Those Stubborn Facts: U.S. Inflation Has Wiped Out Stimulus Gains – & Then Some

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cost of living, inflation, stimulus, Those Stubborn Facts, wages Covid relief

Combined total of individuals’ COVID stimulus checks passed during the Trump and Biden administrations: $3,200

Total wage loss from inflation for the average worker between June, 2021 and June, 2022: $3,400

 

(“Inflation Has Now Devoured All Biden’s Covid ‘Rescue ‘ Checks,” unsigned editorial, Issues & Insights, July 18, 2022, Inflation Has Now Devoured All Biden’s COVID ‘Rescue’ Checks – Issues & Insights (issuesinsights.com))

(What’s Left of) Our Economy: A Second Straight Month of Production Shrinkage for U.S. Manufacturing

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aircraft, aircraft parts, apparel, appliances, automotive, CCP Virus, China, coronavirus, COVID 19, dollar, electrical components, electrical equipment, exchange rates, Federal Reserve, fiscal policy, inflation, inflation-adjusted growth, machinery, manufacturing, medical devices, medicines, metals, miscellaneous durable goods, monetary policy, personal protective equipment, petroleum and coal products, pharmaceuticals, production, real output, recession, semiconductor shortage, semiconductors, stimulus, supply chains, textiles, Trade Deficits, Wuhan virus, Zero Covid, {What's Left of) Our Economy

Yesterday’s after-inflation U.S. manufacturing production report (for June) marked a second straight decline in real output for domestic industry, adding to the evidence that this so far resilient sector is finally suffering the effects of the entire economy’s recent slowdown.

Another possible implication of the new downbeat results: The record and surging trade deficits being run in manufacturing lately may finally be starting undermine U.S.-based manufacturing’s growth. (See here for how and why.)

Also important to note: This release from the Federal Reserve incorporated the results of both typical monthly revisions but also its annual “benchmark” revision, which reexamined its data going back several years (in this case, to 2020), and updated the figures in light of any new findings.

And the combination has revealed some big surprises – notably that the domestic semiconductor industry, which along with its foreign competition has been struggling to keep up with recently booming worldwide demand, has turned out fully 36 percent less worth of microchips on a price-adjusted basis since the CCP Virus struck than was calculable from the (pre-revisions) May report.

In real terms, U.S.-based manufacturing shrank by 0.54 percent on month in June – the worst such result since last September’s 0.78 percent drop. Moreover, May’s originally reported 0.07 sequential percent dip is now judged to be a decrease of 0.52 percent.

The April results remained good, but were downgraded a second time, from 0.75 percent monthly growth in after inflation to 0.66 percent, while the March numbers told a similar story, with a third consecutive modest downward revision still leaving that month’s inflation-adjusted expansion at 0.76 percent.

Especially discouraging, though – the June report plus the two revisions left constant dollar U.S. manufacturing output just 2.98 percent greater than just before the pandemic struck the economy in full force and began distorting it, in February, 2020. The pre-benchmark revision May release pegged its virus-era real growth at a much higher 4.94 percent, and the first post-benchmark number was 4.12 percent.

May’s biggest manufacturing growth winners among the broadest manufacturing categories tracked by the Fed were:

>the very small apparel and leather goods industry. Its price-adjusted output surged by 2.54 percent month-to-month in June – its best such perfomance since May, 2021’s 2.63 percent. May’s initially reported 0.88 percent gain was revised down to a 0.34 percent loss, though. April’s upgraded 0.30 percent rise is now judged to be a 0.33 percent decrease, and March’s figures were revised down after two upgrades – from 1.54 to a still solid 1.30 percent. But whereas last month’s Fed release showed inflation-adjusted production in this sector up 4.59 percent during the pandemic era, this growth is now pegged at just 0.56 percent; 

>the miscellaneous durable goods sector, which contains the medical products like personal protective equipment looked to as major CCP Virus fighters. It’s June sequential output jump of 2.25 percent was its biggest since March, 2021’s 2.61 percent, and revisions were overall positive. May’s initially reported 0.96 percent monthly price-adjusted production gain was downgraded to 0.49 percent, but the April figure was revised up for a second time – to 0.71 percent – and March’s results were upgraded a third straight time, to 0.51 percent.

These industries are now 14.11 percent bigger in constant dollar terms than in February, 2020, versus the 11.41 percent gain calculable last month; and

>the electrical equipment, appliances, and components cluster, where price-adjusted production climbed 1.34 percent on a monthly basis in June, the strongest such showing since February’s 2.29 percent.. Revisions were positive on net, with May’s originally reported 1.83 percent monthly falloff downgraded to one of 2.35 percent, but April’s initially estimated -0.60 percent decrease upgraded a second time,to a 0.49 percent gain, and March’s three revisions resulting in an originally judged 1.03 percent increase now pegged at 1.23 percent. These results pushed these companies’ real production 5.59 percent higher than in immediately pre-pandemic-y February, 2020, not the 2.19 percent calculable last month;

The list of biggest manufacturing inflation-adjusted output losers for June was considerably longer, starting with

>printing and related support activities, where the monthly inflation-adjusted production loss of 2.16 percent was the worst such showing since February, 2021’s 2.26 percent. Revisions were actually net positive, with May’s initially reported dip of 0.35 percent upgraded to one of 0.15 percent; April’s results downgraded from a one percent advance to one of 0.33 percent after being revised up from an initially reported 0.49 percent; and March’s totals rising cumulatively from an initially reported 1.10 percent decrease to a decline of just 0.05 percent. All the same, the printing cluster is now judged to be 11.37 percent smaller in real terms than in February, 2020, not the 1.89 percent calculable last month;

>petroleum and coal products, whose June sequential production decrease of 1.92 percent was its biggest since January’s 2.96 percent. Revisions here were mixed, too, with May’s figure revised up from a 2.53 percent improvement to one of 2.61 percent; April’s totals downgraded a second time, from a 0.13 rise to one of 0.04 percent to a decrease of 1.91 percent; and March’s results increasing from an initial estimate of 0.72 percent to one of 1.03 percent. But whereas last month’s Fed release showed petroleum and coal products’ after-inflation output 1.21 percent above its last pre-pandemic level, this month’s reports that it’s 0.27 percent below.

>textiles and products, where price-adjusted output sank on month by 1.80 percent for its worst month since March’s 2.45 percent shrinkage. Revisions were negative, with May’s initially reported 0.02 percent real production decline downgraded to one of 0.35 percent, April’s upgraded 0.45 percent increase now pegged as a 0.05 percent decrease, and March’s initially reported 1.55 percent falloff now judged to be one of 2.45 percent. As a result, the sector is now 5.35 percent smaller in terms of constant dollar output, rather than down 3.80 percent as calculable last month; and

>primary metals, whose inflation-adjusted production sagged by 1.60 percent on month – its poorest performance since March’s 1.42 retreat. Revisions were overall positive here, with May’s initially reported 0.77 percent real output rise downgraded to one of 0.66 percent, April’s initially downgraded 1.22 percent increase revised up to 1.46 percent, and March’s initially reported 1.69 percent drop now judged to be that aforementioned 1.42 percent. Even so, primary metals price-adjusted production is now estimated as having inched up only 0.50 percent since the pandemic arrived, not the 4.45 percent increase calculable last month.

