(What’s Left of) Our Economy: The Virus Leaves U.S. Growth and Trade Figures Still Distorted After All These Months

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CCP Virus, coronavirus, COVID 19, exports, GDP, goods trade, Great Recession, gross domestic product, imports, inflation-adjusted growth, real GDP, real growth, real trade deficit, recession, recovery, services trade, trade deficit, U.S. Commerce Department, Wuhan virus, {What's Left of) Our Economy

The final (for now) official read for America’s economic growth in the third quarter came out this morning, and it confirmed again that both the gross domestic product (GDP) and the country’s major trade flows changed (and were distorted by) historic rates during that phase of the CCP Virus pandemic.

At the same time, the new inflation-adjusted GDP data (the measure most closely followed by serious students of the economy) and the related trade figures make clear that in these 30,000-foot macroeconomic terms, trade has been a minor part of the post-virus growth picture. (In terms of specific products, like healthcare-related goods, the story is of course different, because their availability has affected the severity of the pandemic and resulting deep economic slump, and the expected schedule for recovery.)

Not surprisingly, given the slightly faster real expansion reported by the Commerce Department this morning (33.4 percent at an annual rate, versus the previously judged 33.1 percent), and continued economic sluggishness overseas, the quarter’s after-inflation overall trade deficit came in slightly higher, too – $1.0190 trillion annualized as opposed to $1.0164 trillion.

That’s a new quarterly record by an even wider margin than reported in the previous GDP report. So is the sequential increase – 31.47 percent as opposed to 31.13 percent. Just for some perspective, the next biggest quarterly jump in the constant dollar trade gap was just 13.18 percent (between the first and second quarters of 2010).

But as noted in last month’s RealityChek GDP post, 2010 was when the U.S. economy was recovering from the Great Recession that followed the global financial crisis, and annualized growth during that second quarter was just a ninth as fast (3.69 percent) as this year’s third quarter.

The subtraction from real economic growth generated by the latest surge in the trade deficit was big in absolute terms (3.21 percentage points), increased slightly over the previously reported 3.18 percentage points), and still stands just shy of the all-time biggest trade bite (3.22 percentage points, in the third quarter of 1982). But set against 33.4 percent annualized growth, it’s clearly not very big at all.

Combined goods and services exports and imports changed to roughly the same modest degree as the overall trade deficit. The quarter-to-quarter price-adjusted export increase was revised down from 12.56 percent to 12.41 percent, and the total real import increase is now judged to be 17.87 percent, not 17.89 percent. As a result, both figures remained multi-decade worsts and bests.

Somewhat greater relative changes took place in the service trade data – which isn’t surprising, with the service sector having been hit much harder by the pandemic than goods sectors.

All the same, whereas the previous GDP report showed that after-inflation services exports edged up on quarter by 0.21 percent (from $582.1 billion annualized to $583.3 billion), this morning’s release recorded slippage – by 0.14 percent, to $581.3 billion. Consequently, they now stand at their lowest quarterly level since the third quarter of 2009 – just as that Great Recession recovery was beginning.

As for real services imports, their quarterly price-adjusted increase was revised down from 5.91 percent to 5.70 percent, and their $393.3 billion level was the lowest since the third quarter of 2006.

Unfortunately, the prospect that these CCP Virus-related distortions in economic growth and trade figures will soon come to an end still seems as remote as the prospect that the virus itself will soon be tamed – even with the beginning of mass vaccination. As a result, for the time being, tracking these numbers will be useful for getting a sense of those distortions’ scale, but the underlying health of the economy, and of its trade flows, will remain elusive.

(What’s Left of) Our Economy: Has the U.S. Seen Peak Manufacturing Output for the Virus Era?

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(What's Left of) Our Economy, appliances, automotive, capex, capital spending, CCP Virus, coronavirus, COVID 19, Federal Reserve, furniture, household appliances, housing, inflation-adjusted growth, Institute for Supply Management, machinery, manufacturing, real growth, recession, recovery, Wuhan virus

Today’s monthly Federal Reserve report on U.S. manufacturing production was full of surprises, but not enough were of the good kind. And with signs of economic slowing on the rise, the new figures – for September – could mean that, for the time being, industry’s relative out-performance during the pandemic era will begin weakening markedly as well.

The surprises start with the overall figure for the September monthly change in inflation-adjusted output for American factories. Despite an abundance of encouraging data from so-called soft surveys like those issued by the private Institute for Supply Management and the Fed system’s regional banks (see, e.g., here) real manufacturing production dropped by 0.29 percent sequentially. The decrease was the first since April, when national economic activity as a whole bottomed due to the spread of the CCP Virus and resulting shutdowns and stay-at-home orders.

The biggest bright spot in the report came from the upward nature of most revisions. August’s initially reported 0.96 percent monthly gain is now judged to have been 1.13 percent. The July result was upgraded from 3.97 percent to 4.30 percent. And June’s previous 7.64 percent improve was reduced to 3.61 percent. Further, these advances built on similar upward revisions that accompanied last month’s Fed report for August.

