(What’s Left of) Our Economy: Why Biden’s Trade Policies are Looking Trump-ier Than Ever

Tags

America First, arbitrage, Biden, China, economic nationalism, environmental standards, global minimum tax, globalism, globalization, infrastructure, Jake Sullivan, Janet Yellen, labor rights, race to the bottom, subsidies, tariffs, tax policy, taxes, Trade, trade Deals, trade wars, {What's Left of) Our Economy

As the author of a book titled The Race to the Bottom, you can imagine how excited I was to learn that the main rationale of Treasury Secretary Janet Yellen’s new proposal for a global minimum tax on corporations is to prevent, or bring to an end, a…race to the bottom.

But this idea also raises a question with profound implications for U.S. trade and broader globalization policies: Why stop at tax policy? And it’s made all the more intriguing because (a) the Biden administration for which Yellen surprisingly seems aware that there’s no good reason to do so even though (b) the trade policy approach that could consequently emerge looks awfully Trump-y.

After all, the minimum tax idea reflects a determination to prevent companies from engaging in what’s known as arbitrage in this area. It’s like arbitrage in any situation – pitting providers and producers that boast little leverage into competition with one another to sell their goods and services at the lowest possible price, and usually triggering a series of ever more cut-rate offers.

These kinds of interactions differ from ordinary price competition because, as mentioned above, the buyer usually holds much more power than the seller. So the results are too often determined by considerations of raw power, not the kinds of overall value considerations that explain why market forces have been so successful throughout history.

When the arbitrage concerns policy, the results can be much more disturbing. It’s true that the ability of large corporations to seek the most favorable operating environments available can incentivize countries to substitute smart policies for dumb in fields such as regulation and of course taxation. But it’s also true, as my book and so many other studies have documented, that policy arbitrage can force countries to seek business with promises and proposals that can turn out to be harmful by any reasonable definition.

Some of the most obvious examples are regulations so meaningless that they permit inhumane working conditions to flourish and pollution to mount, and encourage tax rates to fall below levels needed to pay for public services responsibly. Not coincidentally, Yellen made clear that the latter is a major concern of hers. And the Biden administration says it will intensify enforcement of provisions in recent U.S. trade deals aimed at protecting workers and the environment – and make sure that any new agreements contain the same. I’ve been skeptical that many of these provisions can be enforced adequately (see, e.g., here), but that’s a separate issue. For now, the important point is that such arbitrage, and the lopsided trade flows and huge deficits they’ve generated, harm U.S.-based producers and their employees, too.

But as my book and many other studies have also documented, safety and environmental arbitrage aren’t the only instances of such corporate practices by a long shot. Businesses also hop around the world seeking currency arbitrage (in order to move jobs and production to countries that keep the value of their currencies artificially low, thereby giving goods and services turned out in these countries equally artificial, non-market-related advantages over the competition). Ditto for government subsidies – which also influence location decisions for reasons having nothing to do with free markets, let alone free trade. The victims of these versions of policy arbitrage, moreover, have been overwhelmingly American.

The Biden administration is unmistakably alert to currency and subsidy arbitrage. Indeed a major element of its infrastructure plan is providing massive support for the U.S. industry in general, and to specific sectors like semiconductors to lure jobs and production back home and keep it there. Revealingly, though, it’s decided for the time being to keep in place former President Trump’s steep, sweeping tariffs on China, and on steel and aluminum.

So it looks like the President has resolved to level these playing fields by cutting off corporate policy arbitrage opportunities of all types with a wide range of tools. And here’s where the outcome could start looking quintessentially Trump-y and America First-y. For it logically implies that the United States shouldn’t trade much – and even at all – with countries whose systems and policy priorities can’t promote results favorable to Americans.

Still skeptical? Mr. Biden and his leading advisers have also taken to talking about making sure that “Every action we take in our conduct abroad, we must take with American working families in mind.” More specifically, the President’s White House national security adviser, Jake Sullivan, wrote pointedly during the campaign that U.S. leaders

“must move beyond the received wisdom that every trade deal is a good trade deal and that more trade is always the answer. The details matter. Whatever one thinks of the TPP [the proposed Trans-Pacific Partnership trade deal], the national security community backed it unquestioningly without probing its actual contents. U.S. trade policy has suffered too many mistakes over the years to accept pro-deal arguments at face value.”

He even went so far as to note that “the idea that trade will necessarily make both parties better off so long as any losers could in principle be compensated is coming under well-deserved pressure within the field of economics.”

