(What’s Left of) Our Economy: Trade Wars’ Impact on U.S. Manufacturing Output Still Clouded by GM and Boeing

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737 Max, aircraft, aluminum tariffs, automotive, Boeing, Fed, Federal Reserve, General Motors, General Motors strike, GM, household appliances, inflation-adjusted growth, inflation-adjusted output, manufacturing, metals-using industries, safety, steel tariffs, supply chain, tariffs, Trade, trade wars, {What's Left of) Our Economy

If you read last month’s Federal Reserve report on after-inflation U.S. manufacturing output (for September), then there wasn’t much reason to read yesterday morning’s report on after-inflation manufacturing production (for October). For it described the same puzzling picture: American industrial performance clearly dragged down by the recently ended strike at General Motors (GM), but apparently completely unaffected by Boeing safety woes that have sharply reduced the aviation giant’s enormous exports.

The top-line figures released by the Fed were definitely gloomy. Last month, real U.S. Manufacturing output dropped by 0.62 percent sequentially – the worst such result since April’s 0.87 percent fall-off. Inflation-adjusted motor vehicle and parts output, however, plunged by 7.65 percent – its worst such performance since the 7.97 percent nosedive of April, 2011. Moreover, September’s previously reported 4.22 percent monthly automotive price-adjusted automotive decrease was revised all the way down to a 5.49 percent slump.

As the Fed observed, without the huge October monthly plunge in inflation-adjusted automotive output, the overall manufacturing production decline would have been just 0.14 percent – which obviously doesn’t show any strength, either.

But this is where the Boeing puzzle comes in. There’s still no sign of it in these Fed data. Most curiously, constant dollar production for aircraft and parts production rose a solid 0.57 percent on month in October. It’s down since March, when governments the world over began grounding its popular but now troubled 737 Max jet or banning it from their national air spaces.

But although Boeing’s exports have deteriorated sharply, too, the real output shrinkage has only been 1.48 percent since March, and since April (the first full data month since those March woes), after-inflation production of aircraft and parts has actually risen 1.15 percent. That’s considerably better than the output performance of domestic manufacturing as a whole during this period. And it’s much better than the output of key supplier sectors, although surely they’d been affected by the GM strike as well:

overall manufacturing: -0.19 percent

durable goods: -0.81 percent

primary metals: -1.62 percent

fabricated metals products: -0.60 percent

machinery: +0.37 percent 

It’s true that export sales and production don’t move in lock step for aircraft, or for any other industry.  But with foreign markets representing well over half of Boeing’s revenue last year, the former sinking while the latter keep growing isn’t easy to explain.

Something else that needs to be considered: Whatever the Fed data actually show, they’re not able to show much about how aircraft parts and production would have fared without the Boeing troubles. And they’re even less capable of showing such counterfactuals regarding how supplier sectors might have fared.

As for the impact of the trade wars, as usual, the consequences of the President’s tariffs on aluminum and steel are easiest to gauge, since they’ve been on the longest, and the major metals-using industries (the presumed leading victims) are so easy to identify. The table below represents the changes in their real output since April, 2018 (the first full month in which the levies were in effect), with the data for manufacturing overall used as a control group, and durable goods included because it’s the super-category in which most of the main metals-using industries are located:

                                          Old Apr thru Sept    New Apr thru Sept    Apr thru Oct

overall manufacturing:       +0.09 percent            +0.08 percent         -0.54 percent

durables manufacturing:    +1.25 percent            +0.87 percent         -0.32 percent

fabricated metals prods:    +1.85 percent             +1.63 percent        +1.42 percent

machinery:                            0 percent                 -0.96 percent         -0.81 percent

automotive:                        -3.92 percent             -5.53 percent       -12.24 percent

major appliances:               -2.19 percent            -2.03 percent          -9.14 percent

aircraft and parts:              +5.43 percent           +3.00 percent         +3.59 percent

In absolute terms, the results are still all over the place, and a GM strike effect is clearly evident for supplier industries like fabricated metal products and machinery. The interruption of GM production also seems to have aggravated – but not caused – the loss of relative momentum exhibited by the metals-users – meaning, that their production slowdown has gotten faster relative to that of overall manufacturing, even leaving out the cratering of automotive output. Interestingly, that momentum loss is now affecting aircraft and parts, too – whose September production figures were also revised down significantly.

Also noteworthy – the steep monthly production dive in major appliances in October. Yes, they’ve experienced their own product-specific tariffs (on large household laundry equipment) as well as the metals tariffs. Production of these products is pretty volatile, too. But the 7.26 percent real monthly output drop was the biggest since it plummeted 8.29 percent between September and October, 2013. Even stranger – the housing sector, which drives much appliance buying and therefore indirectly production – registered a major uptick in growth in the third quarter after six quarters of substantial decline.

As for the impact of the China tariffs on manufacturing output, since that’s much more difficult to gauge than the effects of the metals tariffs (e.g., because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries) it seems to make less sense than ever to examine them, given the possibility of the Boeing effect lasting months more.

And somewhat depressingly, I find myself wondering if that’s going to be true for following any manufacturing-and-trade-relevant data for at least a month or two more. (Though I’m sure I’ll keep soldering on!)

(What’s Left of) Our Economy: Boeing’s Safety Woes are Hammering U.S. Manufacturing & Overall Trade Flows Under Trump

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Airbus, Boeing, civilian aircraft, exports, imports, manufacturing, non-oil goods trade deficit, safety, services trade, tariffs, Trade, trade deficit, Trump, World Trade Organization, {What's Left of) Our Economy

When last month’s U.S. trade figures (for August) came out, I wrote about how the economic narratives about the woes of domestic manufacturing and America’s trade accounts during the Trump Tariffs Era have been turning into a story about the safety related troubles of Boeing. This morning, the September data were issued, and the Boeing drag on the trade performances of industry and the entire economy look bigger than ever. Especially interesting, the Boeing effect worsened during a data month when total U.S. trade, manufacturing trade, and civilian aircraft trade all took modest turns for the better.