In fact, the revisions effect was strong enough to leave domestic industry’s cumulative after-inflation production performance during the virus-induced downturn better than the Fed’s estimate from last month. As of that industrial production report (for August), manufacturing constant dollar production had fallen 6.39 percent from its levels in February – the final month before the pandemic began impacting the economy. Today’s new September release now pegs that decline at only 5.81 percent, and even the monthly September decrease left it at 6.08 percent.

Nevertheless, the breadth of the September monthly decrease in overall price-adjusted manufacturing output unmistakably disappointed. Yes, the automotive sector (vehicles and parts combined) saw its on-month production tumble by 4.01 percent. But in contrast to most of the manufacturing data during the CCP Virus period, automotive didn’t move the overall manufacturing needle much, as real output ex-auto rose only fractionally in September.

Also discouraging –and unexpected, considering the good recent capital spending data reported by the Census Bureau (see, e.g., the “nondefense capital goods excluding aircraft” numbers for new orders in Table 5 in this latest release) – was the 0.41 inflation-adjusted production decline in the big machinery sector following five months of growth.

And even though the U.S. housing sector has been booming during the recession, real output of furniture also slumped for the first time in six months (by 0.96 percent), while price-adjusted household appliances production was down 4.99 percent after its own good five-month run.

As indicated by today’s revisions, these glum September manufacturing output figures could be upgraded in the coming months. Yet given the CCP Virus’ return – which will at best greatly complicate the challenge of maintaining recovery momentum for industry and the entire national economy – no one can reasonably rule out the possibility that, for now, Americans have seen peak post-virus manufacturing production.

Making News: Back on National Radio Tonight, a New Podcast…& More!

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Angela Merkel, Cato Journal, CCP Virus, China, collusion, coronavirus, COVID 19, election 2020, Germany, Gordon G. Chang, Joe Biden, journalism, Making News, manufacturing, Market Wrap with Moe Ansari, natural gas, Nord Stream 2, presidential debate, recession, recovery, reshoring, Russia, stimulus package, Ted Galen Carpenter, The John Batchelor Show, Trade, trade war, Trump, Trump-Russia, Wuhan virus

I’m pleased to announce that I’m scheduled to return to national radio tonight when I guest on The John Batchelor Show.  The subjects for John, co-host Gordon G. Chang, and me will be China, trade, manufacturing, and the election.

The pandemic is still forcing John and Gordon to pre-record segments, so I’m not yet sure about air-time.  But it seems that you can listen live to the show on-line at this all-purpose link starting at 9 PM EST.  And of course, if you can’t tune in, I’ll post a link to the podcast as soon as one’s available.

In addition, yesterday, I was interviewed on the popular Market Wrap with Moe Ansari radio show on the election (including the debate!), trade policy, the future of the entire U.S. economy, the fate of CCP Virus relief legislation, and a surprising recent example of collusion with Russia.  To listen to the podcast, click here and then on the show with my name on it.  My segment starts at about the 23:38 mark.

Finally, my friend Ted Galen Carpenter has just published in the Cato Journal a fascinating piece on the history of U.S. news coverage of U.S.-China relations – which certainly has seen its ups and downs in recent decades.  It was great, moreover, to see Ted cite two of my writings along the way.  Here’s the link.

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

Making News: Featured in The Los Angeles Times & Industry Today

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Brookings Institution, CCP Virus, China, coronavirus, COVID 19, election 2020, IndustryToday.com, Joe Biden, Making News, manufacturing, Michael Hiltzik, recession, recovery, The Los Angeles Times, Trade, Trump, working class, Wuhan virus

I’m pleased to report that my views have been presented three times in important news outlets in recent weeks.

Yesterday, Los Angeles Times business columnist Michael Hiltzik cited some of my research findings and perspectives in this essay on the economic policy differences between President Trump and his Democratic challenger, former Vice President Joe Biden.

Hiltzik’s piece, incidentally, reveals a great deal about how many journalists – including opinion journalists – work, at least in my experience.  He’s a clear Never Trumper, and so would need a lot of convincing to reach the conclusion that the President has done a commendable job of keeping his campaign promises to his working class supporters. (For the record, there’s nothing wrong with that, since everyone has his or her particular slant on life, everyone has every right to them, and Hiltzik is in the opinion business.)

Hiltzik did take the time to consult with someone like me, who does give Mr. Trump solid marks in this respect.  And during our conversation, he was genuinely interested in what I discovered when I looked at recent income trends in “Trump flip counties” – those that voted for Barack Obama in both 2008 and 2012, and then backed the President in 2016.  (I know the interest was genuine because he questioned me at length on the subject.)

All the same, if you read the entire column, you’ll see that he pooh-poohed Trump achievements like outdoing the Obama administration record on manufacturing job creation, and placed lots of weight on the findings of folks at the Brookings Institution, a mainstream establishment (and therefore pretty Never Trump-y) think tank, even when the opinions they expressed to him were flat wrong.  (In particular, there is no set of official data showing that U.S. after-inflation manufacturing output was “higher than it has ever been” right after the 2016 election.)

On balance, though, since my perspectives, however on target or not, are definitely minority perspectives, Hiltzik deserves praise for paying some attention to them.