In addition, an unusually high three other major industry sectors suffered constant dollar output declines of more than one percent on month in June. On top of plastics and rubber products (1.25 percent), the were two that RealityChek has followed especially closely during the pandemic period – machinery and automotive.

As known by RealityChek regulars, the machinery industry is a bellwether for both the rest of manufacturing and the entire economy, since use of its products is so widespread. But in June, its real production was off by 1.14 percent on month, and May’s initially reported 2.14 percent decrease is now estimated at-3.14 percent – its worst figure since the 18.64 collapse recorded in pandemic-y April, 2020. And although this April’s numbers have been revised up twice, to have reached 2.20 percen, March’s initially reported 0.78 percent inflation-adjusted increase is now estimated to have been a 0.89 decrease. Consequently, in price-adjusted terms, the machinery sector is now estimated to be 4.70 percent larger than in February, 2020, not the 6.29 percent calculable last month.

As for motor vehicles and parts makers, dogged for months by that aforementioned semiconductor shortage, their real output was off by 1.49 percent on month in June, and May’s initially reported rise of 0.70 percent is now estimated as a1.86 percent decline. Following a slight downgrade, April’s output is now pegged as growing by 3.85 percent rather than 3.34 percent, and March’s initially reported 7.80 percent advance is now pegged at 9.08 percent – the best such total since last October’s 10.34 percent. Nonetheless, after-inflation automotive output is now reported to be 1.07 percent lower than just before the pandemic arrive in force, not the 1.17 percent higher calculable last month.

Notably, other industries that consistently have made headlines during the pandemic outperformed the rest of manufacturing in June.

Constant dollar output by aircraft- and aircraft parts-makers was up 0.26 percent month-to-month in June, but revisions were mixed. May’s initially reported 0.33 percent rise has now been downgraded to a 0.23 percent decline – snapping a four-month winning streak. April’s results were upgraded a second straight time – from a hugely upgraded 2.90 percent to an excellent 3.13 percent (the best such performance since January, 2021’s 8.60 percent burst). But the March figures have been substantially downgraded from an initially reported 2.31 percent to a gain of just 0.53 percent. After all this volatility, though, real aircaft and parts production is now 25.58 percent greater than in February, 2020, much better than the 19.08 percent calculable last month.

The big pharmaceuticals and medicines industry grew its real putput by another 0.39 percent in June, but revisions were generally negative. May’s initially reported 0.42 percent improvement, however, is now judged to be just an infinitesimal 0.01 percent. April’s upgraded 0.15 percent rise is now pegged as a 0.04 percent loss, and March’s results have been downgraded all the way from an initially reported 1.17 percent increase to one of just 0.49 percent. Price-adjusted output in these sectors, therefore, is now estimated at 12.98 percent higher than in February, 2020, versus the 14.64 percent calculable last month.

Medical equipment and supplies firms boosted their inflation-adjusted output for a sixth straight month in June, and by a stellar 3.12 percent – their best such performance since January’s 3.15 percent. May’s growth was downgraded from 1.44 percent to 1.01 percent, but April’s estimate rose again, from 0.51 percent to 1.01 percent, and March’s initially reported 1.81 percent improvement has been slightly downgraded to 1.67 percent. This progress pushed these companies’ real pandemic era output growth from the 11.51 percent calculable last month to 17.27 percent.

The news was significantly worse, though, in that shortage-plagued semiconductor industry. Real production rose by 0.18 percent sequentially in June, but May’s initially reported 0.52 percent advance is now judged to have been a 2.24 percent drop. Meanwhile, April’s already dreary initially reported 1.85 percent slump has now been downgraded again to one of 2.71 percent (the sector’s worst such performance since the 11.26 percent plunge in December, 2008 – in the middle of the Great Recession that followed the global financial crisis). Even March’s initially reported impressive 1.99 percent monthly price-adjusted production increase has been revised all the way down to 0.52 percent.

The bottom line: The pandemic-era semiconductor real production increase that was estimated at 23.82 percent last month is now judged to have been just 15.22 percent.

It’s not as if the recent official manufacturing data has been all disappointing. Employment, notably, rose respectably on month in June. And the pace of capital spending has actually sped up some (at least through May) – which, like employment is a sign of continued optimism among manufacturers about their future outlook.

But at this point, the headwinds look stronger – including continued credit tightening by the Federal Reserve (not to mention a drawdown in the massive bond purchases that also have significantly propped up the entire economy); the resulting downshifting in domestic economic growth at which the Fed is aiming in order to bring down raging inflation; an even worse slump in economies overseas, which have been important markets for U.S.-based industry; the strongest dollar in about two decades, which puts Made in America products at a price disadvantage the world over; and the ongoing supply chain snags resulting from the Ukraine-Russia War and China’s lockdowns-happy Zero Covid policy.

And don’t forget those stratospheric and still-rising manufacturing trade deficits, which could well mean that, once the unprecedented pandemic fiscal and monetary stimulus/virus relief that have helped create so much business for domestic industry starts fading significantly, U.S.-based manufacturers could might themselves further behind the eight-ball than ever.  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Is the New (April) U.S. Trade Report a False Dawn?

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Advanced Technology Products, Biden, Census Bureau, China, Donald Trump, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, services trade, South Korea, stimulus, supply chains, Switzerland, tariffs, Trade, trade deficit, Zero Covid, {What's Left of) Our Economy

Although today’s new official figures showed a major dropoff in the U.S. trade deficit between March and April, and the results came from a normally encouraging combination of more exports and fewer imports, the Census data also show that big caveats and questions are hanging over these results and how enduring they might be.

First and foremost, the improvement in the combined goods and services deficits, and all virtually all the trade balances comprising it, could be resulting from a dramatic slowdown in U.S. economic growth. Second, the latest decline in the chronic and huge U.S. goods trade gap with China surely stems from Beijing’s recent over-the-top (but surely temporary) Zero Covid policies, which have further snagged already tangled up supply chains. And third, large revisions in some of the numbers (especially for services trade) inevitably cast some doubt as to their reliability lately.

In fact, these features of the report – along with the still-near historic levels of many of these trade deficits and other usually typical gap-widening developments like a strong U.S. dollar and still-astronomical levels of economic stimulus from Washington – are telling me that my prediction last month of higher deficits to come will age pretty well.

Not that the narrowing of the trade gap in April was bupkis. The combined goods and services deficit fell 19.11 percent from March’s all-time high of $107.65 billion (which itself was revised down a hefty 1.96 percent) to $87.08 billion. This level was the lowest since December’s $78.87 billion and the nosedive the biggest since December, 2012’s 19.85 percent.

And as just mentioned, the improvement came from the right combination of reasons. Total exports hit their third straight monthly record, rising 3.49 percent from an upwardly revised (by 0.99 percent) $244.11 billion to $252.62 billion

Overall imports, meanwhile, tumbled 3.43 percent from their record $351.79 billion to $339.70 billion. The total was the second biggest ever, but the decrease was the greatest since the 13.16 shrinkage during pandemic-y and recession-y April, 2020.

The trade shortfall in goods was down 15.04 percent from a downwardly revised (by 1.04 percent) $126.81 billion in March to $107.74 percent in April. This level, too, was the lowest since December’s $100.52 billion, and the 15.04 percent sequential tumble the biggest since April, 2015’s 15.09 percent.

