(What’s Left of) Our Economy: New Fed Figures Show the U.S. Manufacturing Recovery is Proceeding Nicely

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automotive, CCP Virus, China, coronavirus, COVID 19, Federal Reserve, inflation-adjusted output, lockdowns, manufacturing, manufacturing production, real growth, shutdown, stimulus package, Trump tariffs, Wuhan virus, {What's Left of) Our Economy

It’s not apparent from the overall numbers, but the most important takeaway from this morning’s monthly Federal Reserve report on U.S. manufacturing production is that American industry has continued a steady comeback from the ravages of the CCP Virus and the government-induced shutdown of much of the U.S. economy. And the continuing healthy pace of this comeback is all the more impressive given the stop-and-start nature of so many of the economic restrictions imposed by Washington, D.C. and by the states and localities, and given the recent uncertainty about a new virus-relief bill.

The overall Fed numbers, as indicated above, do show a manufacturing bounceback that’s losing noteworthy steam. In August (the latest available data month), inflation-adjusted manufacturing output grew by 0.96 percent sequentially. That’s definitely a weaker pace than July’s growth (now pegged at 3.97 percent on month), much weaker than June’s 7.64 percent monthly burst, and well short of May’s 3.91 monthly percent production rise.

Grounds for encouragement, though, are justified even by these aggregate figures, as revisions for recent months generally were positive, and July’s was really positive – that month’s previously estimated manufacturing real growth was 3.41 percent.

But the best and most important news comes from the numbers on manufacturing production outside the automotive sector. As known by RealityChek regulars, the wild sequential swings in output from vehicle and parts makers have dominated the Fed manufacturing production reports for nearly the entire CCP virus period. (See., e.g., last month’s post on this subject.) So important though automotive is – both because of its size per se and because it affects the rest of its industry due to its big domestic supply chain – the non-auto results arguably provide a more accurate picture of U.S. manufacturing’s fundamentals. And this picture looks remarkably good, and still displays significant momentum.

Ex-auto, as the cognoscenti put it, constant dollar manufacturing production increased by 1.40 percent on month in August. So since that’s much faster than overall manufacturing’s performance (up 0.96 percent) that means automotive output fell (by 2.13 percent, specifically).

The August sequential improvement for ex-auto manufacturing, moreover, isn’t dramatically lower than July’s (1.93 percent). And it compares pretty well with June’s (now estimated at 3.82 percent) and May’s (now judged to be 2.12 percent).

Even better, all the pre-July results have been revised up except for May’s.

When all is said and done, the August Fed report underscores just how resilient domestic manufacturing has been despite the formidable CCP Virus challenges (which also include major economic slowdowns in the foreign markets U.S. industry has always relied on for much of its sales). As of August, overall price-adjusted American manufacturing output was just 6.39 percent below its levels in February (the final month before virus effects began impacting the economy). Manufacturing ex-auto’s real production was just 7.04 percent less than in February. And automotive’s after-inflation production was a mere 1.98 percent below that February benchmark.

And another factor to consider: Since China’s has been the world’s first major economy to resume growth since the virus struck, and since its recent growth has been so markedly export-led, think of how much worse U.S. industry’s state would be had the steep Trump tariffs on hundreds of billions of Chinese goods normally sent to the United States not been imposed, or left almost completely in place by the Phase One trade deal.

(What’s Left of) Our Economy: The New York Fed Whiffs on Tariffs and Trade Policy

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China, currency manipulation, imports, intermediate goods, New York Fed, non-tariff barriers, subsidies, tariffs, Trade, Trade Deficits, Trump, Trump tariffs, value-added tax, VAT, {What's Left of) Our Economy

Do you want to know how slipshod a new post from the New York branch of the Federal Reserve on tariffs and trade deficits is? I’m not a Ph.D. economist, and it took me about thirty seconds to spot no less than four fatal flaws.

