(What’s Left of) Our Economy: The Latest Data Remain Full of Normalization Puzzles

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Biden, CCP Virus, China, construction, coronavirus, COVID 19, Donald Trump, exports, goods trade, imports, inflation, inflation adjusted wages, labor shortages, leisure and hospitality, lockdowns, manufacturing, metals, non-oil goods trade deficit, non-supervisory workers, private sector, real wages, reopening, retail, services trade, shutdowns, tariffs, Trade, Trade Deficits, transportation, wage inflation, wages, Wuhan virus, {What's Left of) Our Economy

While I was away for a few days last week, two major U.S. government reports came out both giving off conflicting signals on on whether the economy has started to return to normal in critical ways as the CCP Virus subsides and reopening, along with consequent changes in consumer behavior, proceed.

The monthly trade figures (for April) showed a sequential decline, following a record surge, in America’s chronically huge gap between exports and much larger amounts of imports. Moreover the monthly drop took place as economic growth sped along at unusual rates after being shut down by government mandates and consumer caution. So maybe they’re an early sign that a return to immediate pre-virus conditions has begun?

Or is their most important message that these deficits, and especially the import levels, are still hovering near all-time highs in (the most widely followed) pre-inflation terms even though the economy as of the latest (first quarter) numbers is still a bit smaller in (the most widely followed) inflation-adjusted terms than during the last full pre-pandemic quarter (the fourth quarter of 2019)?

Indeed, the deficits are gargantuan even though President Biden has left former President Trump’s substantial tariffs on metals and goods from China practically untouched. 

The monthly inflation numbers (for May) are similarly confusing. They revealed that consumer prices (just one inflation measure published by Washington, but an important one) rose by 4.93 percent in seasonally adjusted terms. That was their fastest annual pace since September, 2008’s 4.95 percent. Surely, as widely claimed (including by the Federal Reserve, which wields so much influence over the economy, this upswing stems from a combination of bottlenecks resulting from (1) the sudden, widespread reopening; (2) the unusually low overall inflation numbers generated a year ago, when the economy was near the depths of its viruts- and shutdown-induced slump; and (3) the immense dose of stimulus injected into the economy by both elected politicians and the unelected Fed.

At the same time, the Fed has told us that its stimulus isn’t ending anytime soon, and although the Biden administration and Congressional Democrats are displaying some cold feet about approving more such levels of economic fuel (e.g., in the form of outlays on infrastructure, and a wide variety of income supports and enhanced unemployment benefits), it’s difficult to imagine that most or even much of this spending will actually be withdrawn even once a post-virus recovery is an indisputable reality.

But the biggest surprise of all: Despite the economy-wide inflation pressures, and by-now-routine claims that employers are dealing with nearly crippling labor shortages, wages overall adjusted for inflation keep going down.

Compounding the confusion over whatever conclusions can legitimately be drawn from these two reports: They cover two different months.

But let’s begin with the most important details from the April trade report. The ambiguity embodied in the data begins with the total deficit figure. The record March result was revised up from $74.45 billion to $75.03 billion but April’s $68.90 shortfall for goods and services combined, though the second worst monthly figure ever, was 8.17 percent smaller. That’s the biggest sequential drop since February, 2020 (8.39 percent), when China’s export-heavy economy was still largely closed because of the virus.

The same holds for the goods trade gap. The record March figure was revised up, too, from $91.56 billion to $92.86 billion. But April’s $86.68 billion result represented a 6.65 percent monthly decline, and this falloff was the biggest since the 8.39 percent plunge of January, 2019 – when American businesses were still adjusting both to Trump’s tariffs and anticipated tariffs.

Also still fueling the high U.S. deficits – a worsening of services trade balances. Here, U.S. trade has long been in surplus, but the surpluses keep shrinking because service sectors like travel are still suffering from the pandemic’s arrival and the consequent decimation of travel and othe transportation in particular. In fact, the April figure of $17.78 billion was the lowest since September, 2012’s $18.62 billion.