The second and third instances were IndustryToday.com‘s re-publication of RealityChek posts on the latest government data on the (still-robust) recovery of U.S. manufacturing production, and on evidence that the President’s tariff-centric trade policies have performed effectively during the CCP Virus period in shielding domestic American manufacturing from predatory Chinese trade practices.

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

 

(What’s Left of) Our Economy: The Start of a V-Shaped Recovery So Far for Manufacturing Production, Too?

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aircraft, automotive, autos, Boeing, CCP Virus, durable goods, Federa Reserve, inflation-adjusted output, manufacturing, motor vehicles, non-durable goods, real output, recession, recovery, {What's Left of) Our Economy

The May Federal Reserve figures on inflation-adjusted U.S. manufacturing production were released this morning, and what stood out to me right away was how closely the main results resembled those of the remarkable May jobs report from the Labor Department. Not that the surprise factor for manufacturing output was anywhere near that for the jobs report. And of course factories don’t reopen or ramp up production in lockstep with gains in employment (which speak volumes about the economic fortunes of many of their customers). But consider the following figures and what they could be signaling about the pace of recovery:

On a monthly basis, as the CCP Virus pandemic’s effects peaked for the time being, the private sector shed 15.37 percent of its jobs in April, and for manufacturing, the figure was 10.34 percent. That month, real manufacturing output plunged sequentially by 15.66 percent.

In May, as the economy’s reopening sped up, private sector payrolls expanded by 2.86 percent, manufacturing saw a 1.96 percent net jobs gain, and manufacturing production rose by 3.83 percent. It looks an awful lot like an economy that’s bouncing back pretty quickly so far from the worst of the virus-induced shutdowns, but that still has far to go before returning to normal. Call it the possible start of a “V.”

Something else that comes through loud and clear about the latest Fed manufacturing reports – including today’s: They’re being remarkably driven by the stunning gyrations of the automotive sector, and especially price-adjusted vehicles output levels. In fact, in April, production of autos and light trucks – which literally had collapsed according to last month’s preliminary figures – have been revised down to as close to zero as you can get.

But before detailing those results, let’s return to 30,000 feet. That May monthly after-inflation manufacturing output increase was the biggest on record – and by a long shot. But April’s sequential nosedive was revised from 13.28 percent – and therefore is even more of a record-breaker than previously thought. And it’s only slight consolation that the March drop was reduced to 5.27 percent from 5.53 percent. (It was originally reported as 6.27 percent.) At least as bad, as of May, American factories’ monthly output in real terms was their lowest since Great Recession-y July, 2009.

Most of the action continues to be concentrated in the durable goods super-sector, which led manufacturing down in March and especially April, and led it up in May.

As with industry as a whole, the new monthly durable goods production drop for March was smaller than previously estimated (7.73 percent rather than 8.23 percent) and the April disaster was bigger than first judged (with constant dollar output down 21.64 percent rather than 19.27 percent).

Real output in the supersector increased by 5.83 percent sequentially in May – but that record monthly rise still left absolute production levels at their lowest since November, 2009, another Great Recession month.

And the automotive sector continues leading the fluctuations in durable goods production. The revisions for vehicles and parts combined for March and April were both slightly worse than previously judged (30.03 percent vs 29.96 percent for the former, and 76.47 percent versus 71.69 percent for the latter).

The May results (for now preliminary, as are all the May numbers – with April’s set for one more revision next month)? After-inflation output surged by 120.83 percent. That’s not a typo. For comparison’s sake, this latest jump smashed the old monthly record (29.95 percent, in July, 2009) by a factor of four. Even so, inflation-adjusted vehicle and parts output hasn’t been this low since July, 1983 – 33 years ago

As for the numbers for vehicles alone, they’ve been positively fantasmagorical. Cutting to the chase, “nosedived” and “careening” don’t begin to describe the April results. That month, auto and light truck output after inflation practically disappeared – standing 98.87 percent lower than in March and slightly worse than initially reported). Similarly, May’s improvement was less a rebound or even a rocket ride than a restart. What else can you reasonably call a 3,187.39 percent increase? And still, in absolute terms, that only brought output back to its worst level since February, 1982.

This astounding automotive performance, moreover, has clearly moved the needle for manufacturing as a whole. Without the April automotive tailspin, price-adjusted manufacturing production was off by 11.94 percent, not 15.66 percent. In May, without the recovery of the sector, U.S. constant dollar manufacturing production advanced by 1.96 percent – just about half the rate of the 3.83 percent increase recorded with automotive.

The May Fed manufacturing report left the relatively mild March output downturn in the non-durable goods super-sector unrevised at 2.64 percent. But the April decrease was estimates to be worse:  9.59 percent rather than 8.23 percent.

Non-durable factory production rose by 2.07 percent sequentially in May, but interestingly, that advance was only the biggest since October, 2017 2.28 percent – when lots of oil refineries and petrochemicals-using industries came back on line after that autumn’s hurricanes in the Gulf of Mexico.

Finally, some genuinely puzzling results seem to be recorded for the aircraft and aircraft parts sectors, which were troubled for months before the CCP Virus struck by Boeing’s safety woes . Whereas in last month’s Fed manufacturing report, the March monthly inflation-adjusted drop in these industries was reported at 12.09 percent, this morning it was reported to be just 5.38 percent.