The post, written by a senior Fed economist and three academic colleagues (including one from a Chinese university), argues that President Trump’s tariff-heavy trade policies are likeliest to backfire on the administration and the entire U.S. economy by widening, not narrowing, the country’s trade deficit. Their main evidence? The experience of China after it entered the World Trade Organization (WTO) at the end of 2001.

According to the authors:

“While more costly imports are likely to reduce the quantity and value of imports into the United States, the story does not stop there, because we cannot presume that the value of exports will remain unchanged. In this post, we argue that U.S. exports will also fall, not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S. firms producing goods for export will rise and make U.S. exports less competitive on the world market. The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”

The Chinese example, they claim, supports this hypothesis because China significantly reduced its tariffs following WTO entry (i.e., pursued a policy exactly the opposite of that sought by Mr. Trump), and both its exports as well as its imports soared. Moreover, the authors found that

“Focusing on China’s exports to the United States…shows that by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the U.S. export market and compete with other firms. With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their U.S. market shares.”

But the weaknesses in this analysis are positively jaw-dropping. First, the data supporting that latter key finding is no less than a dozen years out of date.

Second, the post completely fails to take into account the possible effects over time of a U.S. failure to provide trade protection for sectors, like steel, that represent key inputs for manufacturing. Although obviously the cheaper they are, the more competitive the industries that utilize them will be, intermediate goods sectors (including not only materials like metals but machinery and equipment of all kinds) could represent as much as nearly half of America’s entire manufacturing complex. Should the United States just sit back and watch those sectors trashed by foreign competition?

Third, and even more important, should the United States accept this result if much of the foreign competition faced by its manufacturers is predatory? In this vein, the Fed post contains not a single word about China’s currency manipulation – which kept the value of the yuan significantly and artificially suppressed throughout the early post-WTO admission years (and arguably still does) for reasons completely unrelated to trade liberalization, and which gave Chinese products a major and wholly artificial advantage in China’s own market, the U.S. market, and markets around the world.

Fourth, the authors similarly ignore the impact of China’s value-added tax (VAT) system, which not only surrounds the entire Chinese economy with high, tariff-like walls that nonetheless aren’t technically considered tariffs, but which provides comparably impressive subsidies for China’s exports.  Not to mention the other massive supports Beijing offers to manufacturing, or its still (and perhaps increasingly) formidable array of non-tariff trade barriers.

Indeed, all these non-market practices no doubt largely explain why China has both supercharged its exports since it entered the WTO and impressively raised the levels of Chinese inputs they contain. 

In baseball, three strikes means “you’re out.” At the New York Fed, by contrast, four strikes apparently earns a “well done.”

Im-Politic: A Left-Wing Attack on Trump Tariffs that the Offshoring Lobby Could Love

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"resistance", China, Democrats, globalism, globalization, Im-Politic, liberals, multinational companies, NAFTA, Nomi Prins, North American Free Trade Agreement, offshoring lobby, progressives, strange bedfellows, tariffs, The Nation, Trade, Trump, Trump Derangement Syndrome, Trump tariffs

Although I view it as being small-minded, short-sighted, and often over-the-top, I can’t completely fault many left-of-center American trade policy critics for failing to support (and even attacking) most of President Trump’s trade policy initiatives. Not so with Nomi Prins’ new indictment in The Nation. She’s taken this dimension of Never Trump-ism and “Resistance” to a wholly new and troublingly counterproductive level,

Mr. Trump has assaulted many of the trade deals that liberals, progressives, and many Democrats themselves long resisted (like NAFTA – the North American Free Trade Agreement – and the the Trans-Pacific Partnership – TPP). And he’s dealing decisively (so far!) with many other foreign trade policy transgressions and global trade institutions they’ve long assailed (like China’s dumping of steel and aluminum and wide array of other predatory trade practices, and the World Trade Organization, or WTO).