Specifically, the overall U.S. trade deficit in September dropped by 4.70 percent, from an upwardly revised $55.04 billion to $52.45 billion. The total was the lowest since April’s $51.98 billion, and the sequential decrease the biggest since January’s 12.61 percent nosedive.

Partly as a result, the year-to-date trade deficit is up by 5.47 percent – a rate of increase less than half that of the previous year’s 12.68 percent.

Combined goods and services exports rose by 0.88 percent from $207.83 billion to $205.99 billion – their worst monthly performance since April’s $205.76 billion. Total imports, however, sank by nearly twice as much proportionately – 1.68 percent. And September’s $258.44 billion figure was also the lowest since April ($257.74 billion).

Services trade, however, provided an oddly glum counterpoint. It’s long been a trade surplus generator, and remained so in September. But the new monthly surplus of $19.27 billion was the lowest since December, 2012’s $18.55 billion. The main culprit? The fourth straight high for monthly services imports ($49.89 billion).

At the same time, the huge and chronic manufacturing trade deficit fell sequentially in September for the second straight month, from $92.08 billion by 4.53 percent, to $87.91 billion. That total was the best since June’s $83.63 billion. And this progress was mirrored in civilian aircraft. Their exports jumped month-to-month in September by 25 percent. Imports rose even faster – by 41.58 percent. But their amount is much smaller ($1.35 billion vs $3.29 billion). Therefore, the civilian aircraft trade surplus improved from $1.69 billion to $1.95 billion.

What, then, is the problem? It becomes glaringly visible upon examining trade in civilian aircraft during the entire stretch of Boeing’s current woes (which essentially began this past March with many national aviation authorities grounding the plane in their own countries’ airlines, and/or barring it from their national air spaces), and comparing it with the aircraft trade figures for the same periods of previous years, and with the performance of overall manufacturing exports and imports.

Last month, I described how civilian aircraft’s trade performance between this past April (the first full month in which the Boeing effect could be expected to begin showing up) and August had deteriorated markedly from the same period last year. Today’s trade data show that the deterioration has grown far worse.

As made clear in last month’s post, despite its reputation as a major American trade winner, the civilian aircraft sector has experienced ever poorer results since 2017, and the new trade figures confirm this trend.

Between April and September of 2017 and April and September of 2018, civilian aircraft exports fell by 10.32 percent, even though overall U.S. manufacturing exports increased by 6.84 percent. The industry’s record on the import side was better – they dropped during this time by 13.98 percent, while manufacturing imports in total climbed by 11.64 percent.

But the comparison between the following April-to-September periods looks considerably drearier for aircraft. Between April and September of last year and the same period this year, although manufacturing exports were down by 3.82 percent, civilian aircraft foreign sales sank by 26.80 percent. And although manufacturing imports edged up only 0.27 percent between these periods, American purchases of civilian aircraft surged by just over 26 percent.

Further, the impact of aircraft’s slump on manufacturing and overall U.S. trade has been substantial and growing. As of last month’s trade report, the fall in these products’ exports between the April-August 2018 and April-August 2019 periods accounted for 30.72 percent of the decrease in total manufacturing exports during that time, and 16.81 percent of the increase in total manufacturing imports.

As of today’s figures, the civilian aircraft share of manufacturing’s total export decline is up to 31.35 percent of the total, while their share of industry’s total import increase has shot up to more than half manufacturing’s total.

Expanding the focus to all U.S. goods trade except for energy products (which to date haven’t received significant attention in free trade negotiations or any other aspects of American trade diplomacy) also reveals a sizable Boeing effect. Between the April-September 2018 and 2019 periods, civilian aircraft’s export decline accounted for fully 42.39 percent of the total U.S. non-oil goods export decrease recorded then, and 20.61 percent of the non-oil goods import increase.

In addition, to repeat a crucial point, this major Boeing effect on manufacturing and overall trade has absolutely nothing to do with the Trump trade wars, since civilian aircraft so far have not been subjected to foreign tariffs on American exports imposed in retaliation for Mr. Trump’s levies. This situation will change due to recent and upcoming rulings in the long-running World Trade Organization case between Boeing and the European Union’s Airbus. But as of now, any evaluation of the Trump effect on U.S. trade flows ignoring the powerful drag created by Boeing’s troubles deserves a grade of “incomplete” – at best.

(What’s Left of) Our Economy: A New Anti-Trade War Argument Bites the Dust

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BLS, blue-collar workers, Bruce Yandle, Bureau of Labor Statistics, consumers, George Mason University, inflation-adjusted wages, Mercatus Center, private sector, real wages, tariffs, Trade, trade war, Trump, wages, Washington Examiner, work week, workers, {What's Left of) Our Economy

Bruce Yandle of George Mason University’s Mercatus Center has just added a novel claim to the list of catastrophes allegedly triggered by President Trump’s tariff-centric trade policies. In an October 28 Washington (D.C.) Examiner post, He seems to understand that amid rock-bottom rates of U.S. joblessness, it’s getting ever tougher to contend that the trade wars are killing American employment (though the rate of net job gains has certainly slowed in most sectors since the advent of tariffs on steel and aluminum imports in March, 2018).

So Yandle, a former university business school dean, has come up with another reason for the nation’s workers and aspiring workers to hate the curbs on trade: They’re making Americans work too darned hard for the stuff they like to buy. It’s an intriguing idea with just one fatal flaw: It’s not supported by a shred of evidence. P.S.: It takes about 10 minutes of internet surfing and arithmetic-ing to demolish.

Here’s Yandle’s case:

“[T]he occurrence of high employment in the face of a slowing economy can be the result of putting tariff-made rocks in our own harbors to keep out lower-cost foreign goods. When cheaper goods can no longer be imported, we have to work longer and harder to maintain the same level of consumption.

“Low unemployment is something to celebrate but let’s at least note that there are some people who might (quite reasonably) prefer to work a little less with more leisure time and cheaper cars, clothes, and tools, which are some of the goods that have been hit with tariffs.”