But no one should be confident that economic nationalism will ultimately triumph in Biden administration counsels. There’s no doubt that the U.S. allies that the President constantly touts as the keys to American foreign policy success find these views to be complete anathema. And since Yellen will surely turn out to be Mr. Biden’s most influential economic adviser, it’s crucial to mention that her recent speech several times repeated all the standard tropes mouthed for decades by globalization cheerleaders about U.S. prosperity depending totally on prosperity everywhere else in the world.

Whether she’s right or wrong (here I presented many reasons for concluding the latter), that’s clearly a recipe for returning trade policy back to its pre-Trump days – including the long-time willingness of Washington to accept what it described as short-term sacrifices (which of course fell most heavily on the nation’s working class) in order to build and maintain prosperity abroad that would benefit Americans eventually, but never seemed to pan out domestically.

Nor is Yellen the only potential powerful opponent of less doctrinaire, more populist Biden trade policies. Never, ever forget that Wall Street and Silicon Valley were major contributors to the President’s campaign coffers. Two greater American enthusiasts for pre-Trump trade policies you couldn’t possibly find.

And yet, here we are, more than two months into the Biden presidency, and key pieces of a Trump-y trade policy both in word and deed keep appearing.  No one’s more surprised than I am (see, e.g., here).  But as so often observed, it took a lifelong anti-communist hardliner like former President Richard M. Nixon to engineer America’s diplomatic opening to Mao-ist China. And it took super hard-line Zionist Menachem Begin, Israel’s former Prime Minister, to sign a piece treaty with long-time enemy Egypt. So maybe it’s not so outlandish to suppose that a died-in-the-wool globalist like Joe Biden will be the President establishing America First and economic nationalism as the nation’s new normals in trade and globalization policy.  

(What’s Left of) Our Economy: Why the U.S. Still Holds the Winning Economic Cards Versus China

Tags

Biden, CCP, China, Chinese Communist Party, CNBC.com, consumers, consumption, demographics, Donald Trump, export-led growth, gross domestic product, IMF, International Monetary Fund, per capita GDP, population, technology, Trade, trade wars, workforce, {What's Left of) Our Economy

Since there seems to be no end in sight to the rise in U.S.-China tensions, it’s especially interesting that two analyses of the Chinese economy and its future that challenge some widely held views on the subject have just appeared. Also noteworthy: They matter greatly for America’s perceived prospects for success, and one of them comes from the Chinese Communist Party (CCP) itself.

More important still:  When you put them both together, the implications look positively startling – and encouraging – for America’s prospects in its economic and technological struggle with the People’s Republic.

The first apparently contrarian information comes from the International Monetary Fund in the form of this chart.

It shows recent and projected trends in U.S. and Chinese gross domestic product (GDP) per capita – that is, how much economic output each country turns out adjusted for population. This statistic is a valuable gauge of economic power and affluence because it reveals which national economies (or the economies of any other political unit) are a certain size simply because their populations are a certain size (big or small), and which economies are doing a particularly good or bad job generating goods and services given how many people are doing the producing.

For example: Let’s say you have one economy with a population of 100 and one with a population of 10,000, and the latter generates twice as much economic output than the former. The more populous country would have the larger economy in absolute terms, but its performance wouldn’t be seen as especially impressive because it took so many people to achieve this result – and indeed orders of magnitude more people than the smaller population economy.

Moreover, the latter economy would have much less wealth to distribute among its own people than the former, and therefore each of its citizens would be a good deal poorer than their counterparts in the smaller economy all else being equal.

But let’s not dismiss the bigger economy’s record altogether. For if the two ever fought a war – all else equal again – the bigger economy would have much more in the way of resources to build and equip a military, and keep it fighting, than the smaller.

Throughout modern history, the U.S. economy has greatly exceeded China’s by both measures, but because of the amazing progress made in recent decades by the People’s Republic and a slowdown in U.S. growth, China has been able to close the gap in terms of the size of the two economies. In fact, many forecasters (as made clear in the CNBC.com post containing the chart), believe that the Chinese will catch up before too long. As indicated above, the implications are sobering for Americans if the two countries come to blows, and by extension for any diplomatic jockeying they engage in – for relative military power always casts a political shadow.

China’s overall catch up has been so fast that you might think that the per capita GDP gap that’s been so large because China’s population has been so much bigger than America’s might start narrowing, too. But the chart makes clear that this hasn’t been the case at all. Indeed, the gap has continued to widen, and is projected to keep widening at least for the next four years.