One key set of trade flows does, however, provide some evidence of Trump tariff effectiveness – U.S. non-oil goods trade, which encompasses those exports and imports whose magnitudes are most heavily influenced by trade policy (because, as known by RealityChek regulars, trade in oil is almost never the subject of any trade policy decisions and services trade liberalization remains at very early stages). In April, the monthly shortfall retreated 4.16 percent from its March record of $90.12 billion to $86.37 billion – which is only the fourth highest such total ever.

The import figures I focused on last month exhibit the same overall patterns: April saw big drops from record levels but the absolute numbers remain distressingly high. March’s initially reported record $274.48 billion in total imports was revised up considerably – to $277.69 billion. April’s total of $273.89 billion represented a 1.37 percent drop, but nonetheless was the second worst such figure on record.

March’s record monthly goods import figure was upgraded, too – from $234.44 billion to $236.52 billion. April’s total of $231.97 billion was a 1.92 percent drop but these purchases also still represented the second highest of alll time.

As for non-oil goods imports, the $215.33 billion April total was 1.98 percent down from an upwardly revised record $219.68 billion, and also the second biggest ever. Biggest drop since last April’s 10.91

Whether normalization is returning in manufacturing is more difficult to tell. Imports in March hit a record $207.59 billion, and did drop by 4.59 percent sequentially to $198.06 billion in April. That decrease, however, was a typical monthly move for manufacturing imports, and the April figure was still the third highest ever.

Incidentally, the April manufacturing deficit of $103.60 billion was 4.64 percent lower than March’s $108.66 billion. The March total was the second highest on record, but April’s figure was only the seventh all-time worst. The record, $110.20 billion, came last October, and it’s notable that the gap has narrowed on net despite the resilience shown during the pandemic period by manufacturing output.

More evidence of the Trump tariffs’ impact comes from the data on goods trade with China – whose products have attracted nearly all of these levies, and that cover hundreds of billions of dollars worth of products. The April figure of $37.59 billion was 6.56 percent lower than its March predecessor – a thoroughly unexceptional sequential decline and monthly level by historical standards. But the monthly dropoff was consideraby greater than the aforementioned 1.98 percent decrease for non-oil goods – the closest global proxy.

As a result of all these inconclusive developments, I’ll be awaiting the May trade report with even more interest than usual.

But despite all the uncertainties I mentioned at the start of this post, those May inflation figures have made me more confident than before in my previous contention that current price surges are anomalies by the extremely low inflation generated by the CCP Virus-battered economy of a year ago, and by the sudden reopening of so much of the economy following the long shutdowns and lockdowns. Even clearer, as I see it: Claims of significant, troubling wage inflation are especially weak.

After all, that 4.93 percent year-on-year May price increase followed a previous May-to-May rise that was just 0.22 percent. That was the feeblest such rise since September, 2015’s 0.13 percent. In addition, May’s month-to-month 0.64 price advance was smaller than April’s 0.77 percent. Two months do not a trend make, but these numbers certainly don’t point to raging inflation fires.

Nor do the wage data. Otherwise after-inflation total private sector wages wouldn’t be down more on-month in May (-0.18 percent) than in April (-0.09 percent). And the same couldn’t be said of constant dollar wages for non-supervisory workers (-0.20 percent in May versus flat in April).

Getting more granular, the price-adjusted wage trends are as bad or worse in construction; trade, transportation and utilities overall; retail trade; and education and health services.

The two big exceptions: the leisure and hospitality workforces that have been so decimated by the virus (and especially the non-supervisory group) and the transportation and warehousing sub-sector of the transportation and utilities industry category that contains a trucking sector unusually strained by the rapid reopening. In both cases, however, (and especially the leisure and hospitality industry), inflation-adjusted wages in absolute terms are well below the national private sector average. If anything, therefore, it seems like some wage inflation for these workers is long overdue.