I’m unaware of any instances of workers complaining that, “I’d be able to knock off earlier and clean out Walmart if only for those stupid tariffs,” but what I suppose really doesn’t matter. Nor should what anyone supposes matter – because the federal government keeps statistics both on Americans’ hours on the job and their pay.

The results of my research are below. They show hours worked for various major categories of private sector employees, and the change in their hourly inflation-adjusted wages, over two relevant time periods. The first goes from the first full month of the Trump administration (February, 2017) through the latest data month (this September – tomorrow the Bureau of Labor Statistics (BLS) will release the October numbers), and from the first full month of the administration’s first important tariffs (April, 2018, for the steel and aluminum levies) through September. (Government employees’ wages aren’t monitored by BLS because their pay is set largely via politicians’ decisions, and therefore says little about the economy’s fundamental strengths or weaknesses.)

Total private weekly hours since Trump inauguration: 34.3 to 34.4

Total private weekly hours since 1^st (metals) tariffs: 34.5 to 34.4

Total blue-collar weekly hours since Trump inauguration: 33.6 to 33.6

Total blue-collar weekly hours since 1^st (metals) tariffs: 33.8 to 33.6

Total manufacturing weekly hours since Trump inauguration: 40.7 to 40.5

Total manufacturing weekly hours since 1^st (metals) tariffs: 41.0 to 40.5

Total manufacturing blue-collar weekly hours since Trump inauguration: 41.9 to 41.5

Total manufacturing blue-collar weekly hours since 1^st (metals) tariffs: 42.4 to 41.5

Total private real hourly wage since Trump inauguration: +2.53 percent

Total private real hourly wage since 1^st (metals) tariffs: +.1.86 percent

Total blue-collar real hourly wage since Trump inauguration: +3.05 percent

Total blue-collar real hourly wage since 1^st (metals) tariffs: +2.49 percent

Total manufacturing real hourly wage since Trump inauguration: +0.46 percent

Total manufacturing real hourly wage since 1^st (metals) tariffs: +0.83 percent

Total manufacturing blue-collar real hourly wage since Trump inauguration: +2.77 percent

Total manufacturing blue-collar real hourly wage since 1^st (metals) tariffs: +1.25 percent

For every category except two, over both time periods, workers’ weekly hours went down, and their real wages went up. That is, their leisure time and the buying power of their pay both have risen. They’ve been working less and been able to purchase more.

The first exception is overall private sector workers. Since Mr. Trump’s administration began, their work week has edged up – a tenth of an hour. Even so, their pay rose faster. So they don’t have much cause to complain about working too hard and enjoying the fruits of their labor less.

The second exception entails the overall blue-collar workforce (called “production and nonsupervisory employees” in BLS-ese). Its work week has stayed the same since the Trump inauguration. At the same time, however, this group experienced the fastest wage increase during this period. And its pay in constant dollars went up even faster after the metals tariffs were imposed – as its workweek dipped.

Moreover, this points to another problem with Yandle’s case:  All four categories of workers saw their workweek fall faster after the tariffs’ imposition than before. And in three of the four (except for manufacturing blue-collar workers) wages rose faster after the tariffs went on as well.

And in case you’re wondering, to create some context, whether American workers recently have been significantly better off in the absence of tariffs and trade wars, the answer is, “Not consistently during the current economic recovery.”

No one’s saying that these results show that the United States is a workers’ paradise, or is becoming one because of the Trump tariffs. But if anyone has a right to be grumpy about the above trends, it’s trade mavens like Yandle, who are pushing fact-free arguments to take the levies down.

(What’s Left of) Our Economy: New Data but Cloudier Skies on Trump’s Trade Policies and Manufacturing

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Barack Obama, China, Commerce Department, exports, GDP-by-industry, imports, manufacturing, manufacturing output, manufacturing trade deficit, tariff front-running, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

If only the Commerce Department’s data on gross domestic product (GDP) by industry didn’t come out on a basis timelier than once a quarter. For they’ve provided uniquely valuable information on how well the Trump administration is faring in its efforts to (1) reduce the humongous U.S. manufacturing trade deficit, and (2) reduce domestic industry’s reliance on imported parts, components, and materials, and boost total output and employment over the long-term by ensuring that more of the value in these manufactured products are Made in the USA.

More specifically, the data (whose latest edition came out this morning) shed light on the crucial question over whether the best business model for domestic manufacturing is that recommended by traditional trade theory, or whether an America First-type approach is more effective. The former, of course, holds that output of any kind is maximized by capitalizing on the principle of comparative advantage, and encouraging U.S.-based companies to use whatever inputs are made more efficiently abroad. The latter insists that such reliance on foreign inputs deprives the economy of the enormous output gains that are possible by encouraging growth in these very inputs.

Sadly, however, the reasonably clear analytical skies that permitted a reasonably clear verdict to be returned during the first two years of the Trump era in trade are rapidly clouding up, for a variety of reasons. And much of the growing confusion has been created by the President himself. 

During Mr. Trump’s first two (nearly) full years of the Trump administration (keeping in mind that the President didn’t take office until late January, 2017), his America First-style policies were looking pretty impressive. (It’s true that no new tariffs came on during the President’s first year. But he did put the kibosh on a major trade agreement signed by his predecessor, the Trans-Pacific Partnership, and made clear that levies were on the way.)

Since Mr. Trump actually began imposing tariffs in early 2018, however, the results have been harder to interpret for two main and related reasons. First, the administration’s tariff decisions have oscillated pretty dramatically, featuring not only steps to put in place, threaten, suspend, and remove such levies, but actual and threatened tariff rate changes on big chunks of imports (especially from China). Second, these policy swings have produced lots of “tariff front-running” – that is, U.S. importers speeding up their foreign purchases in order to avoid paying higher tariff-ed costs.

And this overall picture is exactly what’s been borne out by today’s figures (which incorporate revisions going back to 2014). The table below shows the new annual totals from 2011 (when the current economic recovery finished its early rapid bounce-back phase and settled into a more durable pattern) to 2018, The (slightly) revised numbers make clear that during the first two Trump years, domestic manufacturing did a much better job of generating healthy growth without ballooning manufacturing trade deficits (which reflect in part growing industry dependence on imported inputs) than during the previous Obama administration years.