And this finding and prediction suggests that the unquestionable surge in living standards that China has been able to foster due to its rapid growth – which has led so many U.S. and other non-Chinese businesses to pin their future hopes largely on selling to this huge and supposedly ever-burgeoning market – won’t even come close to American living standards for many years. So if the chart is right, the purchasing power growth of the typical Chinese will stall out at pretty low levels and disappoint many of these corporate hopes.

As a result, fears that a thorough “decoupling” of the two economies resulting mainly from U.S. concerns about over-dependence on an increasingly hostile country will kneecap many U.S.-based businesses and possibly the entire American economy could be seriously overblown, at least longer term. For if the chart is right, these expectations will be revealed as unrealistic no matter what course Washington follows – and even if China displayed any willingness (which it hasn’t) to permit foreign businesses to make any more inroads into its economy than are absolutely necessary.  (See here for the latest – and an unsually explicit – official Chinese designation of “complete” economic self-reliance as a goal.)  

All of which brings us to the second contrarian take on China that’s been expressed recently – and by the Communist Party. It’s a finding from the Deputy Director of a party-run research institute that the country’s “Consumption has already past the phase of rapid increase and will only rise slowly in the future.” And his opinion deserves big-time credibility because he clearly believed that he could express such a downbeat view without getting his head chopped off, or being sent for a few decades to a reeducation camp, or risking punishment for any immediate family and relatives.

In addition, however, Xu cited two specific, interlocking reasons for this judgement: an aging population and a shrinking workforce.  And although he seemingly didn’t mention this, if China will need to temper its plans to generate more economic growth through its own domestic consumption, it will need not only to rely more on the kinds of infrastructure investment he did cite.  It will also need to keep relying heavily on exports – which should ensure that the United States will retain plenty of leverage over the People’s Republic with its tariffs as long as the Biden administration decides to leave them in place. 

None of this means that former President Trump was right in claiming that trade wars are “easy to win,” or that maintaining satisfactory technological superiority will be a piece of cake, either, or that generally the United States can stop worrying so much about China threats on these scores.  But it does mean that if American leaders have the will to prevail – and to advance and safeguard U.S. interests adequately – they’ll have plenty of wallet to use.                                    

 

Im-Politic: Trump-ism Without Trump for America as a Whole?

Tags

"Defund the Police", allies, CCP Virus, China, climate change, coronavirus, court packing, COVID 19, Democrats, election 2020, enforcement, Executive Orders, filibuster, Green New Deal, Huawei, human rights, Im-Politic, Immigration, Joe Biden, judiciary, lockdowns, mask mandate, masks, metals, multilateralism, Muslim ban, Phase One, progressives, Republicans, sanctions, Senate, shutdowns, stimulus, Supreme Court, tariffs, taxes, Trade, trade wars, Trump, unions, Wuhan virus

Since election day, I’ve spent some time and space here and on the air speculating about the future of what I called Trump-ism without Donald Trump in conservative and Republican Party political ranks. Just this weekend, my attention turned to another subject and possibility: Trump-ism without Mr. Trump more broadly speaking, as a shaper – and indeed a decisive shaper – of national public policy during a Joe Biden presidency. Maybe surprisingly, the chances look pretty good.

That is, it’s entirely possible that a Biden administration won’t be able to undo many of President Trump’s signature domestic and foreign policies, at least for years, and it even looks likely if the Senate remains Republican. Think about it issue-by-issue.

With the Senate in Republican hands, there’s simply no prospect at least during the first two Biden years for Democratic progressives’ proposals to pack the Supreme Court, to eliminate the Senate filibuster, or to recast the economy along the lines of the Green New Deal, or grant statehood Democratic strongholds Puerto Rico and the District of Columbia. A big tax increase on corporations and on the Biden definition of the super-rich looks off the table as well.

If the Senate does flip, the filibuster might be history. But big Democratic losses in the House, and the claims by many veterans of and newcomers to their caucus that those other progressive ambitions, along with Defunding the Police, were to blame, could also gut or greatly water down much of the rest of the far Left’s agenda, too.

CCP Virus policy could be substantially unchanged, too. For all the Biden talk of a national mask mandate, ordering one is almost surely beyond a President’s constitutional powers. Moreover, his pandemic advisors are making clear that, at least for the time being, a sweeping national economic lockdown isn’t what they have in mind. I suspect that some virus economic relief measures willl be signed into law sometime this spring or even earlier, but they won’t carry the total $2 trillion price tag on which Democratic House Speaker Nancy Pelosi seems to have insisted for months. In fact, I wouldn’t rule out the possibility of relief being provided a la carte, as Congressional Republicans have suggested – e.g., including popular provisions like some form of unemployment payment bonus extension and stimulus checks, and excluding less popular measures like stimulus aid for illegal aliens.