(What’s Left of) Our Economy: Why Inflation Isn’t Worrisome So Far

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CCP Virus, CNBC, coronavirus, COVID 19, Federal Reserve, inflation, logistics, reopening, semiconductor shortage, shutdowns, Steve Liesman, stimulus, supply chains, transportation, West Coast ports, Wuhan virus, {What's Left of) Our Economy

By now you’ve surely seen or heard – or should have seen or heard – that the new U.S. official figures (for April) show that inflation is back big time and could all too easily spin out of control. The emphasis should be on “could,” because, as also widely observed (including by the Federal Reserve, which is a major U.S. government line of inflation defense), the recent price rises arguably stem from developments that are temporary byproducts of America’s utterly unprecedented economic circumstances these days – reopening in fits and starts, but overall quickly, from lengthy government-mandated shutdowns aimed at fighting the CCP Virus.

I’m pretty firmly convinced that the inflation optimists are right, even though the pessimists make strong points in observing that (a) prices have been rising faster on a monthly basis with each passing month this year; and (b) inflation tends to generate its own momentum. That is, the expectation of rising prices typically encourages households and businesses alike to step up their purchases in order to avoid paying more for the same goods and services later on. Further, more expensive inputs for specific businesses can easily prompt those companies to compensate by raising the prices they charge their customers, while at the same time generating the same reactions from other businesses that are their customers, and so on.

I’ll also grant that the pessimists shouldn’t be dismissed when they contend that even temporary inflation can cause serious damage to an economy, especially when we’re talking about price increases that only come to an end after, say, a year or longer rather than after two or three months. Therefore, it’s important to note that the optimists’ case depends heavily on the relatively rapid end to the price-boosting combination of sudden increases in consumer demand resulting from the reopening, and of all the supply bottlenecks that have emerged as businesses struggle to catch up with that demand – which of course is being buoyed by the immense doses of stimulus being injected into the economy, and that may be increased in the near future.   

Indeed, the prolonged shipping backups at West Coast ports should be making clear that the more optimistic definition of “temporary” might rest on some pretty dicey assumptions. In addition, we’re unlikely to see a quick end to the global semiconductor shortage that’s shut down considerable automobile production and thinned inventories all over the world – curbing supply and of course driving up prices.

So why am I optimistic? Largely for a reason that’s been generally overlooked in the inflation uproar. (One major exception has been CNBC’s Steve Liesman, whose segment yesterday partly inspired this post.) When you look at where prices actually are now in the economy as a whole, and even in particularly hot sectors, you find that they’re not much higher than they were just before the pandemic hit (in February, 2020, which will be the baseline month I’ll use). And that’s because they had been falling or weak for so many months while much of the economy was closed.

This methodology, to start, puts an entirely different shine on the news that the overall April inflation rate of 4.2 percent year-on-year was the strongest such surge since September, 2008. But from February, 2020 to April, prices by this broadest measure increased by just 3.1 percent. That’s much higher than the 1.3 percent increase during the previous comparable period (February, 2019-April, 2020). Remember, however: April, 2020 was the depth of the virus-related lockdowns and consequent recession.

During the February-April period before that, prices rose 2.4 percent – and that’s with none of the stop-start distortions currently being experienced. The period before that it was 2.6 percent. And the period before that – also a normal stretch – it was 2.9 percent. And in comparable (also normal) 2011-2012 timespan, it was 3.3 percent. So the new 3.1 percent doesn’t seem all that exceptional when you consider all the abnormalities of this post-virus recovery.

Another widely watched inflation gauge is called “core inflation.” It strips out food and energy prices because they can be volatile over whatever timeframe examined for reasons having nothing to do with the economy’s fundamentals – and supposedly fundamental vulnerability to inflation (e.g., unusual weather that impacts agriculture, or oil price decisions by the OPEC cartel and other major foreign producers).

On a monthly basis, they advanced by 0.9 percent, and year-on-year they were up three percent in April. The former figure was the worst since 1982, and the latter is on the high side as well. But let’s look at the February-April numbers. Between 2020 and 2021, core inflation was 2.6 percent. It was just two percent during the previous comparable period, but again, those numbers are distorted by deflationary April, 2020. The period before it was 2.6 percent – the same as this year, but without the reopening issues. And as recently as 2016, it was even higher – 2.7 percent – even with no virus-related confusion.