More reasonably, the April sequential decline was judged to be slightly smaller – 28.31 percent rather than 28.88 percent. And May’s on-month recovery is estimated to be a robust 9.43 percent.

Since this spring’s manufacturing slump and rebound so closely resembles that of the jobs market, it’s fitting that the same questions hover over it. Will the comeback last, or are we seeing the real economy version of a stock market dead cat bounce? Like the Fed itself, RealityChek‘s judgments will be data-dependent.

Making News: New Daily Caller Piece On-Line on the CCP Virus and the Economy

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bankruptcies, CCP Virus, consumers, coronavirus, COVID 19, DailyCaller.com, deflation, economy, exports, Im-Politic, Jobs, manufacturing, public health, real estate, recession, recovery, rent, reopening, restart, restaurants, retail, small business, testing, travel, unemployment, vaccines, Wuhan virus

I’m pleased to announce that my latest freelance article has just been published on the popular DailyCaller.com news site.  The title pretty much says it all:  “Don’t Expect A V-Shaped Recovery From Coronavirus,” and you can read it at this link.

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

(What’s Left of) Our Economy: A Respectable Case for Optimism?

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CCP Virus, China, consumer confidence, consumers, coronavirus, COVID 19, Federal Reserve, Jerome Powell, lockdown, recovery, reopening, restart, restaurants, retail, second wave, shutdown, social distancing, Sweden, testing, vaccines, Wuhan virus, {What's Left of) Our Economy

At the risk of being (undeservedly) tarred as a CCP Virus pollyanna, I can’t help but being struck by the some new evidence that the U.S. economy’s recovery from its pandemic-induced swoon will be faster than widely feared. In fact, I still share these fears to some degree. But I can’t ignore increasing signs to the contrary.

To be clear, this evidence has little to do with the subject of yesterday’s post. Just because data can be cited showing significant national progress in beating back the virus threat doesn’t necessarily mean that a more so-called “V-shaped” economic rebound is on the way. The same goes for the impact of this progress on the economy reopening decisions of individual U.S. states – even though the more decline seen in numbers of new cases (despite gains in testing that should be revealing much more infection), numbers of deaths, and numbers of virus-related hospitalizations, the more reopening obviously will be seen.

Nor are my views being shaped by the strong rebound seen in U.S. stock markets so far (including today so far), or by the newly bullish recovery views voiced last night on “Sixty Minutes” by Federal Reserve Chair Jerome Powell. And this post isn’t even driven by the latest news about vaccine progress (though such reports will clearly help as long as the results continue being validated).

The reason: I’ve been convinced that the key to the recovery’s strength will be Americans’ willingness to start patronizing businesses in an economy where most activity – and most income earning opportunities – depend on consumer spending. So I’ve put considerable stock in predictions that, even though all the objective conditions can show that a return to normality will be safe, too many Americans will remain too fearful to boost the economy significantly.

I also take seriously the idea that all the restrictions on visiting retail stores (including restaurants) and personal service businesses will limit their customer flow either simply by forcing them to operate substantially below capacity, or by dissuading many customers from visiting in the first place, and thereby sharply reducing impulse consuming. Further, I’m well aware that the much more modest shock administered to Americans by the Great Recession triggered by the 2007-08 financial crisis was painfully slow to wear off. (See here and here where I write about reasons for recovery pessimism.)

In addition, the experiences of other countries that started reopening earlier has reenforced consumer caution concerns. Sweden, for example, has imposed fewer economic restrictions than any other major country. But this survey by the consulting firm McKinsey & Co. reports that consumer spending has dropped significantly anyway, and may not recover for months. China claims that it’s beaten the virus and its regime has been easing factory lockdowns since February. But as of late April, retail sales were still way down.

Finally, there’s the second wave threat, which could kneecap the economy as temperatures start dropping in the fall even if summer does witness a decent bounce back toward pre-virus consuming.

So the case against a relatively quick recovery with real legs is still awfully strong.

But don’t overlook reasons for more optimism. One that’s nothing less than amazing: The piece in this morning’s Washington Post reporting that even though virus testing is now much more widely available in the United States than previously, Americans are far from rushing to capitalize on these opportunities. Even accepting the various reasons offered in this article (e.g., not enough Americans know that the situation has changed; there’s too much mistrust of medical providers in some U.S. communities, particularly African-Americans), it’s difficult at least for me to conclude anything else but that many in the United States simply aren’t concerned enough about the pandemic to take this precaution. After all, if they were panic-stricken, wouldn’t they be following every bit of news about the supply of tests with baited breath?

Perhaps more important, the more news that emerges that the CCP Virus is much less lethal than early reports suggested, the (understandably) less concerned about infection more and more Americans seem to be.    

Then there are all the reports of Americans, whether in states that have eased lockdowns more vigorously and those that haven’t, violating social distance guidelines, either by not wearing masks where they’re supposed to, or seemingly ignoring social distancing rules in public place – and indeed returning to restaurants and bars and beaches in pretty impressive numbers. These reports are anecdotal, and therefore should be viewed with lots of caution. Also, please don’t assume that I’m endorsing this behavior! But there sure seems to be a lot of it, these reports also seem related to growing evidence of the virus’ relatively modest death rates, and and as an old adage goes, when enough anecdotes appear, they become data. 