The figure in the left-hand column represents U.S.-based manufacturing’s growth during the year in question (according to a gauge called “value added), the middle column represents the growth that year of the manufacturing trade deficit, and the right-hand column shows the ratio between the two growth rates (with the trade gap’s growth coming first). The higher the ratio, more closely linked manufacturing output growth is to the expansion of the manufacturing trade deficit. All figures are in pre-inflation dollars.

2011:             +3.93 percent           +8.39 percent            2.13:1

2012:             +3.19 percent           +6.27 percent            1.97:1

2013:             +3.36 percent          +0.77 percent             0.23:1

2014:             +2.93 percent        +11.78 percent            4.02:1

2015:             +3.72 percent       +13.65 percent             3.67:1

2016:              -1.19 percent         +4.66 percent                —

2017:             +3.99 percent         +3.16 percent            0.79:1

2018:             +6.23 percent         +3.96 percent            0.64:1

In other words, whereas during the Obama years, the manufacturing trade deficit nearly always expanded considerably faster than manufacturing output (and 3.67 and 4.02 times faster in 2014 and 2015), the first two Trump years saw both significantly higher output growth per se, and output growth that topped trade deficit growth. During 2018, moreover, numerous tariff were imposed, and not merely threatened.

This year, however, saw a major change. As shown below, the ratio of manufacturing output growth to manufacturing trade deficit growth returned to levels resembling the worst of the Obama years. And overall growth itself was feeble in comparison.

2Q 2017 – 2Q 2018:           +7.00 percent        +7.83 percent         1.12:1

2Q 2018 – 2Q 2019:           +2.03 percent        +7.27 percent         3.58:1

But here’s where the tariff front-running comes in, especially in the huge volume of trade with China – as made clear here. Unfortunately for trend-spotters, however, the administration’s success in fostering strong manufacturing output performance while weaning industry from imports won’t become any easier to identify anytime soon. The President’s China trade policies, after all, are likely to remain mercurial.  Further, the General Motors strike and Boeing’s safety problems are sure to distort the production numbers for at least the next quarter or two. Add a still-sluggish world economy that, along with foreign retaliatory tariffs, will keep weighing on U.S. exports, and you get uncertainty that could even dwarf that supposedly paralyzing American business investment.

(What’s Left of) Our Economy: How Certain Should We be About Trade War-Spurred Business Uncertainty?

Tags

business investment, capex, China, Dallas Federal Reserve, manufacturers, manufacturing, Philadelphia Federal Reserve, tariffs, tax incentives, Trade, trade war, Trump, {What's Left of) Our Economy

Among my most vivid memories of my years trying to make some sense out of the economy is one of a conversation with my late father. Since he was a tax lawyer for many decades, I once asked him if he supported some ideas that keep coming up for strengthening American manufacturing, chiefly making permanent the tax credit for corporate research and development (which Congress approved in 2015), and permitting companies to claim deductions for spending on machinery and equipment sooner rather than later, and even immediately (which the tax bill passed in 2017 allowed in some circumstances).

His answer: They’re small beans. His explanation: Any business-person with The Right Stuff will try and capitalize on new business opportunities whatever the tax laws allow (within reason).

I’ve been thinking of that conversation often as President Trump has waged his trade wars, especially against China (a long-time trade and broader economic predator), particularly in regard to the widespread claims that unanswered questions about his real aim (a bilateral level playing field? Decoupling the two economies?), and the herky-jerky nature of his tariff announcements and postponements have created enough uncertainty to paralyze business investment in new products and processes. Of course, that’s the type of activity that fosters healthy, sustainable, and not bubble-ized, growth.

I’m not unsympathetic to the difficulties of planning in this environment. But my father’s analysis makes me wonder if – assuming the uncertainty narrative is correct – too many American executives have lost their nerve. And this suspicion has just been borne out by a report spotlighting how many companies look to be plowing ahead with upgrades and innovations, trade war or not.

The evidence came from the latest monthly survey of mid-Atlantic state manufacturing published by the Philadelphia branch of the Federal Reserve system. As often the case, the October edition, released a week ago, featured responses to questions posed by “Philly Fed” researchers seeking regional manufacturers’ views on specific economic issues and challenges, and the current queries included:

>”Do you expect the following capital expenditure categories over the next year (2020) to be higher than the same, or lower than in the current year”; and

>”How has trade policy (including tariffs) affected your expected capital spending for 2020 compared with 2019?”

Here are the answers to the first question, by spending category measured in percentage of responses:

                                                            Higher           Same            Lower

Noncomputer equipment:                     41.1              44.6              14.3

Software:                                              28.6              58.9               12.5

Energy-saving investments:                 21.3              68.1               10.6

Computer and related hardware:         26.8              55.4                17.9

Structures:                                           32.1              45.3                22.6

Total:                                                   39.1              41.3                19.6

No overwhelming evidence of uncertainty-induced paralysis here. If anything, mid-Atlantic manufacturers seem pretty determined to take steps they deem necessary to bolster their competitiveness even though the trade wars are far from over. Especially encouraging are the results for noncomputer equipment and structures, since they’ve been capital spending laggards lately.

And here are the answers to the second, more specific, question, about trade policy’s effects on capital spending plan, again measured in percentage of responses:

Significantly increase: 5.3

Modestly increase: 8.8

No change: 54.4

Modestly decrease: 15.7

Significantly decrease: 1.8

All increases: 14.1

No response: 14.0

All decreases: 17.0

These results add slightly to the case that Trump-ian trade policies are depressing capital spending. But only slightly.

Trade war opponents can point out that this year’s business investment has been weaker than the previous year’s, so that some capital spending increase was inevitable barring concerns about a major economic slowdown or recession. But supporters can observe that such spending was rising strongly from spring, 2017 through summer, 2018, and so some cooling off was just as inevitable (and not only for mean-reverting-type reasons, but because it would be natural for companies to try to finish current projects before starting new ones).