Goods exports rose sequentially by 3.57 percent in April, from 170.04 billion to a third consecutive record of $176.11 billion. And U.S. purchases of foreign goods sank by 4.38 percent on month in April, from a downwardly revised (by 0.65 percent) record $296.85 billion to $283.84 billion (as with total imports, the second highest result of all time). The decrease was the biggest since the 12.79 percent drop in that pandemic-y April, 2020.

But even the above sizable revisions paled before those made for services trade. The March surplus was upgraded fully 4.48 percent, from $18.34 billion to $19.16 billion, and the April figure grew by another 7.83 percent to $20.66 billion – the highest level since December’s $21.66 billion.

Services exports (apparently) deserve much of the credit. They reached an all-time high of $76.52 billion. This total bested May, 2019’s previous record of $75.41 billion by only 1.46 percent, but the milestone is significant given the outsized hit suffered by the service sector worldwide during the pandemic period.

April services exports, moreover, rose 3.30 percent from March’s $74.07 billion – a total that itself was revised up by 4.23 percent.

Services imports set their third consecutive monthly record in April, rising 1.73 percent, to $55.86 billion, from March’s upwardly revised (by 4.19 percent) $54.19 billion.

A big April fall-off also came in the non-oil goods trade deficit – known to RealityChek regulars as the Made in Washington trade deficit, because by stripping out figures for oil (which trade diplomacy usually ignores) and services (where liberalization efforts have barely begun), it stems from those U.S. trade flows that have been heavily influenced by trade policy decisions.

This shortfall decreased by 14.72 percent in April, to $108.68 billion, from March’s downwardly revised record $127.42 billion. The drop was the biggest since March, 2013’s 16.74 percent.

The enormous and persistent manufacturing trade deficit retreated in April from record levels, too. But even though the month’s $124.41 billion shortfall was 12.71 percent lower than March’s all-time high $142.22 billion, and even though the monthly decline of 12.71 percent was the biggest since pandemic-y February, 2020’s 23.09 percent, this deficit was still the second biggest ever.

April’s manufactures exports of $109.36 billion were 4.03 percent lower than March’s record $113.96 billion, but were still the second best total on record. Ditto for the month’s manufactures imports, which tumbled 8.85 percent from their March record of $256.18 billion to $233.50 billion.

Another April fall-off from a record monthly deficit came in advanced technology products (ATP). After ballooning by 73.65 percent sequentially in March, to $23.31 billion, the recently volatile gap narrowed in April by 21.50 percent, to $18.30 billion.

Both the better manufactuing and ATP trade figures surely stemmed at least in part from the Zero Covid policies that interfered with so much industrial production from China. The U.S. goods deficit with the People’s Repubic, however, narrowed by just 10.02 percent on month in April, from $34 billion to $30.57 billion. Even so, the level was the lowest since last July’s $28.56 billion.

U.S. goods exports to China were down on month in April by 16.25 percent (their biggest drop since February, 2021’s 278.85 percent), from $13.38 billion to $11.20b. This total is the lowest since last September’s $11.03 billion.

The much greater amount of U.S. goods imports from China plummeted 11.82 percent n month in April, from $47.37 billion to $41.77 billion – the lowest level since last July’s $40.32 billion.

Also notable – breaking a pattern going back several years — the 10.02 percent April monthly drop in the U.S. goods deficit with China was smaller than the month’s sequential decline in the non-oil goods deficit (14.72 percent). And on a yar-to-date basis, the China deficit is up only slightly less (27.59 percent) than the non-oil deficit (28.95 percent). So the next few months’ worth of data may shed some light on whether the Trump (now Biden) tariffs on China are losing their effectiveness, or whether the last few months’ numbers are anomalies.

Other significant April results for individual U.S. trade partners: The goods deficit with South Korea set a new record of $4.09 billion – 23.79 percent higher than March’s total of $3.30 billion and 21.70 percent greater than the old record of $3.36 billion set last September.

And the goods deficit with Switzerland cratered in April by 67.63 percent, to $2.89 billion, from March’s $8.93 billion level. The percentage shrinkage of this bilateral trade gap was the biggest since September, 2018, when a $1.22 billion U.S. deficit turned into a $149 million surplus.

(What’s Left of) Our Economy: Why U.S. Manufacturing’s Record Trade Deficits Aren’t Biting — Yet

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Biden administration, CCP Virus, China, consumers, coronavirus, COVID 19, Covid relief, exports, Federal Reserve, imports, inflation, manufacturing, manufacturing jobs, manufacturing production, stimulus, tariffs, Trade, Trade Deficits, {What's Left of) Our Economy

Perceptive RealityChek readers (no doubt the great majority!) have surely noticed something odd about my treatment of trade-related developments and the American domestic manufacturing base. For most of the CCP Virus period, I’ve been writing both that U.S.-based industry has been performing well according to practically every major measure, and that the manufacturing trade deficit has been setting new record highs.

It’s not that I’ve ignored a situation that would normally strike me as being utterly paradoxical and even inconceivable over any serious time span. I’ve mainly attributed it to the pandemic’s main economic damage being inflicted on services industries, and to the Trump tariffs on Chinese imports, which have shielded domestic manufacturers from hundreds of billions of dollars’ worth of competition that has nothing to do with free trade or free markets.

But the longer manufacturing has excelled as the trade gap has skyrocketed, the more convinced I’ve been that something else was at work, too. What finally illuminated this influence has been the recent controversy these last few weeks over President Biden’s suggestion that he might cut some of those Trump China tariffs in order to curb inflation.

As I’ve written previously (see, e.g., here), there’s no shortage of economic-related reasons to dismiss the claims that levies that began being imposed in mid-2018 bear any responsibilityfor inflation that only became worrisome three years later, and that reducing the tariffs would ease this inflation meaningfully. Even the Biden administration keeps admitting the latter point.

But the increasingly striking contrast between manufacturing’s strong output, job creation, and capital equipment spending on the one hand, and its historically awful trade deficits on the other points to the paramount importance of another explanation I’ve mentioned for doubting that tariffs have fueled inflation. It’s the role played by the economy’s overall level of demand.

I’ve written that trade levies will contribute to higher prices or boost prices all by themselves overwhelmingly when consumers are spending freely – and consequently when businesses understandably believe they have scope to charge more for tariff-ed goods. That is, companies are confident that the higher costs stemming from tariffs can be passed along to customers who simply aren’t very price sensitive.

Strong enough demand, however, has another crucial effect on manufacturing – and on other traded goods: It creates a market growing fast enough to enable domestic companies to prosper even when their foreign competitors are out-performing them and taking share of that market. In other words, even though all entrants aren’t benefitting equally, all can still benefit.

Conversely, when demand for manufactures is expanding sluggishly, or not at all, this kind of win-win situation disappears. Then U.S.-based and foreign industry are competing for a stagnant group of customers, and one’s gain of market share becomes the other’s loss. In this situation, increasing trade deficits mean that American demand is being met by imports to eliminate any incentive for domestic manufacturers to boost production or employment. Indeed, they become hard-pressed even to maintain output and payrolls.

Of course, even if trade deficits keep surging during periods of slow domestic demand, U.S.-based manufacturers can still in principle keep turning out ever more products and hiring ever more workers if they can achieve one goal: super-charging their export sales. But the persistently mammoth scale of the American manufacturing trade shortfall indicates either that foreign demand for U.S.-made goods almost never improves enough to compensate for reduced or stagnant domestic sales, or that foreign economies prevent such growth by keeping many American goods out, or some combination of the two.