Finally are several indicators pointing to an actual, non-trivial comeback in economic activity, and for a variety of sectors. This account mentions encouraging signs from the tech sector to the automotive industry. This article presents evidence of bottoming even in hard-hit bricks and mortars retail stores and restaurants. And click here for information on the housing industry.

Of course, the references above to “bottoming” could still be entirely consistent with pessimistic predictions of a painfully slow climb back to pre-virus prosperity. But I still find myself wondering if, having seen the overpoweringly depressive effect of various official edicts literally to halt and outlaw much economic activity, Americans might experience a reasonably powerful growth effect from their withdrawal – not to mention declining fears that infection is a death sentence.

(What’s Left of) Our Economy: How Bad Will it Get?

Tags

Baby Boom, CCP Virus, Cold War, coronavirus, COVID 19, Edward Harrison, Federal Reserve, Great Depression, Great Recession, health security, military spending, moral hazard, recession, recovery, secular stagnation, small business, start-ups, technology, Trump, uncertainty, unemployment, World War II, Wuhan virus, {What's Left of) Our Economy

How bad economically? That’s a CCP Virus-related question everyone’s understandably asking these days. In fact, last night one of my social media friends expressed the super-bear case pretty compellingly:

“I can’t see any way this is not going to destroy us. No one will have any money, so they won’t buy anything, won’t pay their bills, can’t pay rent or mortgages. No spending power means no employment. More layoffs. certainly as soon as stores open there wil be a rush to sell everything, a rush to normal, hoping for the best, but I think this is pretty much The End of life as we know it.”

And an economy-watcher I know with an unusually good feel for finance is awfully pessimistic, too – and has been right so far about the virus’ impact on output, employment, and the markets.

I’m feeling even less confident than usual in my economy crystal ball (that’s a low bar). The main reason of course is that the current U.S. nosedive, as I (and nearly everyone else) have observed, isn’t a standard recession or depression. That is, it hasn’t been caused either by some built-in weakness in the economy that finally becomes too big to ignore or paper over, or similar problems in the financial system that wind up wrecking the “real economy.” We can’t even blame the current crisis on some outside economic shock, like the boost in global oil prices that wreaked such economic havoc in the 1970s.

Even so, here are four somewhat related, extremely tentative thoughts that I hope will help readers form their own judgments about the American economy’s future. Spoiler alert: They’re pretty pessimistic.

First, the fundamentally biological nature of the crisis creates the kind of uncertainty that’s unprecedented in modern times, and that consumers, businesses, and investors will hate even more than usual. For example, what if there’s a second wave? Or a third? How will these three groups of economic actors respond to attempted restarts of economic activity that, however gradual or rolling, turn out to be premature?

Worse, what if the CCP Virus is here to stay for the time being, and treatments can only become good enough to reduce it to the status of a really nasty flu? And what if it mutates into something requiring qualitatively different cures?

Second, because of all these possible biology-rooted uncertainties, I fear that many of the standard arguments for expecting a relatively quick, strong rebound should be thrown out the window. All of them, after all – including President Trump’s – apparently assume that the timeout mandated in most of the economy’s consumption (and that therefore inevitably undermines its business spending) is creating lots of frustrated demand that will burst into actual spending once the crisis passes.

One big historical precedent cited: the aftermath of World War II. At that time, officials inside the federal government feared that growth would fizzle at best for two main reasons. First, the massive boost to growth and employment delivered by wartime military spending would dramatically fade. Second, this pessimism was no doubt greatly reenforced by the nation’s immediate pre-war experience – a lengthy and deep depression that showed no signs of ending until the global fascist threat inspired a pre-Pearl Harbor military buildup.

But after the war, consumption came back with a vengeance – because the main threats on everyone’s mind were decisively defeated; because so many Americans had lots of income to spend; because Washington laid the ground for more income-earning with programs like the G.I. Bill, along with war-time advances in science and technology that boasted phenomenal peacetime uses; and because baby-making boomed along with consumption, juicing demand for more housing in particular.

And let’s not forget the Cold War! The household spending binge did slow in 1947 and 1948. But by 1949, defense spending began rising again, and it really took off from 1951 on, once the Korean War in particular convinced policymakers that a global Communist threat was alive and here to stay.

Today, however, determining when the major threat is finally over is much more difficult. Unemployment is sure to rise much higher than the 5.9 percent pre-Korean War peak (in 1949), meaning that not only will incentives to save remain stronger, but that much more income is being lost. And nothing like a post-World War II Baby Boom was even in sight before the CCP Virus struck. Indeed, the arrows were pointing in the opposite direction. A post-virus repeat seems unimaginable.

The one interesting possible reason for purely economic optimism? A new military spending surge – perhaps spurred by worries about China? And new healthcare products investment might jump as well, possibly boosted by government incentives, to prevent a repeat of current supply shortages.

