(What’s Left of) Our Economy: More Evidence that U.S. Growth is Healthier Under Trump

Tags

Barack Obama, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, real growth, recovery, toxic combination, Trump, {What's Left of) Our Economy

The current U.S. economic recovery has lasted so long (at more than ten years old, it’s already tied with the 1990s expansion as the longest on record), that anxiety about how long it might last, and when a new recession might begin, is entirely understandable. Yet what most economy watchers keep missing is what RealityChek regulars have understood for years – the quality of America’s growth matters at least as much as the quantity.

As a result, the latest government report shedding light on this growth – the preliminary look at the gross domestic product (GDP) for the first quarter of this year – was important not only for revealing that the economy expanded at a healthy 3.21 percent at an annual rate. It was also important for showing that by several crucial measures, the growth recipe was by far the healthiest since at least the period during which United States enjoyed its last period of robust expansion – back in 2014 and 2015.

The definition of healthy growth used by RealityChek is growth that depends relatively little on increases in personal consumption and housing investment. Those segments of the GDP and their bloat were most responsible for inflating the previous decades’ bubbles that burst so disastrously in 2007 and 2008, nearly blew up the entire global economy, and triggered the worst national economic downturn since the Great Depression of the 1930s. Fortunately, the GDP data compiled by the Commerce Department make it easy to calculate how their current growth contribution compares with their past record. And, as with the latest trade figures, they show that progress towards improving growth’s health has been dramatic so far during President Trump’s administration.

In particular, during that previous high growth period (under President Obama), the economy’s quarterly expansion ranged from 2.60 percent at an annual rate to 3.81 percent after inflation. But the growth contributions made by personal consumption and housing (which I’ve called a “toxic combination”) generally ranged from 62.86 percent to 79.70 percent (with one outlier quarter – the fourth of 2014 – coming in at nearly 187 percent, meaning that other elements of the GDP worked to shrink the economy).

During the high growth period under President Trump, which began in the first quarter of 2018, inflation-adjusted quarterly GDP has actually risen by a somewhat slower pace: between 2.58 percent annualized and that 3.21 percent rate of the first quarter of this year. But the contributions made by the toxic combination have ranged only from ten percent to 67.27 percent. And the figure for that high-growth first quarter of this year was only 22.19 percent.

Also worth noting are the growth rates during the Obama years when the role of the toxic combination was within that Trump range. They were somewhat lower.

Principally, in the second and third quarters of 2014, the toxic combination’s combined real growth contribution was 65.69 percent and 62.86 percent, respectively. Annualized constant dollar growth during those quarters was 2.60 percent and 3.04 percent. Those are solid results, but not quite as good as those from the second, third, and fourth quarters of 2018. Then, the toxic combination’s growth contribution ranged between 60 percent and 67.27 percent, and growth ranged from 2.87 percent to three percent.

As indicated above, these results can be pretty volatile from quarter to quarter. But smoothing them out by using annual figures tells a story even more favorable to the Trump record. Here are those annual figures starting with 2009-10, the first recovery year.

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

09-10:          1.20/2.60       -0.08/2.60         1.12/2.60         46.92%         2.56%

10-11:          1.29/1.60        0.00/1.60         1.29/1.60         80.63%         1.55%

11-12:          1.03/2.20        0.31/2.20         1.34/2.20         60.91%         2.25%

12-13:          0.99/1.80        0.34/1.80         1.33/1.80         73.89%         1.84%

13-14:          1.97/2.50        0.12/1.80         2.09/1.80       116.11%         2.45%

14-15:          2.50/2.90        0.33/2.90         2.83/2.90         97.59%        2.88%

15-16:          1.85/1.60        0.23/1.60         2.08/1.60      130.00%         1.57%

16-17:          1.73/2.20        0.13/2.20         1.86/2.20        84.55%         2.22%

17-18           1.80/2.90      -0.01/2.90         1.79/2.90        61.72%          2.86%

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

As with the quarterly figures, during the Obama years, when the growth contribution of the toxic combination was low, so was growth.  During the two full Trump data years, as growth itself sped up, the toxic combination’s contribution has plummeted to multi-year (at least) lows.

But a big question remains unanswered: When, under the Obama administration, the economy did manage to grow satisfactorily with a relatively small contribution by the toxic combination, this health growth recipe didn’t last. Indeed, by the third quarter of 2015, growth itself began slowing markedly, until it bottomed at 1.30 annualized in the second quarter of 2016. And it never broke two percent again. But the toxic combination’s contributions during that decelerating growth period ranged from 91.05 percent to a stunning 430 percent (in the fourth quarter of 2015).

The Trump years’ much better performance in this respect has lasted only two years. Only if this strengthening proves to have legs will it be legitimate to start considering the economy genuinely Great Again.

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(What’s Left of) Our Economy: New Fed Manufacturing Figures Show Industry is Still Nicely Withstanding the Metals Tariffs

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aluminum, China, durable goods, Federal Reserve, growth, industrial production, inflation-adjusted growth, manufacturing, metals tariffs, metals-using industries, real growth, steel, tariffs, {What's Left of) Our Economy

This morning brought another poor result for U.S. domestic manufacturing – specifically, a 0.52 percent decrease in inflation-adjusted output that was its worst such performance since January’s 0.66 percent sequential decline. As a result, the temptation is to blame the Trump tariffs that have so dominated economic and business news headlines, but as usual, the data simply don’t support this claim.

Unquestionably, these new figures from the Federal Reserve point to a problem with American industry. Tariffs, however, look beside the point. Instead, the numbers reveal what looks like an April problem and an automotive problem, and especially where tariffs on metals are concerned – the major Trump-era levies that have been longest lasting, and where the affected manufacturing sectors are easiest to identify.