My strong sense is that Biden is itching to declare an end to President Trump’s trade wars, and as noted previously, here he could well find common cause with the many Senate Republicans from the party’s establishment wing who have never been comfortable bucking the wishes of an Offshoring Lobby whose campaign contributions it’s long raked in.

Yet the former Vice President has promised his labor union supporters that until the trade problems caused by China’s massive steel overproduction were (somehow) solved, he wouldn’t lift the Trump metals tariffs on allies (which help prevent transshipment and block these third countries from exporting their own China steel trade problems to the United States) – even though they’re the levies that have drawn the most fire from foreign policy globalists and other trade and globalization zealots.

As for the China tariffs themselves, the latest from the Biden team is that they’ll be reviewed. So even though he’s slammed them as wildly counterproductive, they’re obviously not going anywhere soon. (See here for the specifics.) 

Later? Biden’s going to be hard-pressed to lift the levies unless one or both of the following developments take place: first, the allied support he’s touted as the key to combating Beijing’s trade and other economic abuses actually materializes in very convincing ways; second, the Biden administration receives major Chinese concessions in return. Since even if such concessions (e.g., China’s agreement to eliminate or scale back various mercantile practices) were enforceable (they won’t be unless Biden follows the Trump Phase One deal’s approach), they’ll surely require lengthy negotiations. Ditto for Trump administration sanctions on China tech entities like the telecommunications giant Huawei. So expect the Trump-ian China status quo to long outlast Mr. Trump.

Two scenarios that could see at least some of the tariffs or tech sanctions lifted? First, the Chinese make some promises to improve their climate change policies that will be completely phony, but will appeal greatly to the Green New Deal-pushing progressives who will wield much more power if the Senate changes hands, and who have demonstrated virtually no interest in China economic issues. Second, Beijing pledges to ease up on its human rights crackdowns on Hong Kong and the Muslims of Xinjiang province. These promises would be easier to monitor and enforce, but the Chinese regime views such issues as utterly non-negotiable because they’re matters of sovereignty. So China’s repressive practices won’t even be on the official agenda of any talks. Unofficial understandings might be reached under which Beijing would take modest positive steps or suspend further contemplated repression. But I wouldn’t count on such an outcome.

Two areas where Biden supposedly could make big decisions unilaterally whatever happens in the Senate, are immigration and climate change. Executive orders would be the tools, and apparently that’s indeed the game plan. But as Mr. Trump discovered, what Executive Orders and even more routine adminstrative actions can do, a single federal judge responding to a special interest group’s request can delay for months. And these judicial decisions can interfere with presidential authority even on subjects that for decades has been recognized as wide-ranging – notably making immigration enforcement decisions when border crossings impact national security, as with the so-called Trump “Muslim ban.”

I know much less about climate change, but a recently retired attorney friend with long experience litigating on these issues told me that even before Trump appointee Amy Coney Barrett joined the Supreme Court, the Justices collectively looked askance on efforts to create new policy initiatives without legislating. Another “originalist” on the Court should leave even less scope for ignoring Congress.

The bottom line is especially curious given the almost universal expectations that this presidential election would be the most important in recent U.S. history: A deeply divided electorate could well have produced a mandate for more of the same – at least until the 2022 midterms.

(What’s Left of) Our Economy: The Trade Wars Would’ve Been Much Easier to Win if Not for Boeing

Tags

(What's Left of) Our Economy, aerospace, aircraft, aircraft parts, Boeing, manufacturing, metals tariffs, tariffs, Trade, trade wars, Trump

Today’s grim news about recent Boeing aircraft orders and deliveries is just the latest valuable reminder that any evaluation of the Trump record on manufacturing and trade policy has to take into account the entire aircraft and parts industry’s transformation from a slight to a bigtime industrial laggard. Moreover, Boeing’s weakness – which has nothing to do with the President’s trade or any other policies — seems likely to continue for the foreseeable future, at least according to Boeing. The company’s latest long-term forecast for the global aircraft market affirms that it will take years for aviation worldwide to return to pre-CCP Virus levels.