The third consideration weighing on my mind is the separation factor. Even if post-virus improvement is solid, I wonder how sustainable it will be. The main reason is that, at least during past episodes of major job loss (e.g., the last decade’s Great Recession that followed the global financial crisis), many of the unemployed face big difficulties returning to work in any form, and particular difficulties finding work at previous pay levels. Because the longer unemployment lasts, the harder these obstacles generally become, and because of the likely rate joblessness is likely to hit, this separation factor could become considerable even if unemployment insurance and other income supports do turn out to be generous enough to sustain such economic victims until the nation reaches “the other side.” 

The separation factor, moreover, may go beyond workers. I don’t by any means rule out the possibility that significant numbers of small business owners may call it quits, too – either because cratering demand for their products and services will kill off their enterprises, because the the government aid being offered doesn’t cover all their losses for long enough, or because they conclude that applying for the aid just isn’t worth the candle.

Sure, new start-ups will fill part of this gap. But all of it? Not if the abundant pre-crisis evidence of a significant drop-off in such entrepreneurism is any indication.

Fourth, also reenforcing the bear case: Although the roots of the current economic mess are dramatically different from those of the last near-meltdown and recession, the “whatever it takes” response of the federal government and the Federal Reserve are remarkably similar. As pointed out by Edward Harrison, the economy- and finance-watcher I cited above, on the one hand, the authorities probably don’t have a choice. On the other, this thick, pervasive safety net did produce an epidemic of “moral hazard” – financial decisions in particular that turn out to be bad but that initially look smart because confidence in some form of bailout reduces the perceived risks and costs of mistakes.

As I explained previously, the last outbreak of moral hazard took a painful pre-virus economic toll, as the resulting inefficient use of capital helped produce  one of the weakest economic recoveries American history. In fact, it’s produced a theory that I personally find as convincing as it is depressing (personally): secular stagnation. It holds that the economy has become so fundamentally unproductive and inefficient that the only way it’s been able to generate even adequate (not especially strong) levels of growth has been for government to inflate bubbles of various kinds (with all its moral hazard-creating spending and guarantees) that, of course, eventually burst. So it doesn’t seem at all unreasonable to believe that the upcoming recovery will be similarly feeble.

Even worse, according to Harrison, even the current official backstopping might not suffice to prevent defaults by the financially weakest businesses – which would generate their own harmful spillover effects.

I’m not saying that there’s no case for optimism – at least cautious optimism. The overall long-term historical momentum for improvement in living conditions the world over is very impressive. As a result, doom-saying has a lousy record in the post-World War II period in particular. Technological advance isn’t going to stop, and may not even slow much. Maybe most important, at least in the medium-term, the human desire to acquire and consume shows no signs of having vanished.

So maybe the safest conclusion to come to (however unsatisfyingly timid): This time won’t be completely different. But don’t bet on a simple, and particularly a quick, return to pre-virus times.

(What’s Left of) Our Economy: U.S. After-Inflation Wages Could Still Use More Inflation

Tags

Barack Obama, election 2020, inflation-adjusted wages, manufacturing, private sector, real wages, recovery, Trump, wages, {What's Left of) Our Economy

This morning’s real wages figures from the Labor Department (for December) contained an unusually diverse grab bag of results, and with a presidential election year now officially underway, perhaps the most newsworthy are those that could well affect the race for the White House – and which on balance seem unfavorable to President Trump.

In addition, though, some other results undermine a major belief about how after-inflation paychecks have fared during the current (record length) economic recovery versus its two immediate predecessors.

Not that the news was all bad for the President and his supporters (and anyone else rooting for a stronger American economy). Yes, overall, inflation-adjusted wages in the private sector dipped sequentially for the second time in three months – by 0.09 percent. (The Labor Department doesn’t track real public sector wages because their trends say more about politicians’ decisions than about economic fundamentals).

But if these preliminary figures hold tightly enough, the 2019 year-on-year improvement of 0.64 percent will be higher than 2018’s 0.56 percent increase.

At the same time, wage growth decelerated throughout 2019 – from 0.37 percent between January and June to 0.27 percent between June and December.

Real manufacturing wages fared better, continuing a year-long trend. Month-to-month in December they climbed by 0.18 percent, and their year-on-year increase and improvement were stronger than that of the private sector, too. The latest annual rise was 0.74 percent – up from the previous year’s flatline. And throughout 2019, they increased at the same 0.37 percent rates during both halves of the year.

But the results were less encouraging for non-supervisory workers in both the private sector overall and in manufacturing. By certain measures, paychecks for the lowest paid U.S. workers have been improving faster than those for the workforce overall. And using the Labor Department’s methodology of distinguishing supervisory from non-supervisory workers provides some support for that finding.

For example, on an annual basis, in 2019 and 2018, inflation-adjusted wages increased faster for both non-supervisory manufacturing and blue-collar workers than those wages for all workers, as shown here:

                                     Total private     N/S private     Total mfg      N/S mfg

Year-on-year, 2019:         +0.64%           +0.75%          +0.74%        +0.45%

Year-on-year, 2018:        +0.56%           +1.63%                0%          +1.14%

Yet the table also shows 2018-19 deceleration for both groups.