Super-strong demand for manufactured goods is precisely what’s characterized the economy since the CCP Virus arrived in force. As a result, the pie has gotten so much bigger that domestic industry as a whole has had no problem finding enough new customers to support healthy production and hiring levels even though imports’ sales have been lapping them.

Specifically, between the first quarter of 2020 and the fourth quarter of last year (the last quarter for which current-dollar (or pre-inflation) U.S. manufacturing production data are available, the U.S. market for manufactures increased by 22.83 percent – or $1.518 trillion. Revealingly, this demand would have been strong enough to enable domestic industry to pass tariff hikes on to customers, and enable these levies to fuel inflation on at least a one-time basis. But tariffs of course have not been raised during this stretch.

Meanwhile, the manufacturing trade deficit soared by 64.31 percent ($566 billion). And the import share of the U.S. market rose from 29.50 percent to 32.47 percent.

But domestic industry was able to boost its production (according to a measure called current-dollar gross output) by 16.55 percent, or just under $954 billion. ,

Contrast these results with the pre-CCP Virus expansion. During those 10.5 years (from the second quarter of 2009 through the fourth quarter of 2019), the U.S. market for manufactured goods increased by just 45.37 percent, or $2.154 trillion. That is, even though it was more than five times longer than the above pandemic period, that market grew by only about twice as much.

The manufacturing trade deficit actually also grew at a slower rate than during the much shorter pandemic period (169.2 percent). But because the pie was expanding more slowly, too, the import share of this domestic manufacturing market climbed from 23.12 percent to 31.10 percent.  These home market share losses combined with inadequate exports were enough to limit the growth of U.S. manufacturing output to 34.64 percent, or $1.512 trillion. Again, though this 2009-2019 growth took place over a time-span more than five times longer than the pandemic period, it was only about twice as great. That is, the pace was much more sluggish.

And not so coincidentally, because pre-CCP Virus demand for manufactures was so sluggish, too, businesses concluded they had little or no scope to raise prices when significant tariffs began to be imposed in 2018. Further, the levies generated no notable inflation over any significant period even on a one-time basis. Companies all along the relevant supply chains (including in China) had to respond with some combination of finding alternative markets, becoming more efficient, or simply eating the higher costs.

The good news is that as long as the U.S. market for manufactures keeps ballooning, domestic industry can keep boosting production and employment even if the manufacturing trade deficit keeps worsening or simply stays astronomical, and even if domestic industry keeps losing market share.

The bad news is that the rocket fuel that ignited this growth spurt is running out. Massive pandemic relief programs that put trillions of dollars into consumers’ pockets aren’t being renewed, and Americans are starting to dig into the savings they were able to pile up in order to finance their expenses (although, as noted here, these savings remain gargantuan). Credit is being made more expensive by the Federal Reserve’s decision both to raise interest rates and to reduce its immense and highly stimulative bond holdings. And some evidence shows that U.S. consumer spending is shifting from goods like manufactures to services (although some other evidence says “Don’t be so sure.”)

Worse, when the stimulus tide finally recedes, domestic industry will likely find itself in a shakier competitive position than before. For without considerably above-trend demand growth, and with the foreign competition controlling more of the remaining market than before the pandemic, it will find itself more dependent than ever on maintaining production and employment (let alone increasing them) by winning back customers it has already lost. And changing purchasing patterns in place will be much more challenging than selling to customers whose patterns haven’t yet been set.

U.S. based manufacturing is variegated enough – including in terms of specific sectors’ strengths and weaknesses – that the above generalizations don’t and won’t hold for every single industry. But the macro numbers make clear that domestic manufacturing as a whole has experienced unusually fat years lately, and generally has been competitive enough to take some advantage of these favorable conditions. But industry’s continuing and indeed widening trade shortfall and market share losses in its own back yard should also be warning both manufacturers overall and Washington that many of domestic industry’s pre-pandemic troubles could come roaring back once leaner years return.

(What’s Left of) Our Economy: U.S. Manufacturing’s Hiring Takes a (Slight) Breather

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aerospace, aircraft, aircraft engines, aircraft parts, automotive, CCP Virus, chemicals, computer and electronics products, coronavirus, COVID 19, fabricated metals products, Federal Reserve, fiscal policy, food products, inflation, Jobs, Labor Department, machinery, manufacturing, medical devices, medicines, monetary policy, non-farm jobs, non-farm payrolls, personal protective equipment, pharmaceuticals, PPE, semiconductor shortages, semiconductors, stimulus, transportation equipment, Ukraine, Ukraine-Russia war, vaccines, wood products, {What's Left of) Our Economy

U.S.-based manufacturing’s employment performance has been so strong lately that the 18,000 net gain for May reported in today’s official U.S. jobs report was the worst such performance in more than a year – specifically, since April, 2021’s 28,000 employment loss. And even that dismal result stemmed mainly from automotive factories that were shut down due to semiconductor shortages – not from any underlying weakness in domestic industry.

Moreover, revisions of the last several months’ of sizable hiring increases were revised higher. April’s initially reported 55,000 increase is now pegged at 61,000, and March’s headcount boost was upgraded again, this time all the way from 43,000 to 58,000.

Indeed, taken together, this payroll surge has enabled U.S.-based manufacturing to increase its share of American jobs again. As of May, industry’s employment as a share of the U.S. total (called “non-farm payrolls” by the Labor Department that releases the data) rose sequentially from the 8.41 percent calculable last month to 8.42 percent. And the manufacturing share of total private sector jobs climbed from the 9.86 percent calculable last month to 9.87 percent..

The improvement since February, 2020 – the last full data month before the CCP Virus’ arrival began roiling and distorting the entire U.S. economy – has been even greater. Then, manufacturing jobs represented just 8.38 percent of all non-farm jobs and 9.83 percent of all private sector employment.

Domestic industry still slightly lags the private sector in terms of regaining jobs lost during the worst of the pandemic-induced recession of March and April, 2020. The latter has recovered 99.01 percent of the 21.016 million jobs it shed, compared with manufacturing’s 98.75 percent of its 1.345 million lost jobs.

But the main reason is that industry’s jobs losses during those months were smaller proportionately than those of the private sector overall.

Viewed from another vantage point, the May figures mean that manufacturing employment is just 0.13 percent smaller than just before the pandemic struck.

May’s biggest manufacturing jobs winners among the broadest individual industry categories tracked by the Labor Department were:

>fabricated metals products, which boosted employment on month by 7,100 – the sector’s biggest rise since since February’s 9,300. Its recent hiring spree has brought fabricated metals products makers’ payrolls to within 2.24 percent of their immediate pre-CCP Virus (February, 2020) levels;

>food products,where payrolls grew by 6,100 sequentially in May. Employment in this enormous sector is now 2.53 percent higher than in February, 2020;

>the huge computer and electronics products sector, whose headcount improved by 4,400 over April’s levels. As a result, its workforce is now just 0.19 percent smaller than in immediate pre-pandemic-y February, 2020;

>wood products, which added 3,800 employees in May over its April levels. Along with April’s identical gain, these results were these businesses’ best since May, 2020’s 13,800 jump, during the strong initial recovery from the virus-induced downturn. Wood products now employs 6.85 percent more workers than in February, 2020; and

>chemicals, a very big industry whose workforce was up in May by 3,700 over the April total. The result was the best since January’s 5,500 sequential jobs growth, and pushed employment in this industry 4.76 percent higher than in February. 2020.