It’s also possible that mid-Atlantic manufacturers are simply pluckier than their counterparts elsewhere in America. But similar responses to similar questions were provided by southwestern companies in the Dallas Fed’s June manufacturing sounding. In other words, there’s lots of uncertainty surrounding the trade war-related uncertainty claims.

(What’s Left of) Our Economy: Were the US Washing Machine Tariffs Really Failures?

Tags

consumers, Federal Reserve, General Electric, imports, jobs multiplier, large residential washers, LRWs, manufacturing jobs, metals tariffs, safeguard tariffs, South Korea, tariff-rate quota, tariffs, U.S. International Trade Commission, University of Chicago, USITC, washing machines, Whirlpool, {What's Left of) Our Economy

It’s as close to a slam dunk conclusion as can be – at least according to economists, think tank hacks, and Mainstream Media journalists: The early 2018 U.S. tariffs on large household laundry machines have been a dismal failure.

Or have they been?

The levies belong in a category different from those of the main Trump administration trade-limiting measures because they were first mandated by an independent federal agency (the U.S. International Trade Commission, or USITC) via a long-standing legal process.  And they’ve been panned for supercharging costs for consumers, and padding the profits of the domestic industry to extents that dwarfed the new production and jobs they fostered. (Here’s a typical example of the press’ evaluation, drawing on equally typical research from the venerable University of Chicago and the even venerable-er Federal Reserve.)

What has gone oddly unreported has been the verdict rendered by the USITC – which came out in August. Sure, the agency is grading itself. At the same time, it’s privy to the most authoritative data (taken from the domestic and foreign companies involved themselves), and it’s surely worth noting that the Commission paints a significantly different , and brighter, picture.

The tariffs, put in place in February, 2018, affected the nation’s total global imports of these products, but mainly impacted such “large residential washers” (LRWs) from China, Mexico, South Korea, Thailand, and Vietnam – the biggest foreign suppliers to the U.S. market. The duties’ aim: stemming a sudden surge of LRWs that injure U.S.-based manufacturers. But they don’t shelter the domestic industry forever.

After three years – the amount of time the Commission has determined these domestic manufacturers need to adjust – they’re phased out for both the final products and many of the parts covered in the “safeguard order.” In addition, consistent with their surge focus, they only apply to imports above a certain level of units – a trade curb known as a “tariff-rate quota.” In all, moreover, the ultimate objective is to give victim industries time to adjust and then stand on their own two feet. That’s why detailed adjustment plans are a condition of receiving tariff relief.

To some extent, the USITC’s judgment doesn’t contrast dramatically different from that of the tariffs’ critics. Both noted (in the Commission’s words) “generally increased prices” and “decreased imports.” The Commission, though reported some developments generally missed by the critics (especially “some improvement in the financial performance of continuously operating [domestic] producers,” and market share gains for these companies) and some given decidedly short shrift (“increased production by two new U.S. producers” – both of whose owners come from South Korea, undoubtedly because the option of supplying the American market through exports was sharply limited).

The Commission didn’t address one of the critics’ most compelling points – that the new U.S. jobs were created at a cost to consumers (via the higher prices they’ve paid) of a whopping $817,000 per job. But the University of Chicago/Federal Reserve study actually conceded that this number might be an exaggeration, since manufacturing jobs (like all jobs) create a “multiplier effect” – that is, they foster additional employment in related industries ranging from suppliers of inputs to transportation, packaging, and warehousing services. What these researchers didn’t mention is that manufacturing’s jobs multiplier is unusually high.

Moreover, like virtually all scholars of trade, tariffs, and employment, the Chicago/Fed team neglected other benefits of manufacturing job creation (and prevention of further manufacturing job loss). These include:

>avoiding the wage losses suffered by displaced manufacturing workers who find work in lower-paid industries (an especially important consideration given today’s very low overall unemployment rates)

>avoiding the revenue losses incurred by these workers’ communities and the economy as a whole due to reductions in their taxable income;

>avoiding the increased pressure on social programs required to serve employees who can’t find new jobs – which encompass not only unemployment compensation but spending that seeks to address the pathologies that often follow working class Americans’ deteriorating personal finances, like divorce, delinquency, alcoholism, and opioid and other drug use, not to mention higher mortality;

>and the costs incurred by local businesses because of worker-customers who can no longer afford as many of their products and services, which of course reduces business’ own taxable income and additionally crimps public finance at all levels. (See, e.g., this highly cited study.)

The USITC report, moreover, shed light on another big reason that the costs-per-manufacturing-job-saved might be exaggerated: Not all of the increased costs of the tariff-ed products are due to the tariffs. In particular, the Commission listed no less than 14 factors other than import competition (and the tariffs placed on these goods) that affect the prices of LRWs. They range from raw materials, transportation, and energy costs to competition levels from substitute and between domestic producers, U.S.-based production capacity, productivity changes, labor contracts, and state and local government incentives, and demand levels at home and abroad (because all the U.S.- and foreign-owned manufacturers sell all over the world). The USITC then proceeded to ask producers, importers, and purchasers (retailers) to rate the importance of these factors on prices since the tariffs’ imposition in February, 2018.

The answers were reported in table III-26, and import competition levels were anything but dominant. Indeed, their importance consistently was rated by all three stakeholder as lower or no greater than that not only of raw materials costs (higher due to entirely separate tariffs on metals that were imposed by the Trump administration) but of energy costs, domestic production capacity (surely limited over time by the previous import flood), the allocation of this production capacity to other products, productivity levels, labor agreements, transportation and delivery costs, and domestic demand levels.

And adding to the case for reducing the costs per job figure: According to the official U.S. Bureau of Labor Statistics figures, after jumping by 16.31 percent from the February, 2018 onset of the tariffs through that November, they’ve since fallen by 9.73 percent (through September).

In fact, this development leads to a major point completely missed by the tariffs’ critics. As also indicated by the phaseout schedule and the linkage of the tariffs to the submission of adjustment blueprints, the levies were never intended to produce instant results, or to furnish crutches forever. The USITC describes the implementation of these plans starting on p. IV-5 and, more revealing, presents the evaluations of the retailers – who are bound to be the most demanding judges.