The degree of the pain inflicted by Boeing’s troubles – which also include major safety woes that started making headlines in early 2019 – on the whole of domestic industry, and how unrelated manufacturing’s overall Trump era performance has been to the President’s tariff-heavy trade policies, becomes clear from diving into the most detailed U.S. manufacturing output figures available: the Federal Reserve’s industrial production data.

For example, the Fed numbers show that, during the Obama administration, adjusting for inflation, manufacturing output increased by 14.65 percent. Real aircraft and parts production output growth was just slightly slower: 12.39 percent.

But from the start of the Trump years until the arrival of the pandemic (February, 2017 through February, 2020), whereas the manufacturing sector as a whole expanded by 3.60 percent in price-adjusted terms, the aircraft and parts industry shrank by 13.10 percent.

Since the virus struck (from February through the latest available – August – numbers)? Manufacturing output is down by 6.39 percent after inflation, and aircraft and parts production is off by 10.81 percent.

As for the trade war impact, from March, 2018 (the first full month of President Trump’s metals tariffs and a good place for marking the start of the broader trade wars) until February, 2020 (the last month before the virus began significantly affecting manufacturing and the entire domestic economy), overall manufacturing production grew by a bare 0.83 percent. But that poor performance was clearly dragged down by the nation’s aircraft and parts factories – which turned out 10.74 percent less in terms of constant dollar product value.

Aircraft and parts were major industrial also-rans, too, during the comparable 23-month period preceding the first full month of the Trump metals tariffs. Their real production slumped by 4.11 percent, as manufacturing’s overall production rose by 4.07 percent.

The bottom line, then, couldn’t be clearer. The President was wrong in insisting that trade wars for big deficit countries like the United States are “easy to win.” But the facts also demonstrate that the victories the nation has won in these conflicts – which have been significant – would have been come much easier had the aerospace sector and its long-time leader Boeing not turned into such major losers.

(What’s Left of) Our Economy: Some New Trump-Friendly Data on Manufacturing Productivity

Tags

Barack Obama, Labor Department, manufacturing, metals tariffs, multi-factor productivity, productivity, tariffs, total factor productivity, Trade, trade wars, Trump, {What's Left of) Our Economy

If I had a list of twenty top wishes, more timely U.S. government publication of the multifactor productivity statistics wouldn’t make the cut. All the same, I’d like to see the posting of this data sped up for several reasons, including:

>Multi-factor productivity (also called total factor productivity) is the broadest of the measures of economic efficiency tracked by Washington, purporting to show how much in the way of all kind of inputs are needed to produce a unit of economic output in a given time period; and

>although even stalwarts of the rarely humble economics profession agree that productivity is challenging to measure precisely, they also mainly tend to agree that the stronger a country’s productivity performance, the likelier that country’s population will be living standards rise on a sustainable, not bubbly, basis.

So even though the new detailed multi=factor productivity statistics released by the Labor Department late last week only bring us through 2018, they’re worth contemplating anyway – and even for those focused tightly on politics in this presidential election year. For these latest numbers somewhat further undercut widespread claims that President Trump’s tariff-heavy trade policies have been weakening American domestic manufacturing (which is strongly affected by trade), and indeed add to those overall economic metrics for which the Trump years have seen better performance than the Obama years. (As known by RealityChek regulars, the Obama administration holds an edge here.)

Let’s start with what the new Labor Department release says about how many of the industries it follows achieved multi-factor productivity growth during the last two Obama years and the first two Trump years (the best basis for comparison, since it examines time spans closest together in the same – expansionary – business cycle). Here are the numbers:

2015: 21 of 86

2016: 37 of 86

2017: 32 of 86

2018: 44 of 86

On average, these gains were considerably more widespread under the Trump administration. Also noteworthy: Although the number of multi-factor productivity growers dipped between the final year of the Obama administration and the first year of the Trump administration, that first Trump year featured no tariff increases. These moves didn’t begin until the early spring of 2018 – a year in which the numbers of productivity growers rose significantly.

Such figures by no means clinch the case that the tariffs helped domestic manufacturers – because a single year can’t make or break an argument; because trade policy was far from the only development influencing manufacturing; because none of the developments that do influence productivity work their magic in ways convenient for calendar-watchers; and because the 2018 tariffs only covered aluminum and steel.

Still, it’s hard to look at these productivity numbers and see any harm done to U.S.-based manufacturing by the tariffs – or by the very good reasons at the time for assuming that many more were on the way, with all their implications for business plans.

But what about actual multi-factor productivity throughout the entire manufacturing sector. Here’s what separate Labor Department data reveal:

last two Obama years combined:  -2.15 percent

first two Trump years combined: +0.84 percent

Another Trump edge, and another reason for doubting the “tariff-mageddon” claims concerning manufacturing.