The biggest May job losers among those broad manufacturing groupings were:

>transportation equipment, another enormous category where employment fell by 7,900 month-to-month in May. That drop was the biggest since February’s 19,900 nosedive. But it followed an April monthly increase that was revised up from 13,700 to 19.500. All this volatility – heavily influenced by the aforementioned semiconductor shortage that has plagued the automotive industry – has left transportation equipment payrolls 2.57 percent smaller than just before the pandemic’s arrival in February, 2020;

>machinery, whose 7,900 sequential job decline in May was its worst such result and first monthly decrease since November’s 7,000. Moreover, April’s initially reported 7,400 payroll increase in machinery is now judged to be only 5,900. These developments are discouraging because machinery’s products are used so widely throughout the entire economy, and prolonged hiring doldrums could reflect a slowdown in demand that could presage weakness in other sectors. Machinery payrolls are now down 2.12 percent since February, 2020; andent since February 2020; and

>miscellaneous nondurable goods, where employment shrank in May by 2,900 on month. But here again, a very good April increase first reported at 3,300 is now judged to have been 4,400, and thanks to recent robust hiring in this catch-all category, too, its employment levels are 8.12 percent higher than in February. 2020.

As always, the most detailed employment data for pandemic-related industries are one month behind those in the broader categories, and their April job creation overall looked somewhat better than that for domestic manufacturing as a whole.

Semiconductors are still too scarce nationally and globally, but the semiconductor and related devices sector grew employment by 900 on month in April – its biggest addition since last October’s 1,000. March’s initially reported 700 jobs gain was revised down to 400, and February’s upgraded hiring increase of 100 stayed unrevised. Consequently, payrolls in this industry are up 1.66 percent since just before the pandemic arrived in full force, and it must be kept in mind that even during the deep spring, 2020 economy-wide downturn, it actually boosted employment.

The news was worse in surgical appliances and supplies – a category containing personal protective equipment (think “facemasks”) and similar medical goods. April’s sequential jobs dip of 200 was the worst such performance since October’s 300 fall-off, but at least March’s initially reported 1,100 increase remained intact (as did February’s downwardly revised – frm 800 – “no change.” Employment in surgical appliances and supplies, however, is still 3.88 percent greater than in immediate pre-pandemic-y February, 2020.

In the very big pharmaceuticals and medicines industry, this year’s recent strong hiring continued in April, as the sector added 1,400 new workers sequentially – its biggest gains since last June’s 2,600. In addition, March’s initially reported increase of 900 was revised up to 1,200, and February’s slightly downgraded 1,000 rise remained unchanged. Not surprisingly, therefore, this sector’s workforce is up by 9.78 percent during the CCP Virus era.

Job creation was excellent as well in the medicines subsector containing vaccines. April’s 1,100 monthly headcount growth was the greatest since last December’s 2,000. March’s initially reported payroll rise of 400 was upgraded to 600, and February’s results stayed at a slightly downgraded 500. In all, vaccine manufacturing-related jobs has now increased by fully 24.47 percent since February, 2020.

Aircraft manufacturers added just only 200 employees on month in April, but March’s jobs gain was revised up from 1,100 to 1,200 (the best such result since last June’s 4,000), and February’s upwardly revised 600 advance remained unchanged. Aircraft employment is still off by 10.96 percent since the pandemic’s arrival in force.

Aircraft engines and engine parts makers were in a hiring mood in April, too. Their employment grew by 900 sequentially, March’s 500 increase was revised up to 600, and February’s unrevised monthly increase of 900 stayed unrevised. Payrolls in this sector have now climbed to within 11.56 percent of their level just before the CCP Virus hit.

As for the non-engine aircraft parts and equipment sector, it made continued modest employment progress in April, with the monthly headcount addition of 300 following unrevised gains of 700 in March and 200 in February. But these companies’ workforces are still 15.48 percent smaller than their immediate pre-pandemic totals.

The U.S. economy is clearly in a period of growth much slower than last year’s, and since there’s no shortage of actual and potential headwinds (e.g., the course of the Ukraine War, the Fed’s monetary tightening campaign, persistent lofty inflation, the likely absence of further fiscal stimulus), no one can reasonably rule out a recession that drags down manufacturing’s hiring with it. But until domestic industry’s job creation and production growth starts deteriorating dramatically and remains weak, today’s so-so employment figures look like a breather at worst – and not much of one at that.

(What’s Left of) Our Economy: High Inflation’s No Longer Baseline-y But Getting No Less Puzzling

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

This morning’s final pre-Ukraine War Labor Department report on U.S. inflation (for February) contained some relief for data geeks: The “baseline effect” for headline inflation that I (and others) have been arguing has kept reported price rises higher than they’d ordinarily be, seems to have come to an end. 

So going forward, these data should stop confusing the inflation picture (which would already have been worrisome enough). That’s because on an annual basis, they’ve partly stemmed from the inflation figures from 2019-2020 and early 2020-21 being uusually low because of the CCP Virus, related lockdowns, and their depressing effect on economic activity and consumer prices.

Not that the nature of inflation will become entirely clear – or that the news on the prices front is becoming remotely good. After all, regardless of how strongly or not the U.S. economy keeps recovering from its pandemic-related ills, headline inflation appears bound to get worse going forward because of the disruptions to global oil and food supplies resulting from the Ukraine conflict – including curbs on purchases of energy from Russia. And these of course are coming on top of the supply chain snags that have pushed inflation up because of the peculiar stop-start nature of the pandemic era economy and its only gradually normalizing aftermath.

The February numbers indicate that the baseline effects are already shrinking for core inflation data, too. These strip out both energy and food costs because they’re seen as unusually volatile for reasons having nothing to do with the economy’s underlying inflation “prone-ness.”

Not that this distinction between headline and core inflation is or ever has been truly clearcut. Energy prices, in particular, strongly affect the costs of virtually everything created or provided by businesses (including food!). So the energy and food components of headline inflation clearly bleed into core inflation.

Even so, deciding the nature of inflation’s main causes matters because they heavily influence the response of the Federal Reserve – which is required by law to help maintain price stability (along with promoting employment). If the Fed judges that today’s inflation is mainly the classic type – consumer demand growing much faster than the supply of goods and services simply because Americans have too much spending power – then it will continue responding, as it has so far. That is, it will keep reducing the massive stimulus it injected into the economy during the sharp virus-induced recession.

Such monetary “tightening” would slow growth (and cool off prices), and even risk another recession. But so far, the Fed seems convinced that’s a risk worth taking in order to bring inflation under control.

But if the central bank changes its mind and assigns much more blame for inflation to serious price shocks in energy and commodities due to the Ukraine conflict, then it will probably keep monetary policy extremely loose, or tighten less and even more gradually than originally planned.

Adequate growth, therefore, could be maintained, but prices could spiral to genuinely dangerous degrees, and inflation’s momentum could strengthen further because both producers and consumers will start behaving as if they expect prices to keep surging.

That headline figure for the Labor Department’s inflation gauge (called the Consumer Price Index, or CPI) – the gauge that includes food and energy prices – saw its biggest relative monthly jump (23.08 percent, from 0.65 percent to 0.80 percent) since October (when it more than doubled). Further, its level in absolute terms was the highest since October’s 0.87 percent.