Moreover, on month in December, real wages for these blue-collar workers performed worse in absolute terms than for all private sector and manufacturing workers – actually falling by 0.21 percent for the former (the biggest decline since October, 2018’s 0.22 percent drop) and increasing by just 0.11 percent for the latter.

And deceleration continued through the year. Between the first and second halves of 2019, constant dollar wages increases for the private sector fell from 0.53 percent to 0.21 percent, and from 0.23 percent to 0.22 percent for manufacturing.

The impact of Boeing’s safety-related woes on aircraft manufacturing per se and on the company’s huge domestic supply chain could explain some of these disappointing figures for industry. But so could the uncertainties created either by Mr. Trump’s tariff-centric trade policies, or by their ragged implementation, or both. Further, as the numbers indicate, real wage weakness isn’t simply a manufacturing problem.

Perhaps most important for Mr. Trump, real wages’ performance during the first 34 months of his term in office (starting with February, 2017, his first full month), have lagged their increases during the most comparable period in Barack Obama’s presidency – his last 34 months in office (ending in January, 2017). Here are the results:

                                       Total private      N/S private      Total mfg        N/S mfg

1^st 34 Trump months:         +2.53%           +2.72%           +0.65%          +2.77%

last 34 Obama months:      +3.50%           +3.97%          +3.05%           +2.97%

Finally, the new real wages data show that when it comes to this gauge, the current economic recovery stacks up unexpectedly well with the two previous expansions where a reasonable amount of statistics exist – for non-supervisory workers. The comparison is especially striking between the current expansion and the 1990s expansion – which is widely viewed as an excellent one for both the economy and America’s employees.

                                                               Private    N/S private    mfg     N/S mfg

1990s expansion (2Q 91-1Q 01):             n/a           +6.37%       n/a      +2.18%

bubble expansion (4Q 01-4Q 07):           n/a            +0.35%       n/a      -2.77%

current expansion (2Q 09 – present):  +6.30%        +6.79%   +1.59%   +3.01%

Unfortunately for President Trump and Trump-ers, though, this longer-term picture isn’t likely to impress voters as much as more recent developments. And when it comes to workers’ after-inflation wages, he clearly has more work to do.

(What’s Left of) Our Economy: Those New GDP Numbers Keep Showing Healthier Trade-Related Growth Progress Under Trump

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debt, GDP, gross domestic product, inflation-adjusted growth, real GDP, real trade deficit, recession, recovery, Trade, trade deficit, {What's Left of) Our Economy

So much data were released yesterday morning on the U.S. economy’s growth rate – not only the initial read on the second quarter of this year, but revisions going back to 2014 – that it’s impossible to explore all the results and their implications in one post. As a result, I’ll focus today on the main messages being sent by how the tariff-centric Trump trade policies are affecting growth.

In a nutshell, the big takeaway for me was that, despite the sizable increase in the inflation-adjusted trade deficit in the second quarter of this year (to an annualized total of $978.70 billion – the second biggest ever, after the $983 billion mark hit in the fourth quarter of last year), the economy kept indicating that it can grow – and pretty strongly – without racking up big increases in trade gap. In other words, the United States is regaining the ability to expand at acceptable rates without getting deeper into hock. 

Still, there’s a major uncertainty hovering over these results: Signs continue that they’re being distorted by what’s called tariff front-running (accelerating purchases of imports in order to avoid announced or threatened duties), and the consequent effects on building and reducing business inventories. And since tariff threats hang over not only hundreds of billions of dollars of goods imports from China, but rhetorically anyway over automotive imports from all over the world, import and inventory levels could well remain volatile. Moreover, don’t forget the potential effect on exports: If President Trump carries through with tariff threats, foreign economies are likely to impose retaliatory levies on American goods, and curb these sales.

So far, though, so good.

As in recent reports on trade and the gross domestic product (or GDP – what economists define as “the economy”), this post will compare the economy’s growth rate with the growth rate of the trade deficit during two recent similar periods of time – the statistical year (e.g., four straight quarters) during which growth was fastest when former President Barack Obama was in office, and the statistical year during which growth has been fastest so far during President Trump’s administration.

Even with the latest revisions, the fastest statistical Obama growth year was between the second quarter of 2014 and the second quarter of 2015. Adjusted for inflation (the most closely followed GDP measure), the economy grew by 3.35 percent over those four quarters – just a little less than the 3.37 percent previously estimated. And during that period, the real trade deficit rose by 21.34 percent (a little more slowly than the 21.55 percent previously estimated).

Before today’s revisions, the fastest Trump era growth stretch took place between the first quarter of 2017 and the first quarter of 2018. But that 3.18 percent after inflation growth has now been downgraded all the way down to 2.65 percent. But growth between the second quarters of 2017 and 2018 has been revised up – to 3.20 percent. So there’s a new Trump growth champ.

But even though the Trump growth spurt has been only a little slower than its Obama counterpart, the story with the trade deficit was strikingly different. For during the Trump spurt, the gap widened by only 6.34 percent. That’s less than a third as fast as under Obama.

In other words, constant dollar growth under President Trump has taken place while piling up much less debt than similar growth during the Obama years. And growth that’s less reliant on debt is growth that’s a lot healthier and more sustainable.