The multi-factor productivity reports also handily present the numbers of manufacturing sectors that enjoyed overall output growth year in and out. These data make the Trump years look superior, too, and cast further doubt on the tariff opponents’ credibility:

2015: 50 of 86

2016: 31 of 86

2017: 44 of 86

2018: 55 of 86

Unfortunately, even if the multi-factor productivity data for 2019 (a slower growth year for domestic industry) were available, robust conclusions about the Trump manufacturing record on this front per se, and especially about the effects of the tariffs would be difficult for the fair-minded to draw. After all, that’s the year when major tariffs on Chinese goods were imposed, and therefore when the inevitable inefficiencies they created began. In other words, U.S.-based manufacturers were just at the start of efforts to make supply chain and other adjustments to the levies, not at the end of this process. And the CCP Virus’ arrival and all the economic distortions it’s produced will complicate analysis going forward.

Moreover, although it should be “needless to say,” I’ll make the point again anyway: Major changes in U.S. trade policy toward China and overall were vital both for economic, national security, and – as has become clear this year – health security reasons.

As a result, here’s the firmest conclusion I can draw: The stronger U.S. manufacturing’s performance in improving multi-factor productivity remains, the easier these needed trade wars will be to win at acceptable prices.

Those Stubborn Facts: China’s Losing the Trade Wars Globally, Too

Tags

China, exports, Financial Times, globalization, supply chain, Those Stubborn Facts, Trade, trade wars

China’s share of total world goods exports, 2018: 25 percent

China’s share of total world goods exports, 2019: 22 percent

(Source: “China’s share of global exports falls in supply chains rethink,” by Kathrin Hille, Financial Times, August 17, 2020, https://www.ft.com/content/bfef2854-f8f3-4ce6-a00f-3b11123b01e8)

(What’s Left of) Our Economy: A Winning Trade War Message from the Last Pre-China Virus Manufacturing Figures

Tags

aerospace, aircraft, Boeing, China, China virus, coronavirus, inflation-adjusted output, manufacturing, manufacturing production, metals, supply chains, tariffs, Trade, trade wars, {What's Left of) Our Economy

The new Federal Reserve industrial production figures are now out, and although they only bring the story up through February, they contain two vital messages: First, taking into account ongoing safety problems with aerospace giant Boeing (and its vast domestic supply chain), they’re very solid – and reinforce the case that the pre-China Virus manufacturing and overall U.S. economies were faring well despite widespread slowdown fears. Second, they also show that, despite the equally widespread tariff alarmism being mongered throughout the Trump years, domestic manufacturing wound up handling the so-called trade wars just fine.

According to the Fed, inflation-adjusted manufacturing output increased by 0.12 percent month-to-month and remained down on a year-on-year basis (by 0.18 percent). January’s monthly constant dollar production dip was revised down from 0.09 percent to 0.23 percent. Yet this real output is up on net by 1.33 percent since its last low point (last October) and by 0.36 percent since the first full month of significant Trump tariffs (April, 2018).

At the same time, these production levels remain 1.28 percent below those of manufacturing’s last peak – in December, 2018. So these are by no means salad days for domestic industry.

Take a look, however, at the main Boeing-related figures. Aircraft production and parts sank by 5.12 percent sequentially in February. It reached its lowest level since October, 2011 and this drop followed January’s 11.36 percent monthly nosedive.

Moreover, although impossible from the Fed figures to quantify precisely, the production halt of Boeing’s popular 737 Max model that began in January is clearly dragging down output in sectors ranging from metals to industrial machinery to plastics to electronics and instruments.

The rapid recent spread of the coronavirus throughout the United States will start generating very different and much worse manufacturing production and other data going forward. But these latest data show domestic industry’s performance even as tariffs on literally hundreds of billions of dollars worth of tariff on Chinese and metals inputs used by manufacturers remained firmly in place. And if that doesn’t signal loud and clear that both American producers and consumers were withstanding the Trump trade wars – a New Normal that’s likely to survive the passing of COVID 19 – quite nicely, and in fact that the entire economy had been winning it, what could?