Core inflation, however, actually slowed down in February – from January’s 0.58 percent increase to 0.51 percent. And the deceleration (12.07 percent) was the biggest since November’s (13.33 percent).

As for the baseline effect, a February fade becomes clear upon examining the latest monthly annual changes in headline inflation with those that came the year before. Let’s start with the March through December, 2021 period, with the 2020-21 monthy figure on the right and the 2019-20 figure on the far right . (March is chosen because that’s the month in 2020 when the virus’ first major economic effects were felt.)

March:    2.66 percent     1.53 percent

April:     4.15 percent      0.36 percent

May:      4.94 percent      0.24 percent

June:      5.34 percent      0.73 percent

July:       5.28 percent      1.03 percent

Aug:      5.21 percent      1.33 percent

Sept:      5.39 percent      1.40 percent

Oct:       6.24 percent      1.18 percent

Nov:      6.83 percent      1.14 percent

Dec:      7.10 percent      1.28 percent

Given that the Fed’s recent annual inflation target has been two percent, you can see how weakly headline prices rose in 2019-20, and why the economy’s return to normal the following year created a catch up effect for prices.

The two monthly figures below show the annual 2021-22 changes in the monthly inflation rates for the first two months of the year (on the right) and for 2020-21 (on the far right).

Jan:       7.53 percent      1.36 percent

Feb:      7.88 percent      1.68 percent

To me, the end of the baseline effect is augured by the newest, February numbers because the 2020-21 headine inflation rate made its closest approach to the two percent target in more than a year, and at the same time, a strong speed up took place in the 2021-22 annual headline rate. And in March, 2021, the annual headline inflation rate blew past the target – reaching 2.66 percent. So the next CPI report (covering March) should make clear that the baseline effect is completely gone.

By contrast, the annual core inflation figures still look pretty baseline-y. In fact, they’re looking increasingly baseline-y. Here’s how the recent annual results by month compare with those for the year before for March through December, 2021. Again, the 2020-21 results are on the right, and their 2019-20 counterparts on the far right:

March:    1.66 percent     2.12 percent

April:      2.97 percent      1.42 percent

May:       3.81 percent      1.25 percent

June:       4.45 percent      1.20 percent

July:        4.20 percent      1.54 percent

Aug:        3.96 percent      1.71 percent

Sept:        4.04 percent      1.72 percent

Oct:         4.59 percent      1.63 percent

Nov:        4.95 percent      1.64 percent

Dec:         5.48 percent      1.60 percent

The pattern here is somewhat different from that of headline inflation, in that the 2019-20 figures generally stayed and moved closer to the Fed’s two percent target through September. But then, they began a retreat, even as 2021-22 rates quickened. And the baseline effect became much more conspicuous in January and February, as the 2020-21 annual rates slowed dramatically while the 2021-22 rates increased markedly.

Jan:           6.04 percent     1.39 percent

Feb:          6.42 percent     1.29 percent

As shown above, annual core inflation bounced back to 1.66 percent in March, 2021. That’s still below the Fed target, but if next month’s CPI report shows a continued speed-up in the annual rate, that would be pretty strong evidence that this baseline effect is gone, too.

Unfortunately, unprecedented baseline-induced inflation confusion seems sure to turn into major energy and other commodity shock inflation confusion – making the Fed’s judgements about why prices keep rising so strongly more important than ever.

(What’s Left of) Our Economy: Those Baseline Effects Keep Distorting the U.S. Inflation Picture

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baseline effect, consumer price index, core inflation, CPI, Federal Reserve, inflation, PCE, personal consumption expenditures index, stimulus, {What's Left of) Our Economy

Earlier this month, my examination of one of the two main official U.S. measures of inflation concluded that even though it showed a recent month-to-month acceleration (especially in January), it was still too early to declare that it was close to spinning out of control, or even being sure to stay at current excessive levels. That was because, as I read these Consumer Price Index (CPI) data, the most important results (the annual figures) were being distorted by a “baseline effect.”

Specifically, the previous year’s inflation rate was so abnormally low (due to the depressing effect on the entire economy of the CCP Virus’ arrival and the lockdowns and behavioral changes it spurred) that any economic return to normality was bound to produce annual inflation rates that were abnormally high in comparison. Moreover, those 2019-2020 inflation rates made clear to me that the baseline effect would be with us through the February figures (which will come out next month).

Today, Washington released the other main set of inflation figures – the price indexes for Personal Consumption Expenditures (PCE). They’re of special interest because they’re the gauge preferred by the Federal Reserve, and the Fed’s reaction to inflation greatly influences how fast or slow the economy grows. 

And even more interesting: The PCE numbers also reveal a continuing baseline effect that’s got another month to run.

Let’s start, as always, with the monthly percentage changes in the overall PCE inflation rate going back to January, 2021:

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.6

The acceleration in this inflation measure is obvious from looking at the first four months of last year. But then it stops. It’s true that some momentum was regained after summer and autumn slowdown, but since October, it’s remained steady. Moreover, recent revisions (downward for October, upward for December) have cancelled each other out.

Since a prime reason inflation is viewed with such alarm is its tendency to feed on itself, a leveling off in the rate of increase indicates that the worst isn’t in store (although it’s crucial to remember that this doesn’t mean that prices have stopped rising – only that they’ve stopped rising at ever faster rates).

Looking even more stable lately have been the “core” PCE monthly inflation rates. These strip out food and energy data because prices in those sectors are considered volatile for reasons supposedly having little or nothing to do with the economy’s fundamental vulnerability to inflation (like weather events, or the policies of foreign cartels). In fact, as shown below, they’ve shown no monthly speed up at all since October, and only the same modest acceleration from an equally modest summer slowdown:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

The annual percentage changes by month in the headine PCE inflation rate do show genuine and continued acceleration throughout the year:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.            6.1

But as has been the case for the entire year, the comparable annual PCE rate for the previous year was rock-bottom, as the below 2019-2020 (and for January, 2021, the January, 2020-21 year) statistics show. How do we know they were uusually low? Chiefly because they fell short of even (historically modest) two percent annual increases that the Federal Reserve has long viewed as a desirable inflation rate. The misses, moreover, were substantial:

Jan.            1.8

Feb.           1.8

March       1.3

April         0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21            1.4

Further, as noted above, the previous year’s inflation rate didn’t top two percent until March, 2021, and a further big spurt, which understandably started igniting inflation fears, only came in April. Here are those numbers:

Feb. 20-21          1.6

March 20-21       2.5

April 20-21         3.6

So that’s why I’m arguing that we’ll be seeing an important and distorting baseline effect for at least a month more, and that if the March numbers show no meaningful moderation in the annual inflation rate, that’s a sign of trouble. And this conclusion goes double for April.