The reviews are mixed, but varying numbers of these companies stated that the two domestic recipients of the tariff relief – Whirlpool and General Electric – introduced new products (the most commonly cited improvement), upgraded product quality, expanded marketing campaigns, bettered their customer service, and taken other positive steps (Table IV-2).

Will these measures prove sufficient? Even after the tariffs come off, definitive answers will prove elusive, because as made clear, the LRW trade policy picture contains so many moving parts. What does look definitive, however, is that so far, the critics have engaged in a flawed rush to judgment.

 

 

(What’s Left of) Our Economy: How Many Strikes Does Paul Krugman Get on Trade?

Tags

automation, China, China shock, globalization, hyperglobalization, Jobs, manufacturing, manufacturing employment, offshoring, Paul M. Krugman, protectionism, tariffs, The New York Times, Trade, Trade Deficits, World Trade Organization, WTO, {What's Left of) Our Economy

Contrary to what many trade mavens must think, Paul Krugman’s recent confession that he (and nearly all of his economics colleagues) have seriously misjudged the impact of international trade on America’s manufacturing workers isn’t his first. At least twice before (see here and here), this Nobel Prize-winning economist and New York Times columnist has admitted in print that the economics profession’s consensus was wrong to brush off (and often scorn) claims that post-Cold War trade agreements and similar trade policy decisions would foster a combination of wholly new and unbeatable (but economically unsustainable) forms of import competition for domestic industry, and related job and production offshoring. (I’m among those he’s mauled in print.) And he’s granted that trade policy critics who predicted these consequences and kept pointing to evidence of their emergence were right. (See here and here.)

Still, Krugman’s latest mea culpa is noteworthy for two reasons. First, it undercuts another tenet of trade economics dogma held almost as strongly believed as the belief that trade expansion in all circumstances is a net contributor to human welfare – the related conviction that imbalances like trade deficits don’t matter (at worst).

In particular, the author acknowledges that the rapid and massive increase in America’s manufacturing-dominated goods trade deficit – especially from super-low cost economies (and offshoring destinations) like Mexico and especially China – occurred at exactly the same time that U.S. industrial employment cratered. And not coincidentally, the destruction began right about when China was admitted into the World Trade Organization (WTO). That mattered greatly because the Beijing subsidies and other predatory trade practices that benefited both foreign- and Chinese-owned producers in the PRC gained invaluable protection from unilateral U.S. responses.

How greatly? According to Krugman, the worsening of the trade deficit “reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10%, which means that it explains more than half the roughly 20% decline in manufacturing employment between 1997 and 2005.” In other words, most of the manufacturing job loss during this crucial period – which is a particularly important one because that’s when critical masses of recently offshored factories got up and running and began exporting to the American market – should be blamed not on supposedly impersonal and clearly positive forces of progress like containerization in global shipping, and automation generally, but on actions by American leaders.

Not that Krugman abandons conventional trade economics completely. Specifically, he contends that trade deficits generally speaking are still ultimately unimportant, partly because countries can’t grow indefinitely indebted to the rest of the world and “must pay their way eventually.” The post mid-nineties surge in the manufacturing trade shortfall hammered domestic American manufacturing, he explains, only because it skyrocketed so suddenly.

Readers, however, will ask themselves how the United States can pay its way in the foreseeable future when manufacturing still dominates its lopsided goods trade flows. And they should note that although the damage to manufacturing could still prove temporary, it’s already lasted nearly twenty years, with no imminent end in sight until the past year. (See this post for one of my recent claims that President Trump’s trade policies are starting to bend the curve.)

Second, and following logically from the first point, Krugman continues to insist that protective tariffs should be avoided. Now his opposition focuses on his contention that the trade-related danger to U.S. manufacturing is coming to an end. The China shock in particular, which spearheaded the recent period of “hyperglobalization,” was “a one-time event” that’s already showing signs of ebbing.

But if Krugman was so offbase in evaluating trade’s economic effects, why should such predictions deserve any credibility? Off the top of my head, I can think of several reasons for ongoing concern. For example, China still has massive reserves of super cheap, U.S. wage-depressing labor in its interior and, counter-intuitively, in its national student body. In addition, the progress Beijing has fostered in capital- and technology-intensive industries means that these sectors of American manufacturing will keep facing the same kinds of low-wage (but high productivity) challenges that decimated less advanced, more labor-intensive U.S.-based sectors in previous decades. Moreover, if China does lose competitiveness even in these portions of manufacturing, there’s no shortage of bargain basement third world population giants – like India, Indonesia, and Brazil – that would be more than happy to receive more manufacturing investment from the United States and other high-income countries.

Everyone’s entitled to make mistakes – even know-it-alls like Krugman, who’s known for torching those disagreeing with him as know-nothings and liars. And Krugman deserves praise for owning up to his own mistakes. But it’s also appropriate to ask this question: Since Krugman first established his economic chops as a trade expert, and since he’s clearly been proven wrong about the leading trade-related controversy of our time, how many more strikes does he get?

(What’s Left of) Our Economy: A Thoroughly Muddled Manufacturing Production Figure

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aluminum, Boeing, China tariffs, Federal Reserve, General Motors, General Motors strike, industrial production, inflation-adjusted output, manufacturing, metals tariffs, metals-using industries, recession, steel, supply chains, tariffs, trade war, {What's Left of) Our Economy

The latest U.S. inflation-adjusted manufacturing output numbers (for September) are now out, and they leave more muddled than ever the matter of how much (if any) damage American industry has suffered from President Trump’s tariff-heavy trade policies.

And it’s not just because of ongoing uncertainties about the effects of President Trump’s current and threatened China tariffs, and all the fluctuations in coverage and rates. It’s not just because of the month-long General Motors strike – which could end soon if the union rank-and-file approve the settlement agreed on by their leaders, and which the Federal Reserve itself (which tracks manufacturing output) fingered as a big culprit behind September’s lousy read. It’s also because of the impact of Boeing aircraft’s continuing safety woes (a subject on which the Fed has been strangely silent).