But many on the Left (and indeed, all over American politics) are understandably disgusted with some of the President’s rhetoric and record in immigration and gender issues and race relations, and with his family’s continuing domestic and foreign business ties (including with China), which look like conflicts of interest and at the least can look hypocritical (e.g., using immigrant workers both legal and illegal). Moreover, you don’t have to be a Never-Trumper to be upset with the ties between many Trump administration appointees and industries they’re supposed to be regulating.

Moreover, the President is attacking American trade and related globalization policies from an economic nationalist/America First standpoint. Having worked with left-of-center trade critics for nearly 30 years, I can tell you that this has never been their perspective. Though this is an overly broad generalization, they have been loathe to acknowledge that what’s best for America and what’s best for the rest of the world may not be identical – especially in the short and even medium-terms. As a result, their criticisms of many long-standing U.S. trade policies have often demonstrated at least as much concern for their impact on workers in developing countries as on their counterparts in the United States.

In fact, they tend to reject the idea that the main fault-line in the global economy has been the United States (and even the U.S.’ productive economy) versus “the rest”. In the view of these left-of-center critics, the main fault line instead is between the capital holders of the world versus the workers of the world.

The point of this post is not to insist that the nationalists have been right and the progressives et al have been wrong. It is to note that Prins’ new Nation piece disturbingly edges into Trump Derangement Syndrome territory. The main reasons: Her stated problems with the administration’s trade policies aren’t based on any of the above counter-arguments. Instead, her main anti-Trump points are almost indistinguishable from those made by the establishment supporters of the trade and globalist status quo – including not only the foreign policy “Blob” that has always backed seeking geopolitical and diplomatic gains even when they come at the expense of U.S. workers and the domestic economy, but those multinational business groups comprising the “global capitalist” interests that the trade policy progressives have always targeted!

Thus we hear from Prins both that the actual and prospective Trump tariffs have angered America’s “closest allies” in the Group of 7 industrial countries of Europe and the Far East, along with “our regional partners” in NAFTA. She’s repeated the canard that the President’s trade moves scarily resemble the Hawley Smoot tariff that “sparked the global Great Depression, opening the way for the utter devastation of World War II.” She consistently portrays the world’s other major economies as genuine paragons of free trade. (Not even China is chided.)

Even more striking, the main evidence she cites for the claim that the President “is sparking a set of trade wars that could, in the end, cost millions of American jobs” comes from Offshoring Lobby pillars like the U.S. Chamber of Commerce, the Business Roundtable, and the Brookings Institution (which, not so incidentally, takes lots of money from most of the leading foreign economies that will be hit by Trump tariffs).

It’s been noted often since the NAFTA’s negotiation in the early 1990s ushered in the offshoring-happy phase of U.S. trade policy that the resulting domestic political divisions have created some “strange bedfellows” alliances – i.e., coalitions that have had little in common other than common views on this front. Will the Prins article help usher in the strangest trade bedfellow coalition yet – between the left-wing anti-Trump resistance and the Fortune 500? Such groups are singing much the same tune on issues like immigration policy, so this prospect isn’t as far-fetched as it might seem. Further, don’t forget that voters who consider themselves Democrats and those leaning in this direction are viewing trade in general much more favorably these days than during any other recent period – at least according to polls. (Republicans and GOP leaners have shifted in the opposite direction.) And the appearance of an article containing these arguments, and evidence drawn from corporate and corporate-funded sources, has appeared in The Nation – long one of the American Left’s flagship publications – is another ominous sign.

One reason for optimism (if you agree that U.S. trade policy needs a big-time overhaul): Many left-of-center trade policy critics have (albeit grudgingly) supported the main thrust of the President’s trade policies. Even though most still retain their “globalist loyalties,” their complaints about the administration’s approach have centered on its instances of backtracking on Mr. Trump’s campaign promises, and (like me) on apparent inconsistencies. So it will be especially interesting to see if they push back strongly, or at all, versus Prins’ views. The answer could help determine the future of the politics of American trade policy – and of the policy itself.