarter of 1985! But the picture looks much less dramatic if you measure this growth loss as a share of the actual growth.

During the third quarter, the trade bite amounted to 51.44 percent of that growth. But that’s only the biggest such figure since the fourth quarter of 2016, when the sequential increase in the trade deficit subtracted 75.43 percent (1.32 percentage points) of that period’s 1.75 percent annualized constant dollar growth.

All the same, for the time being, the trade drag on cumulative after-inflation growth over the course of the entire economic recovery is up again. As of the second quarter, it had cost the economy 10.77 percent of its cumulative growth – or $363.7 billion. The third quarter numbers reveal the trade hit at 13.05 percent of cumulative growth – or $461.7 billion.

Moreover, the growth lost during the recovery because of the increase of the Made in Washington trade deficit remains much greater. This gauge measures inflation-adjusted trade flows minus sectors (services and oil) still generally unaffected by trade agreements and related policy decisions.

The latest data are from the second quarter, but they show a Made in Washington trade drag of 18.01 percent on cumulative real recovery growth – which translates into $608.12 billion worth of foregone expansion The next set of monthly U.S. trade data, slated to come out on Friday, will provide the first look on the third quarter statistics.

Some more perspective can be gleaned from the price-adjusted trade deficit’s share of the price-adjusted gross domestic product on a stand-still basis. It’s definitely on the upswing – reaching 5.03 percent as of the third quarter. That’s the highest level since just before the financial crisis-induced ensuing Great Recession struck – during the third quarter of 2007, when the share hit 5.23 percent.

The only consolations identifiable are that overall economic growth today is faster than it was eleven years ago, and that it’s still possible that the real trade deficit’s share of GDP, and the size of the trade drag, will settle down once the trade noise goes away. Not that hope will be the test of Mr. Trump’s trade policy success.

(What’s Left of) Our Economy: U.S. Private Sector Job Creation is Still Overstated, but its Comeback Continues

Tags

government, health care services, Jobs, private sector, recovery, subsidized private sector, {What's Left of) Our Economy

Since we get a breather till the last week of the month in the flow of major nation-wide U.S. economic data, why not revisit one of my favorite unofficial measures of the American economy’s health? That’s the share of job creation that’s accounted for by what I call the subsidized private sector – those parts of the economy – notably healthcare services – that are officially classified as private sector industries, but that don’t really deserve the label because they depend so heavily (including for employment levels) on massive government subsidies.

This distinction matters, or should matter, because nearly all Americans rightly believe that the private sector, not the government, is the economy’s best hope for productive, sustainable growth. In turn, genuine private sector job creation is a much better gauge of the economy’s health than private sector job creation whose numbers are inflated by including the subsidized industries’ performance.

So I’m glad to report that the results for the first three-quarters of this year (through September) show the continuation of a trend I’d spotted a while ago: The subsidized private sector’s share of new total jobs and new private sector jobs is considerably lower so far during the Trump years than during Barack Obama’s presidency. At the same time, the subsidized private sector is still punching above its weight in terms of job creation, which isn’t such good news.

Let’s start, as usual, with 2013, since it was a year by which time the current economic recovery (which began in mid-2009) was well established. Conveniently, it also permits examining progress over a five-year period.

Between January and September, 2013, the subsidized private sector generated 11.14 percent of the economy’s total net new jobs created, and 10.83 percent of all the such jobs credited to the private sector as conventionally defined. The “real private sector,” meanwhile, produced fully 91.79 percent of the economy’s new hires, and 89.17 percent of the employment improvement placed in the conventional private sector category. (A drop in government employment accounts for the failure of these percentages to add up to 100.)

But what a change by 2016 – the last year of the Obama administration. During the first nine months of that year, the subsidized private sector’s share of total payroll increases had more than doubled – to 23.04 percent. And its share of all the conventional private sector jobs added during this period rose even faster – to 27.92 percent. Largely as a result, the real private sector accounted for only 59.43 percent of all net new U.S. employment. And the real private sector’s share of job gains credited to the conventionally defined private sector dropped to 72.06 percent.

So far this year, the subsidized private sector’s share of all U.S. job creation is down to 19.73 percent. The real private sector share of this total bounced all the way back to 76.27 percent, and its share of conventional private sector job gains was up to 79.44 percent.