As they say in the investment advice world, past performance is no guarantee of future results. Nor should it be forgotten that many economists still find inflation frustratingly difficult to measure, and criticisms of the U.S. government’s methodology abound as well. (See, e.g., here.) But the official American figures are still widely followed, and certainly lie at the heart of the latest bout of inflation angst. And until these data start showing outsized price gains compared with pre-CCP Virus levels that haven’t been affected by virus-era abnormalities, I’m going to stay pretty relaxed about the U.S. inflation picture.*

Please note: This inflation analysis should not be used as investment advice, because I’m not in that business and don’t feel qualified to be in that business. Also, what I do know of that business teaches that asset prices are much more profoundly influenced by what investors as a whole think about the economy than by what I think about it.

Those Stubborn Facts: Biden’s Hollow Travel Mask Mandate

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Biden, CCP Virus, coronavirus, COVID 19, masks, Those Stubborn Facts, transportation, travel, Wuhan virus

“Biden to sign virus measures, requires mask use to travel”

– Associated Press, January 21, 2021

U.S. “airlines, Amtrak and other transport providers now require masks….”

– Associated Press, January 21, 2021

 

(Source: “Biden to sign virus measures, requires mask use to travel,” by Ricardo Alonso-Zaldivar, Associated Press, January 21, 2021, Biden to sign virus measures, requires mask use to travel (apnews.com))

 

(What’s Left of) Our Economy: Foxconn’s U.S. Plans Debunk China-Related Manufacturing Defeatism

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Apple, China, electronics, flat panels, Foxconn, General Electric, Jeffrey Immelt, Jobs, manufacturing, Obama, supply chains, tariffs, Terry Gou, Trade, transportation, Trump, {What's Left of) Our Economy

Another day, another big corporate announcement about job-creation in the United States in the wake of Donald Trump’s election as president – this time from Taiwanese electronics giant Foxconn, which makes so many iPhones and other products in China.

All the usual skeptical responses have been marshaled – or will be. Some of these have already been made by Foxconn’s chairman, like “We were already thinking of this” and “Trump’s tariff threats had nothing to do with these plans.” (Those aren’t direct quotes – just paraphrases.) An unusual skeptical response is out there, too – that the very large (and growing) flat panel displays Foxconn is thinking of producing in America are inevitable candidates for relocation because they’re too fragile to keep shipping half way around the world to customers.

But here’s what’s especially fascinating about Foxconn even considering this move: It demolishes or at least severely undercuts many of the most powerful explanations for why huge chunks of manufacturing will never return to the United States.

First, although Foxconn chief Terry Gou brushed off Trump’s trade stance, he has also stated that because of surging populism in the United States and globally, the rise of protectionism is “inevitable.” In this way, he’s just acknowledged the same trends that recently prompted his General Electric counterpart Jeffrey Immelt to declare that his huge multinational manufacturer will start making more goods where those goods are sold. So there’s little doubt that, precise timing aside, Gou has had his finger up to the prevailing political winds – which got a lot stronger on November 8.

Second, it may be true that very large flat panels for the highest tech TVs etc aren’t suitable for ocean voyages. But the United States, you may remember, is an awfully big country. And at least some of its roads aren’t in such hot shape. So since these panels will still have to travel by truck thousands of miles inside America to get from factories to warehouses and then to retail outlets (or directly to customers), it’s hard to imagine that transportation technicalities have been the main drivers of Foxconn’s decision.

Third, the kinds of electronics products made en masse by Foxconn in China have long been seen as especially farfetched candidates for domestic American production because the PRC is thought to have created such utterly matchless competitive advantage in this field. As Apple executives apparently told the (credulous) Obama administration five years ago, China’s manufacturing edge goes way beyond labor costs.  The U.S. company, of course, is one of Foxconn’s leading customers.  