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

Tags

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: A Boeing Drag on US Manufacturing Unrelated to Trump’s Trade War

Tags

737 Max, aerospace, aviation, Boeing, exports, manufacturing, manufacturing recession, safety, tariffs, Trade, trade wars, {What's Left of) Our Economy

Ever since Boeing ran into safety problems that early this year resulting in the widespread grounding of one of its most successful airliners, authoritative (as opposed to anecdotal) signs have been elusive that the aerospace giant’s woes have been contributing to the slowdown being experienced by domestic manufacturing. This matter matters because a sizable Boeing Factor would rebut claims that President Trump’s tariff-heavy trade policies deserve nearly all the blame for industry’s recent troubles.

Boeing’s commercial jets, after all, haven’t been subjected to any retaliatory duties from tariff-ed foreign economies – largely because the company is half of a practical duopoly (along with Europe’s Airbus) in large passenger aircraft production. As a result, no countries (including China) want to be left with a single supplier. (Possible European responses to American levies on Airbus products authorized by a U.S. win at the World Trade Organization in a trade dispute long predating Mr. Trump’s inauguration could change that situation.)

Moreover, Boeing uses enormous amounts of manufactured intermediates to assemble its planes (which also include military aircraft), and especially durable goods ranging from fabricated metals products to machine tools. So hard times for Boeing will clearly mean hard times for all these suppliers if they haven’t already.

Last Thursday, however, a Boeing Factor finally became clear in official U.S. economic data – specifically in the monthly trade report (which contained figures through August). These statistics reveal that U.S. exports of civilian aircraft began falling sharply on a year-to-date basis beginning in May – just two months after national aviation authorities and airlines around the world began grounding the 737 Max 8 model or banning it from their airspaces.

Skeptics could still contend that a tariff-induced slump in global economic activity has reduced demand for Boeing’s jets, but the trade data also show significant strengthening of civilian aircraft imports, meaning that, at least in the United States, demand remains healthy.

The most important comparison entails the April-through-August results for civil aircraft exports and imports over the last few years. These ensure the best apples-to-apples findings over respectable periods of time.

According to the trade statistics, the U.S. civil aircraft industry dominated by Boeing hasn’t been killing it recently. From April-through-August, 2017 to April-through-August, 2018, its exports declined by 13.94 percent. And then between the same 2018-19 stretch, the rate of deterioration sped up markedly – to 24.51 percent.

Meanwhile, imports of civil aircraft performed a u-turn. From April-through-August 2017 to April-through-August, 2018, they fell by 7.95 percent. But then between the same 2018-19 period, they actually rose – and by a strong 18.37 percent.

Also pointing to a Boeing/civil aircraft-specific problem – the major difference between civil aircraft’s trade performance in recent years and that of domestic manufacturing as a whole. Between the April-through-August 2017 and 2018 periods, while civil aircraft exports were dropping, overall manufacturing exports rose by 6.76 percent. Between the following April-through-August periods, both kinds of exports decreased, but overall manufacturing exports were down only 3.44 percent versus aircraft’s 24.51 percent. And while civilian aircraft imports were surging, overall manufacturing imports edged up only 0.60 percent.

Could this great recent disparity between civil aircraft’s trade performance and overall manufacturing’s trade performance caused the manufacturing slowdown all by itself? Probably not. Current figures aren’t available for civil aircraft as such, much less for aircraft-specific supply chain output. But a 2016 study from the Federal Aviation Administration reported that in 2014, civilian aircraft and parts manufacturing totaled a little more than $100 billion (in 2012 dollars), and that inputs from the supply chain brought the figure up to just under $258 billion.

Since the Commerce Department pegged total American manufacturing output that year at just under $6 trillion (in those same 2012 dollars), civil aircraft production would have represented 4.27 percent of domestic industry’s total. It’s true that that share isn’t overwhelming. But given that the Federal Reserve’s (inflation-adjusted) manufacturing data show that the sector’s after-inflation output has edged down from only +0.90 percent to +0.89 percent between the April-through-August 2018 and 2019 stretches, civil aircraft’s seriously worsening trade situation may bear noteworthy responsibility. And it certainly could be behind a comparable share of the slight (just 0.36 percent) real output decline over the past year that represents manufacturing’s latest technical recession.

A big complication could still put the spotlight back on the trade wars: Although safety problems have plainly hurt Boeing orders and production, and therefore new business throughout its supply chain, civil aircraft production and sales both feature long time lags between orders and deliveries. Indeed, the company says that its backlog is still considerable – and growing.

Nonetheless, it’s also true that the company’s progress toward regaining its reputation has lagged far behind its initial predictions, and new problems keep emerging with the 737s and other planes . In addition, a leading aerospace industry consultancy reported in August that Boeing-related concerns were depressing civil aircraft production globally. And within Boeing, the damage hasn’t been confined to 737 Max production. The safety crisis is affecting output of other airliners, too.