Trump-era growth looks all the more sustainable upon realizing that during Mr. Trump’s administration so far, robust growth (at least by recent standards) has been much more self-reliant than during the Obama administration – at least until very recently. The table below shows the annual (calendar year, from fourth quarter to fourth quarter) real growth rates during the Obama and Trump presidencies starting in 2010 (the first full calendar yer of the current economic recovery); the growth rate of the after-inflation trade deficits, and the ratios between these two figures for each year:

Obama yrs          real GDP       real trade deficit      deficit growth to GDP growth

10-11:              1.61 percent       0.85 percent                         0.53:1

11-12:              1.47 percent      -0.92 percent                       -0.63:1

12-13:              2.61 percent     -8.89 percent                       -3.41:1

13-14:              2.88 percent    23.36 percent                        8.11:1

14-15:              1.90 percent    21.83 percent                      13.07:1

15-16:              2.03 percent    10.87 percent                       5:35:1

Trump years

16-17:             2.80 percent      5.90 percent                       2.11:1

17-18:             2.52 percent    11.22 percent                       4.45:1

The table shows that only once (between 2012 and 2013) did the Obama-era economy display any ability to grow faster than the humdrum rate of two percent with the trade deficit’s growth restrained. (In fact, it shrunk significantly.) Once growth accelerated (the following year), the trade shortfall exploded, and its rate of increase, along with those ratios, stayed high even as growth itself cooled notably.

Moreover, without pronounced tariff front-running, the 2017-18 Trump trade deficit figure and the resulting ratio both would likely have been much lower. And economic growth looks even more self-reliant, and therefore healthier, so far this year, as the follo  wing table shows:

                               real GDP      real trade deficit     deficit growth to GDP growth

4Q 18-1Q 19:       3.06 percent    -3.97 percent                       -1.30:1

1Q 19-2Q 19:       2.04 percent     3.68 percent                         1.80:1

The Trump record looks even better when presented on a rolling four quarters basis, starting with that peak Obama growth period between the second quarter of 2014 and the second quarter of 2015, and ending with the last such period – between the second quarter of 2018 and the second quarter of 2019:

                              real GDP      real trade deficit      deficit growth to GDP growth

2Q 14-2Q 15:    3.35 percent      21.34 percent                       6.37:1

3Q 14-3Q 15:    2.44 percent      30.60 percent                     12.54:1

4Q 14-4Q 15:    1.90 percent      21.83 percent                     11.49:1

1Q 15-1Q 16:    1.62 percent      11.72 percent                       7.23:1

2Q 15-2Q 16:    1.34 percent        9.59 percent                       7.16:1

3Q 15-3Q 16:    1.56 percent        2.42 percent                       1.55:1

4Q 15-4Q16:     2.03 percent     10.87 percent                        5.35:1

1Q 16-1Q 17:    2.10 percent       6.92 percent                        3.30:1

Trump

2Q 16-2Q 17:    2.16 percent    11.71 percent                        5.42:1

3Q 16-3Q 17:    2.42 percent      9.50 percent                       3.93:1

4Q 16-4Q 17:    2.80 percent     5.90 percent                        2.11:1

1Q 17-1Q 18:    2.86 percent     6.34 percent                       2.22:1

2Q 17-2Q 18:    3.20 percent     0.06 percent                       0.19:1

3Q 17-3Q 18:    3.13 percent   15.44 percent                      4.93:1

4Q 17-4Q 18:    2.52 percent   11.22 percent                      4.45:1

1Q 18-1Q 19:    2.65 percent     6.76 percent                      2.55:1

2Q 18-2Q 19:    2.29 percent   15.07 percent                      6.58:1

Though the figures fluctuate significantly, the difference under two different presidents at roughly the same phase of the same economic expansion is at least as significant. To start, the only time that annual real growth under Obama topped three percent during this stretch, the inflation-adjusted trade deficit soared 6.37 times faster. Under Trump, the economy has enjoyed two such periods. During the first, the real trade deficit barely budged. During the second, it rose 4.93 times faster than the economy.

During these Obama years, the after-inflation trade deficit’s annual growth rate slipped under ten percent three times. Real annual GDP growth never bested 2.10 percent during any of them. During the Trump years, sub-ten percent annual growth for the real trade deficit has occurred five times. Real annual GDP increased during those years at rates between 2.42 percent and 3.20 percent. The worst Obama ratio has been 12.54 percent. The worst Trump ratio has been 6.58 percent (coming during the most recent statistical year, and possibly indicating tariff front-running). 

Has President Trump managed to reduce the U.S. trade deficit as such, or made the U.S. economy, and especially strong growth, completely self-sufficient, and therefore free of debt dependence (in terms of parts of the economy where this is feasible, as opposed to, say, tropical fruit)? Of course not. The nearly $20 trillion American economy is obviously a supertanker that isn’t turned around easily or quickly. But it’s clear that whereas the United States was moving ever further from those goals before Mr. Trump was inaugurated, it’s now moving closer. Just as clear: If the President stays the course on tariffs (much less increase and/or broaden them), progress will likely continue.