Instead, “the vast scale of overseas [especially Chinese] factories as well as the flexibility, diligence and industrial skills of foreign [especially Chinese] workers have so outpaced their American counterparts that ‘Made in the U.S.A.’ is no longer a viable option for most Apple products.” In other words, the electronics sector’s main supply chains are now located in China, and changing this immense fait accompli is impossible.

Yet Foxconn’s Gou is talking about doing just that. For example, he’s talking about a 30,000-50,000 job gain from the investment. Moreover, he already employs 400 in Virginia in a packaging and engineering, and has announced his intention to build a Pennsylvania facility to “build precision tools and develop a robotics programme.” That sure sounds like supply chain stuff to me.

Ever since his first run for the White House, former President Obama has used the phrase “Yes, we can” to inspire his countrymen. His successor seems to recognize that the phrase applies to reviving American manufacturing, too.

(What’s Left of) Our Economy: No Easing American Poverty While Policy Blindspots Persist

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American South, Chico Harlan, Immigration, Jobs, mass transit, poverty, single mothers, The Washington Post, Trade, transportation, wages, welfare, {What's Left of) Our Economy

Chico Harlan and some colleagues at the Washington Post have done some terrific reporting recently on the poverty-heaviness of the American South and especially the new developments fueling it, and his piece this week on its increasing suburban-ization is no exception. (Click here and here for two earlier articles.) Except I take exception in one regard. Harlan here seems to gloss over the role played by poor – and avoidable – personal choices, both by currently poor southerners and by their forebears.

By following the odyssey-like travel forced on one young low-income Atlanta-area woman even to go job-hunting, Harlan convincingly shows the harm done by the dispersal of poor populations from inner cities combined with the lousy mass transit systems in suburbs and equally bad transit links between those suburbs and urban cores. And in fact, recent research makes clear that the transit dimension of poverty and near-poverty is hardly restricted to the south. So it’s completely appropriate to sympathize with Lauren Scott, who can’t afford a car, as she spends literally hours on buses heading to and from job interviews and following up other employment leads.  It’s just as appropriate to condemn the zoning laws and other state and local policies that make such travel so excruciating and time-consuming.

At the same time, I wish Harlan had spent more space discussing other aspects of Scott’s life that deserve more scrutiny, and that shed more light on poverty in America today. For example, she’s a single mother, which the author documents both pushed her below the poverty line to begin with, and which has limited the kinds of positions she could hold and applied for. In Scott’s case, Harlan writes, she was misled by a faulty medical diagnosis of permanent infertility. At the same time, that’s hardly the only, or even a major, reason for out-of-wedlock births by mothers who literally can’t afford motherhood.

In addition, she has a battery charge on her record. A dubious roommate helped drain her modest savings, and her family was in position to help. Her daughter’s father had flown the coop. Scott had “long ago lost contact with her mother.” The article makes no mention of her own father. And although one of her siblings is serving in the military, another has just been released from prison.

All of which puts in interesting, to say the least, perspective Harlan’s observation that “A generation earlier, even people in Scott’s situation had advantages that she lacks. They tended to live in the middle of Atlanta, near the subway, and they received welfare, cash payments from the government that were available to nearly all in deep poverty, regardless of whether they had a job.”

Not that the author implies that this system was ideal. But Scott’s personal and family history strongly indicates that it wasn’t even acceptable – and had destructive effects on its intended beneficiaries.

I also wish that Harlan had mentioned other sources of new and resurgent poverty in the south and elsewhere in America – especially the offshoring-friendly trade policies and Open Borders/amnesty-friendly immigration measures that have destroyed so many family wage job opportunities for the nation’s working class and working poor. Some attention is now being paid throughout the policy community to domestic moves that could alleviate poverty – like the aforementioned transportation improvements and more generous family and medical leave requirements, along with more familiar proposals like further expanding the earned income tax credit, raising the minimum wage, and of course improving the schools. But the near future could well see trade and immigration pressures on native-born workers – which have the greatest direct effects on job-creation and preservation – grow even stronger.

As a result, I’m hoping like heck that 2016 is a better year for Lauren Scott, who like many of America’s poor really does want to overcome past mistakes and work for a living. I just wish I was more optimistic.