Moreover, other non-trade-related problems obviously have been weighing lately on U.S.-based manufacturing, too – notably the confusion in Europe created by the ongoing Brexit mess and the long-time abject failures of the European Union and Japan to generate respectable growth. For now, there’s little evidence that Mr. Trump’s trade policies have been a net plus for domestic industry (although the counter-factual needs to be mulled, too – i.e., how would manufacturing be faring under a pre-Trump policy regime?). But the same, at very best, can be said for the Boeing Factor.

Following Up: Many (and Maybe Most) U.S. Manufacturers Aren’t Buying the Tariff Fear-Mongering

Tags

capex, Dallas Federal Reserve, exports, Following Up, growth, Jobs, manufacturing, NAM, National Association of Manufacturers, Sikich, tariffs, Trade, trade wars

What a week for polls seeking to shed some light on whether and how much President Trump’s tariffs-heavy trade policies have affected American domestic manufacturing! Monday’s post reported on findings from the Dallas Federal Reserve bank pointing to the answer, “Not nearly as much damage as widely supposed, and some benefits.”

Since then, the results of two more surveys have been published, and they, too, indicate that the situation is much more complicated than portrayed by the gloom and doom claims and predictions from globalization cheerleaders in politics, the media, and the U.S. Offshoring Lobby. And one of them shows that more domestic American manufacturers are expecting net gains, not net losses, from the trade wars – and even that many are coping with more and higher tariffs by boosting their production at home. 

Let’s start with the poll supporting the “tariffmageddon” narrative most strongly. It’s the National Association of Manufacturers’ (NAM) Quarterly Outlook Survey for the second quarter of 2019. The headline number for trade mavens: 56 percent of the 689 respondent companies called “Trade uncertainties” their “primary current business challenge.” This concern trailed only “Attracting and retaining a quality workforce” (68.6 percent). During the first quarter, trade uncertainties were the top concern of only 52.6 percent of respondents – so that number’s up, but not dramatically.

For good measure, along these lines, the expected growth rate for exports over the next year was just 0.4 percent – the lowest such figure provided in eleven quarters (going back to the third quarter of 2016).

In addition, respondents’ expectations of major performance indicators also weakened from the first quarter’s results, including their own company’s outlook, and the growth of sales, production, hiring, and capital spending.

But again, the difference between the first and second quarter responses wasn’t game-changing. Indeed, nearly 80 percent of the companies described their outlooks as positive (down from nearly 90 percent in March, sales growth predictions declined from 4.4 percent to 3.4 percent, ditto for production growth, full-time payroll growth dropped from 2.1 percent to 1.6 percent, and capital spending from 2.8 percent to 2.2 percent. The only indicator that slipped into negative territory was inventories (from 0.4 percent growth to 0.1 percent contraction).

So that’s the glass-half-empty evidence. And now for something if not completely different, pretty substantially so. It’s a survey of manufacturers from Sikich, a Chicago-based accounting and consulting firm, and its headline finding: More executives reported feeling optimistic about the impact of recent and ongoing trade developments (38 percent) than expected a negative impact (35 percent). And the most optimistic respondents came from larger companies (45 percent) and “companies with operations outside the U.S.” (51 percent).

Even better for the Trump administration and its trade policy supporters – Sikich’s findings about how companies are responding to these trade developments: “The action cited most often was manufacturing more products, or components, in the United States (45%).” At the same time, “a substantial portion of companies are looking to diversify procurement by sourcing purchased materials from new countries (36%) and sourcing raw materials from new countries (33%).” (Note: These answers aren’t necessarily mutually exclusive.)

In terms of their overall assessment of the economy, only 27 percent of the Sikich respondents believe that a U.S. recession over the next year is “extremely or very likely.” Interestingly, in light of their above trade-related responses, 49 percent of executives from larger companies – nearly twice as great a percentage – were expecting such a downturn.

And especially encouraging for all Americans: Not only were 63 percent of respondents nonetheless preparing for the possibility of a recession. But 53 percent of the total said they were “increasing the efficiency of production/business processes to reduce costs.” Such productivity-boosting measures are much more constructive – and economically beneficial – actions than whining about an imminent end to access to government-subsidized, artificially cheap inputs from places like China.

Nor do the Dallas Fed and Sikich results look like outliers. Their results are very much in line with those of polls I reported on last September – from the big Swiss-owned investment bank UBS, and Yahoo Finance.