But between 2017 and 2018, progress along these lines was much slower than during the previous year. In fact, when examined on a stand-still basis (different from the dynamic basis represented by the above employment change numbers), the subsidized private sector’s share of total U.S. employment actually has edged up over the last year – from 15.85 percent to 15.89 percent, and these industries’ share of conventionally defined private sector employment remained at 18.69 percent. 

With the subsidized private sector’s share of total job-creation this year nearly four percentage points higher (the 19.73 percent referred to in the previous paragraph), it’s clear that these industries keep creating an outsized share of overall new U.S. hiring.   

As always, please remember that I’m not portraying the subsidized private sector as worthless or only marginally important. Of course we need healthcare services in particular, and as the American population continues to age, we’ll continue to need a lot more. All I’m saying is that the nation needs to define its terms properly, and recognize that, without immense government spending (and the consequently greater debts), many of the jobs we’ve come to consider private sector jobs simply wouldn’t exist.

(What’s Left of) Our Economy: Why Trump is Making Headway on Trade Deficits

Tags

China, Made in Washington trade deficit, Obama, recession, recovery, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

Given that two of President Trump’s main trade policy aims have been to reduce the gargantuan U.S. global trade deficit and the comparably huge trade gap with China, it’s been entirely predictable that the chortlers are out with claims that he’s failing on both grounds. (See, e.g., here and here.)

What’s just as predictable? The chortlers are missing the main story: On both fronts, Mr. Trump’s first full year in office (the time-span for which the latest complete data are available), showed noteworthy progress. The main evidence? For both the world as a whole and for China, U.S. trade shortfalls grew more slowly during his first full year in office, even as the American economy grew faster.

As standard economic theory holds, that’s not supposed to happen. Quite the opposite: As growth speeds up, all else equal, trade deficit increases should be expected, as the growth boosts purchases of imports.

As RealityChek readers know, this pattern has been broken often in recent decades. And Trump Year One is an example, especially when the trade flows most heavily influenced by trade policy decisions are examined.

By that I mean what I call the Made in Washington trade deficit – the gap resulting by measuring imports and exports while stripping out oil and services, because trade liberalization in those sectors is in its infancy.

The contrast between the first full Trump year and the previous comparable period (the baseline for which came during former President Obama’s final year in office) is especially instructive. From the second quarter of 2016 to the second quarter of 2017, the Made in Washington trade deficit grew 1.72 times faster than the gross domestic product (GDP) in pre-inflation terms, and the China merchandise deficit grew 1.65 times faster.

Yet from the second quarter of 2017 through the second quarter of 2018 (using the latest GDP figures available), the Made in Washington shortfall increased only half (0.49 times) as fast as the economy overall, while the China goods deficit increased 1.33 times faster than GDP.

Moreover, the first Trump year compares well with the entirety of the current economic recovery, which of course began in mid-2009, early in the first Obama term. We can toss out the results from the second quarter of 2009 to the second quarter of 2010, since the second quarter of 2009 marked the end of the previous recession. But from second quarter 2010-2011 to second quarter 2016-2017, the Made in Washington trade shortfall grew as slowly compared with the economy as it did during the first Trump period only once – from the second quarter of 2010 to the second quarter of 2011 (0.44 times faster). In fact, between the second quarters of 2013-2014, and 2014-2015, this trade shortfall surged by 4.68 and 4.07 times faster than growth.

The relative growth rate of the U.S. goods trade deficit with China diminished during the first full Trump year as well – from 1.65 times faster than the economy, to 1.33 times faster.

On China trade, the immediate pre-Trump years overall look more impressive in comparison with the first full Trump year, but hardly in a slam dunk way. Between second quarter 2010-2011 and second quarter 2016-2017, the China shortfall grew slower compared with growth than it did during the first Trump year three times (2012-2013, 2013-2014, and 2015-2016) and faster the other four years.

It’s completely legit to criticize Mr. Trump’s focus on the global trade deficit or the China trade deficit or any trade deficit (although I regard such criticism as wrong for various reasons, including the one analyzed here). And it’s completely legit to criticize other elements of the Trump trade policies (as I have numerous times – e.g., here and here). What’s not legitimate, though, is to accuse the President of failing to make headway in his trade deficit reduction goals – unless you have no interest in the most pertinent facts.