As I’ve reported, the Boeing effect finally showed up in the latest U.S. trade data – which is especially important given the aerospace giant’s reliance on exports. But it hasn’t appeared anywhere else, including the new manufacturing production figures, even though orders for Boeing jets have been dramatically slashed, and even though the company is a huge consumer of materials, parts, and components from other manufacturing sectors.

With all those cautions out on the table, here’s what the new Fed statistics showed. After-inflation domestic manufacturing output slid by 0.48 percent sequentially in September, the worst such result since April’s 0.87 percent decrease, and more than enough to keep industry overall in recession. Since July, 2018, its real output is down a total of 0.38 percent.

GM’s labor troubles clearly dragged the total number down. Constant dollar vehicles and parts production in September sank by 4.22 percent on month, its worst such performance since January’s 7.18 percent nosedive (when the federal government was still shut down, surely depressing consumer confidence).

The Fed made clear that “Excluding motor vehicles and parts, [its] overall [industrial production] index and the manufacturing index each moved down 0.2 percent.” (More precisely, the real manufacturing decline would have been only 0.15 percent without automotive.) Oddly, though, the Fed didn’t mention that any development that depresses vehicle and parts production is bound to ripple through all the industries making up its extensive supply chain, too.

Yet despite the export troubles revealed in the trade figures, the Fed’s statistics show that aircraft and parts production enjoyed a terrific September. Indeed, the 1.82 percent sequential jump was the biggest since March, 2014’s 2.42 percent.

Nor do sectors comprising the aerospace supply chain (which broadly overlaps considerably with automotive’s) seem to be lagging significantly, except for primary metals. For example, below are the inflation-adjusted output figures for some big supplier sectors and control groups since April (the first full data month following actions the world over grounding or banning from various air spaces Boeing’s 737 Max jets):

overall manufacturing: +0.44 percent

durable goods: +0.75 percent

primary metals: -3.38 percent

fabricated metals products: -0.17 percent

machinery: +1.19 percent

As for the impact of the trade wars, as usual, the consequences of the President’s tariffs on aluminum and steel are easiest to gauge, since they’ve been on the longest, and the major metals-using industries (the presumed leading victims) are so easy to identify. The table below represents the changes in their real output since April, 2018 (the first full month in which the levies were in effect), with the data for manufacturing overall used as a control group, and durable goods included because it’s the super-category in which most of the main metals-using industries are located:

                                           Old Apr thru Aug   New Apr thru Aug   April thru Sept

overall manufacturing:        +0.54 percent          +0.57 percent       +0.09 percent

durables manufacturing:     +1.98 percent          +2.00 percent       +1.25 percent

fabricated metals prods:     +1.88 percent          +2.07 percent       +1.85 percent

machinery:                         +0.67 percent          +1.39 percent           0 percent

automotive:                        +0.17 percent          +0.30 percent        -3.92 percent

major appliances:               -2.04 percent           -1.22 percent        -2.19 percent

aircraft and parts:              +4.39 percent          +3.54 percent        +5.43 percent

The results are mixed – and obviously the most recent automotive number has little to do with the metals duties. Otherwise, three of the remaining four metals users have gained momentum versus the rest of manufacturing (durables, appliances, and aircraft), although their output performances remain subdued in absolute terms, and machinery has lost momentum.

Unfortunately, this kind of analysis not only remains much more difficult for the impact of the China tariffs. But every twist and turn in the trade talks saga only increases the challenge. Primarily because of uncertainties stemming from differences between the manufactured goods classification systems used by the U.S. Trade Representative’s office (which publishes the lists of tariff-ed items) and the main system used by other U.S. government agencies (like the Fed), the sectors below are among the handful that are reasonably certain to have faced tariff pressure since the first duties were placed in imports from China in July, 2018. Each column shows the real output changes since their first full month in effect through July, August, and September of this year:

                                                  Aug thru July      Aug thru Aug      Aug thru Sept

overall manufacturing:             -0.89 percent       -0.33 percent       -0.81 percent

ball bearings:                            -2.32 percent       -2.26 percent       -2.30 percent

industrial heating equip:          -4.58 percent       -1.72 percent       -1.01 percent

farm machinery & equip:        -6.91 percent      +9.71 percent       -0.69 percent

oil/gas drilling platform pts:   -0.86 percent       -1.38 percent       -1.38 percent

As is clear, these results are even more mixed than for the metals-using industries – to which all of these products belong. And with the President’s trade policies all too likely to stay ragged as the 2020 elections come closer, “more confusion” looks like the safest prediction possible regarding American manufacturing production 

(What’s Left of) Our Economy: Now What in the U.S.-China Trade War?

Tags

agriculture, allies, China, decoupling, Democrats, election 2020, forced technology transfer, Hong Kong, Huawei, impeachment, intellectual property theft, National Basketball Association, Phase One, Steven Mnuchin, subsidies, supply chains, Taiwan, tariffs, Trade, trade talks, Uighurs, verification, {What's Left of) Our Economy

This is the second working day since the United States and China reached what the Trump administration is calling a “Phase One” trade deal with Beijing last Friday, and the questions surrounding the agreement still far outweigh what’s known. That alone should tell you that towering obstacles continue blocking any confident assessment of where the President’s so-called trade war stands, much less where the conflict is likely to go. Even so, here are some observations I hope are useful.  (Teaser:  One major point concerns tonight’s Democratic presidential candidates debate.)

First, the absence of any written statements or documents from the U.S. side describing or even summarizing what’s actually in the agreement justifies big doubts that anything deserving the term “deal” has been reached at all. Further reinforcing legitimate skepticism is China’s long record of broken promises on trade.

Second, especially strong skepticism is warranted about U.S. claims that any meaningful progress has been made on the so-called structural issues focused on from the very beginning by the Trump administration. For it as I’ve long argued, China’s government is so vast and secretive, and leaves such scanty written records of key decisions, that it will simply be impossible for the United States to monitor and enforce even the most promising Chinese commitments on intellectual property theft, technology extortion, discriminatory Chinese government procurement, and Beijing subsidies that shaft U.S.-owned and other foreign businesses vis-a-vis their Chinese rivals.