The same analysis is warranted by the core inflation data, IMO. Here are those annual percentage changes going back to January, 2021, and extending through last month:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 20-21           5.2

Again, taken in isolation, the picture they paint looks like worrisome inflation acceleration. But the previous year’s annual figures reveal a considerable baseline effect, too:

Jan.            1.7

Feb.           1.9

March       1.7

April         0.9

May         1.0

June         1.1

July          1.3

Aug.        1.4

Sept.       1.5

Oct.        1.4

Nov.       1.3

Dec.       1.4

Jan 20-21           1.4

As shown below, core PCE inflation began picking up at an annual rate more slowly last year than overall PCE. So in this case, the telltale month looks much more like April than March

Feb. 20-21          1.5

March 20-21      2.0

April 20-21        3.1

The baseline effect clearly isn’t responsible for all America’s recent inflation. The long-time stop-start nature of the CCP Virus-era economy (whose effects are still with us) and related supply chain snags and bottlenecks deserve much blame, too, along with the massive stimulus provided both by super-easy Federal Reserve monetary policies and generous pandemic relief provided by Congress and both the Trump and Biden administrations. But inflation’s failure to keep accelerating even as these approaches continued for much of last year is a major reason for keeping the baseline effect very much in mind – for at least a little while longer

(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory and Baseline-y – For Now

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baseline effect, CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, Federal Reserve, inflation, monetary policy, PCE, personal consumption expenditures index, semiconductors, shortages, stagflation, stimulus, supply chain, Wuhan virus, {What's Left of) Our Economy

Earlier this month, we learned from the latest official U.S. jobs report how dramatically revisions can change the picture of the economy’s performance. Today’s official inflation numbers – presenting the Consumer Price Index (CPI) – contained some interesting revisions, too, and they’re enough to keep me in the “transitory” camp on the future of price increases at least a month more – and specifically, as long as the ”baseline effect” will remain in place.

In plain English, this means that I still believe that inflation nowadays– which is unmistakably high by historic standards and painful for so many Americans – results mainly from major distortions in the economy created by the CCP Virus and related regulatory and behavioral curbs. Also affecting inflation’s annual rates of change throughout 2021 and into early 2022: the fact that the previous year’s inflation – the baseline – was so abnormally low. In fact, one of the key revelations of the revisions is that the baseline effect for “headline inflation” (the figure that tries to cover everything) has increased some in recent months, and therefore has played a moderately larger role in pushing up the latest numbers.

First, though, let’s look at the monthly changes in the overall inflation rate going back to January, 2021, along with the revisions (the number furthest to the right):

Dec-Jan:                          0.26 percent  now 0.24 percent

Jan-Feb:                          0.35 percent  now 0.44 percent

Feb-March:                     0.62 percent   now 0.64 percent

March-April:                  0.77 percent   now 0.64 percent

April-May:                     0.64 percent   now 0.70 percent

May-June:                      0.90 percent   now 0.88 percent

June-July:                      0.47 percent    now 0.45 percent

July-Aug:                      0.27 percent    now 0.33 percent

Aug-Sept:                      0.41 percent   unrevised

Sept-Oct:                       0.94 percent    now 0.87 percent

Oct-Nov:                       0.78 percent    now 0.69 percent

Nov-Dec:                      0.47 percent     now 0.58 percent

Dec-Jan:                        0.65 percent

There’s no doubt that a sequential speed-up took place between December and January. But even with the revisions, decelerations took place between October and November, and November and December. In fact, October remains the peak month for sequential inflation.

It’s important to note that these slowdowns in the inflation rate don’t mean that prices are actually falling. Instead, they mean that they’re not rising as quickly. And although that may sound like a pretty weak reason for encouragement, it counts for more because a major reason that inflation is considered so dangerous is that it tends to feed on itself – and actually grow at increasing rates.

So slowdowns are good news, even if they’re not good enough news. Moreover, the revisions for two of the last three months have been downgrades; in other words, since October, on net, headline inflation has been weaker than originally estimated.

Revisions haven’t had the same effect on so-called “core inflation” (which strips out food and energy prices because they’re viewed as unusually volatile for reasons having little or nothing to do with the economy’s supposed susceptability to inflation). But the absolute rates have been lower than those of headline inflation, and the rates of change have fallen on net since October, too.

Dec-Jan:                        0.03 percent   now 0.05 percent

Jan-Feb:                        0.10 percent    now 0.15 percent

Feb-March:                   0.34 percent    now 0.30 percent

March-April:                 0.92 percent    now 0.86 percent

April-May:                    0.74 percent    now 0.75 percent

May-June:                     0.88 percent    now 0.80 percent

June-July:                     0.33 percent     now 0.31 percent

July-Aug:                      0.10 percent    now 0.18 percent

Aug-Sept:                     0.24 percent     now 0.25 percent

Sept-Oct:                      0.60 percent     unrevised

Oct-Nov:                      0.53 percent     now 0.52 percent

Nov-Dec:                     0.55 percent     now 0.56 percent

Dec.-Jan:                     0.58 percent

But the real importance of those baseline effects and revisions come through in the annual inflation data. The table below shows the annual rates of change by month starting again in January, 2021. The left and center columns show the previous estimates and the revisions, and the right column shows the revisions of these rates for the last few months of baseline year 2019-2020:

Jan:                             1.37 percent    now 1.36 percent

Feb:                            1.68 percent    unrevised

March:                       2.64 percent     now 2.66 percent

April:                        4.16 percent      now 4.15 percent

May:                         4.93 percent      now 4.94 percent

June:                        5.32 percent       now 5.34 percent

July:                         5.28 percent      unrevised

Aug:                        5.20 percent       now 5.21 percent

Sept:                        5.38 percent      now 5.39 percent

Oct:                         6.24 percent      unrevised               2019-20 from 1.19 to 1.18

Nov:                        6.88 percent      now 6.83 percent  2019-20 still 1.14

Dec:                        7.12 percent      now 7.10 percent   2019-20 from 1.31 to 1.28

Jan:                         7.53 percent                                     2019-20 from 1.37 to 1.36

The big takeaway: The November and December annual inflation rates were both revised down by non-trivial degrees, and the baseline effects for October, December, and January have gotten bigger (because the annual inflation rates for 2019-2020 for these months have been revised down, too.

As with their monthly counterparts, the absolute annual core inflation rates are lower, the baseline effects aren’t quite as great, but they’re present anyway:

Jan:                        1.40 percent      now 1.39 percent

Feb:                       1.28 percent       now 1.29 percent

March:                   1.65 percent      now 1.66 percent

April:                     2.96 percent      now 2.97 percent

May:                      3.80 percent      now 3.81 percent

June:                      4.45 percent      unrevised

July:                       4.24 percent      now 4.20 percent

Aug:                      3.98 percent      now 3.96 percent

Sept:                      4.04 percent      unrevised

Oct:                       4.58 percent      now 4.59 percent

Nov:                      4.96 percent      now 4.95 percent    2019-20 from 1.63 to 1.64

Dec:                      5.49 percent      now 5.48 percent     2019-20 from 1.61 to 1.60

Jan:                       6.04 percent                                       2019-20 from 1.40 to 1.39

The baseline effect distortion of both sets of inflation figures should end when the February statistics come out (next month). Unless new revisions change the picture? But there are several other reasons inflation may moderate further going forward.

The economy’s widely predicted growth rate for the first quarter of this year is predicted to be wheezing and even negligible. As long as it lasts, much more sluggish economic activity should undercut price increases. (At the same time, what may be in store is stagflation – a punishing combination of weak growth and strong inflation.) The new CPI figures may well persuade the Federal Reserve to tighten monetary policy earlier and more vigorously than currently expected, which should also slow growth. (The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, or PCE, will be updated later this month. It usually tracks the CPI pretty closely.) And rising prices seem to have put further economic stimulus off the table in Congress. 