Third, even if China currently means to keep its alleged promises to binge buy American agricultural products, any number of external events could upset the apple cart. They include the Hong Kong picture becoming uglier (its becoming prettier can’t be totally ruled out, but seems highly unlikely); new Chinese crackdowns on other protests that may emerge (especially among the Uighur Muslim population) or revelations of new Chinese atrocities against the Uighurs or other minorities or other protesters; more attempted Chinese bullying of high-profile U.S. businesses like the National Basketball Association; a major flare-up of tensions over Taiwan or China’s aggressive moves in the South China Sea; a step forward in the Huawei case that increases the chances that the CFO daughter of the founder of this Chinese telecommunications giant will be extradited to the United States from Canada for sanctions-busting; and Chinese moves that persuade Washington that Beijing has no intention of keeping its perceived agriculture or other promises.

Moreover, the longer China takes to ramp up its buys from American farmers, the greater the potential for these kinds of shocks to bring this “Phase One” agreement crashing down.

Fourth, the less impressive the “mini-deal” keeps looking, the more convincing my view that its apparent modesty reflects President Trump’s belief that his domestic political position has weakened significantly – both because of the new impeachment threat and signs of an economic slowdown.

It’s true that Treasury Secretary Steven Mnuchin has suggested that if the deal hasn’t been finalized by December 15, the Trump administration will go ahead with a previously vowed 15 percent increase on $156 billion worth of levies on Chinese imports. But that’s anything but a concrete threat. In addition, it’s important to note this report suggesting (the specifics are really sloppily described) that China wants the sequencing to work in the opposite way:  First, tariffs get rolled back (or frozen in place?), then the agriculture buys begin. 

Moreover, no one in the administration has said anything about reversing its Phase One-related decision to suspend a big tariff increase (to up to a formidable 30 percent on some products) previously announced to begin on October 15. So even though U.S. duties on some $360 billion worth of Chinese goods would still remain in place if China blows Mr. Trump off, there’s a real chance that Beijing won’t incur any further punishment – doubtless because the President believes that tariffs above and beyond current levels and coverage could panic investors again and further soften economic growth.

Some kind of blow-up in Hong Kong or elsewhere could yet change Mr. Trump’s calculations. But the more important point so far is that events, not the President, are now in charge of the trade talks track of his China policy.

Fifth, at the same time, none of the above means that the United States is devoid of leverage versus China and in particular the kind of clout that can keep advancing its economic as well as closely related technology and national security interests, and this is where a second, arguably more important, track of the Trump China policies needs to be remembered. As I’ve written, the President has sought not only to end the threat of China’s economic predation by forcing Chinese policy changes through tariff pressure. Although he rarely speaks of it, he’s also been trying to repel Chinese threats to U.S. security and prosperity through a series of unilateral measures aimed at decoupling the United States from China economically.

By crimping trade, investment, and technology flows, these decoupling steps are reducing America’s vulnerability to China by significantly reducing the access to the U.S. market so crucial to the success of China’s advanced industries; by shrinking the footprint of China’s state-controlled economy in America’s largely free market system; and by cutting off a Chinese tech sector that could be become highly dangerous from critical supplies of U.S. components.

Decoupling has also been advanced by those tariffs so far imposed on $360 billion worth of Chinese products (amounting to nearly 86 percent of all goods imports from China last year). They haven’t done much to achieve their stated aim of improving China’s behavior, but they have decreased China’s importance to the U.S. economy by prompting an exodus of global manufacturing supply chains out of the People’s Republic.

Further, the Trump decoupling campaign has also helped awaken many foreign governments to the China tech and broader economic threat – though because so many other countries (including major American treaty allies), were profiting so handsomely from the pre-Trump globalization status quo, progress on this front has been uneven and disappointing. (See here for why Germany, for example is so conflicted.) 

Sixth and finally, one major set of actors in this drama, though, hasn’t been very woke on China issues:  most of the Democratic presidential candidates. Sure, many have supported a policy of “doing something” on China (though rarely involving tariffs – or any other concrete measures). But so far, none seems to view China’s multi-dimensional challenge to America as a major concern – and all the top-tier contenders and most others now support impeaching the President. 

Consequently, they could greatly strengthen not only Mr. Trump’s position, but the American position, with firm declarations in tonight’s debate that China will stay squarely in Washington’s cross-hairs if they win the White House, and that therefore there’s no point in stonewalling in hopes of easier post-2020 U.S. policies. Not that any confidence looks well founded that any of them will.        

Making News: Back on CNBC this Afternoon, Piscopo & Breitbart Podcasts…& More!

Tags

AM 970 The Answer, Breitbart News Tonight, Breitbart.com, China, CNBC, Making News, Paul M. Krugman, Phase One, tariffs, The Joe Piscopo Show, Trade, trade war

I’m pleased to announce that I’m scheduled to return to CNBC this afternoon to comment on latest, fast-moving developments surrounding the U.S.-China trade talks and the “Phase One” deal announced last Friday.  The segment is slated to begin at 2 PM EST and, as usual, if you can’t tune in, I’ll post a link to the streaming video as soon as one become available.

In addition, the podcasts of my two Friday radio interviews on the trade talks and “mini-deal” are now on-line.  For my appearance Friday morning on “The Joe Piscopo Show” on New York City’s AM 970 The Answer, click here and scroll down till you see my name.  My segment comes on at about the 22:30 mark.

And here’s the link for my interview on “Breitbart News Tonight.”  Again, scroll down till you see my name.

Moreover, Breitbart.com yesterday posted a piece featuring my comments on a jaw-dropping confession from Nobel Prize-winning economist and New York Times columnist Paul M. Krugman.  He’s now saying that he and his free-trading colleagues have been totally wrong for decades on the question of how globalization has impacted the U.S. economy and its manufacturing sector.  Since Krugman and I have crossed swords in print before, you can count on hearing more from me on this subject before too long.

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