Another (and maybe final?) V-shaped pandemic recovery, prompted by the fading of the Omicron CCP Virus variant, could always overcome all these growth obstacles. So could continuing supply chain snags and shortages – especially in industries like semiconductors, whose products are used in so many products. Or all these uncertainties and wildcards could keep the economy and inflation in a turbulent state, and keep complicating policymakers’ challenges in simultaneously fostering adequate growth and acceptable inflation.       

(What’s Left of) Our Economy: An Omicron Bump in the US Manufacturing Recovery

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aircraft, aircraft parts, automotive, CCP Virus, chemicals, coronavirus, COVID 19, facemasks, Federal Reserve, machinery, manufacturing, masks, medical devices, miscellaneous durable goods, monetary policy, non-metallic mineral products, Omicron variant, personal protective equipment, petroleum and coal products, pharmaceuticals, plastics and rubber products, PPE, printing, semiconductor shortage, semiconductors, stimulus, ventilators, wood products, Wuhan virus, {What's Left of) Our Economy

The big takeaway from today’s Federal Reserve after-inflation U.S. manufacturing data (for December) is that it may show domestic starting to suffer from the arrival into America of the super-infectious Omicron strain of the CCP Virus and the renewed economic curbs and behavioral changes it’s spurring, along with the spread of vaccine mandates in the ranks of U.S. businesses (of course, before yesterday’s Supreme Court decision striking down such policies for the private sector).

And especially discouraging: Just as Omicron began taking off, inflation-adjusted domestic output of medical equipment and supplies – including all the protective gear and treatment devices needed to fight the virus – fell sequentially at its fastest rate since the worst of the spring, 2020 pandemic-induced depression. Indeed, monthly real production in this category is now lower than in February, 2020 – the last full data month before the virus’ first variant began distorting the U.S. economy.

December’s 0.28 percent monthly decline in price-adjusted American manufacturing output represented industry’s first sequential retreat since September’s (hurricanes-affected) 0.52 percent drop. But the solid growth of recent months stayed largely unrevised.

The December results (which will remain preliminary for several more months) brought 2021’s yearly improvement in inflation-adjusted manufacturing output to 3.71 percent. That’s the best growth since 2011’s 6.48 percent, but as known by RealityChek regulars, it’s important to look at possible baseline effects nowadays. And this strong performance in part reflected the virus-fostered 1.94 percent fall-off in such growth in 2020.

The December downturn stemmed in part from problems (like the global semiconductor shortage) in the automotive sector, which shrank on month by 1.29 percent – following sequential expansion in November of a downwardly revised 1.69 percent. But even without the drag from vehicles and parts, domestic industry’s constant dollar production would still have been off by 0.22 percent.

Aside from automotive, the most important December real manufacturing growth loser by far was miscellaneous durable goods – a category that includes those pandemic-fighting essential medical devices and equipment industries. Its price-adjusted output slumped by 2.68 percent – the biggest downturn since April, 2020’s18.43 percent, during the worst of the CCP Virus’ first wave. Even so, measured by real production, the sector is 2.49 percent larger than in February, 2020, right before the pandemic’s initial major economic impact.

Other big December losers included:

>printing and related support activities, whose 1.82 percent slide was also the worst since April, 2020 (23.94 percent), and whose real output is now down by 5.14 percent since February, 2020;

>plastics and rubber products, whose 1.78 percent decrease was the worst since April, 2020 as well (19.12 percent), but that also followed seven months of strong gains. As a result, its real production is off just 1.08 percent since February, 2020; and

>petroleum and coal products, whose 1.58 percent fall-off was its worst since February’s seven percent, and whose after-inflation production is 4.49 percent lower than in February, 2020.

The biggest December winners were:

>non-metallic mineral products, which not only generated a 1.49 percent increase, but whose November inflation-adjusted output advance was revised all the way up from 1.25 percent to 3.03 percent. All the same, this sector’s constant-dollar production is still 1.32 percent lower than in February, 2020;

>wood products, whose 1.18 percent real increase in production was its best since March’s 4.05 percent, and which is now 3.03 percent bigger by this measure since February, 2020;

>the big chemicals sector, where real growth hit 0.69 percent following an upwardly revised 0.65 percent in November (from 0.50 percent), and which has grown by 7.93 percent in real terms since just before the pandemic; and – most encouragingly –

>machinery, a manufacturing bellwether because its products are so widely used throughout both industry and big non-manufacturing sectors like construction and agriculture – not to mention many services sectors. Its price-adjusted output increased by 0.68 percent sequentially in December – its best such result since July’s 2.85 percent, and revisions were unchanged on balance. Machinery production is now 5.20 percent higher than in February, 2020.

As for manufacturing industries that have been prominent in the news during the pandemic, they had a lousy December generally.

Aircraft and parts saw its monthly output down by 0.38 percent, and in stunning news, November’s initially reported 1.90 percent increase is now judged to be a 1.04 percent decrease. With October’s after-inflation production rise downgraded, too, aircraft and parts output is now just 10.71 percent higher than in February, 2020. As of last month’s Fed manufacturing data, this figure was a much higher 15.86 percent.

In pharmaceuticals and medicines, December’s 0.13 percent real output dip was the third straight monthly decline, and November and October revisions were fractionally negative on balance. Consequently, in price-adjusted production terms, these sectors were 13.42 percent larger than in February, 2020 – as opposd to the 13.54 percent calculable from last month’s industrial production report.

And as mentioned at the outset, the December results for medical equipment and supplies sector were awful – especially considering that for the next few months at least, Omicron’s metastasis will greatly increase demand for face masks, protective gowns, ventilators, and the like.

Real production of these products tumbled seqentially by 2.75 percent – the worst such performance since April, 2020’s 15.97 percent, during that first CCP Virus wave. Revisions for November and October were mildly positive, but whereas last month’s report revealed that inflation-adjusted production in these sectors was up since just before the first wave struck in force (though by a bare 0.65 percent), it’s now down by 1.50 percent. 

And let’s add another sector to the pandemic industries list – semiconductors and related devices. As implied by the category name, the numbers include more than the microchips that have been in such global short supply in recent months – and whose U.S. production revival has been such a high stated Washington, D.C. policy priority.

Still, it’s noteworthy that constant dollar output in this grouping rose a mere 0.12 percent on month in December, But it is up 16.86 percent since the pre-pandemicky February, 2020.

So far, betting against domestic manufacturing during the virus era has been a losing bet, But the headwinds for the near future at least look especially strong, topped of course by the spread of Omicron not only in the United States but in all the countries to which its manufacturers sell exports. Add to the list the apparent death of President Biden’s Build Back Better bill – which whatever its long-term economic wisdom and other effects, will certainly reduce government support for domestic economic activity – what seems like greater odds of more monetary policy tightening by the Federal Reserve sooner rather than later; and inflation that might be getting high enough to dampen U.S. consumer outlays.  

Tailwinds are by no means absent – like the beginning of spending made possible by the infrastructure bill, the still considerable amount of stimulus being provided by the Fed, and the easing of global supply chain knots. But even this last depends heavily on the medical, regulatory, and behavioral effects of Omicron in the United States and, perhaps even more important, in China, where the regime’s Zero Covid policy looks like a formula for ever broader lockdowns that will paralyze its ports and other infrastructure systems. 

Domestic manufacturers keep telling major surveys that they remain optimistic about the future.  (See here and here for the latest soundings.)  If anything’s certain about the circumstances they’re heading into, it’s that they’ll need every bit of this optimism to keep succeeding.