Here are the numbers for the economy’s chief metals-using industries. They start in April, 2018 (the first full months when the steel and aluminum levies went into effect). They show the growth rates between then and the last three data months. They include the statistics for overall manufacturing as a control group. And I’ve added two new pieces of information: the year-on-year real production changes for these sectors, and the data for durable goods manufacturing stripped of the automotive industry’s performance.

                                           Apr thru Feb   Apr thru March    Apr y/y prev  Apr y/y

overall manufacturing:          +0.48%             +0.52%              0.00%         +2.33%

durables manufacturing:       +1.31%            +1.35%             +0.40%         +2.49%

fabricated metals prods:       +2.87%            +2.72%             +2.14%         +4.44%

machinery:                           +1.49%            +1.92%              -0.69%         +4.05%

automotive:                          -1.71%             -1.93%              -4.43%          +3.07%

major appliances:                 -1.43%            -6.77%            -10.44%          +0.03%

aircraft & parts:                   +4.89%           +6.08%             +4.82%           -1.30%

durable mfg ex-automotive:  +1.82%        +1.91%              +1.21%          +2.41%

Comparing the automotive and the durables ex-automotive lines clearly shows both the automotive and April effects – with the latter suggesting the possibility of a production hiccup. Strengthening that interpretation: except for the major appliance category, nearly all the April, 2018-March, 2019 growth rates exceeded the April, 2018-February, 2019 growth rates. Moreover, the April automotive nosedive (which has taken place both on a month-on-month and year-on-year basis), is especially important because vehicle and parts production use so much in the way of machinery and fabricated metals products.

In addition, the safety issues encountered by Boeing may be responsible for the April aviation growth slowdown that may also have contributed to manufacturing’s broader woes that month.

The major appliances figures above continue to stick out like a sore thumb.  But of course, this sector has faced not only metals tariffs, but separate product-specific levies that went into effect in February, 2018.  In addition, America’s slumping housing sector has surely depressed sales and therefore production for reasons having nothing to do with tariffs.

As known by RealityChek regulars, gauging the impact of the tariffs on products from China is much more difficult for numerous reasons. Their role as inputs for manufacturing industries varies. The manufacturing classification system used by Washington for designating the tariff-ed products differs from that used for the Fed production statistics. The levies have been in place for a shorter period of time. And their scope has changed since the first batch went into effect in August.

Further, let’s not forget that the China tariff regime is due for some big changes starting in June, when President Trump has just decided that levies will rise on $200 billion worth of products from the People’s Republic. So the data below may tell us little about what to expect going forward. Here they are nevertheless for the handful of industries for which I’m sure the numbers create a reasonably accurate picture.

                                                      Aug thru Feb    Aug thu March    Aug thru April

overall manufacturing:                     -0.33%                -0.38%                -0.90%

ball bearings:                                  +0.32%                +0.25%               +0.14%

industrial heating equip:                 -2.60%                 -1.85%                -5.69%

farm machinery & equip:             -16.86%               -11.65%              -10.40%

oil/gas drilling platform pts:         +4.59%                +4.35%                +2.68%

Something of an April slump can be seen here, too (which in theory is hard to connect to the China tariffs), except for the farm machinery sector. 

The classic Wall Street sales pitch warns (eventually) that “Past performance is no guarantee of future results.” So especially considering the higher China tariffs on the way in two weeks, and the possibility that all goods imports from China will be hit by levies at some future date, predicting manufacturing’s growth performance for the rest of this year seems unusually chancy.

Yet the April figures unmistakably show (yet again) that domestic U.S. manufacturing continues to withstand the metals tariffs with ease.

(What’s Left of) Our Economy: New Trade Data Confirm that U.S. Growth Keeps Getting Healthier Under Trump

Tags

GDP, gross domestic product, Made in Washington trade deficit, non-oil goods trade deficit, real GDP, real growth, Trade, trade deficit, Trump, {What's Left of) Our Economy

This morning’s monthly U.S. trade figures (for March) enable an update for the economic impact of President Trump’s tariff-centric trade policies – and contain very good news both for Mr. Trump and for anyone hoping that the nation’s growth becomes healthier (which should be all Americans).

The major test, as RealityChek regulars know, is a comparison between the economy’s overall growth on the one hand, and the growth of the trade shortfall most heavily influenced by trade policies. The latter can be termed the “Made in Washington trade deficit,” since it strips out oil (which is rarely the object of trade deals or trade policy decisions) and services (where trade liberalization has made only limited progress).

If the economy is growing faster than this non-oil goods deficit (in inflation-adjusted terms – the gauge most closely followed by economy watchers), or if its growth rate is still slower but the gap between these rates is narrowing, that means that its expansion is at least starting to stem more from domestic production, and less from import-led (and therefore debt-financed) consumption. If the trends are showing the opposite results, then overall growth is becoming still more heavily reliant on credit-financed shopping (whether by households, businesses, governments or some combination of these).

And in case you forgot, that’s the kind of growth that led directly to the last global financial crisis and the worst American recession since the Great Depression. And even though the economy began recovering a decade ago, its expansion consistently trailed the growth rate of the Made in Washington trade deficit – and never more than when the inflation-adjusted gross domestic product was increasing most robustly.

That’s why the new U.S. trade figures are so encouraging. They confirm that the American economy recently has been able to grow impressively without supercharged Made in Washington trade deficits. In fact, that’s way understating the case. For calculations based on the March trade results show that, during the first quarter of this year, the after-inflation Made in Washington trade deficit actually shrunk sequentially (by a 6.09 percent annual rate) while real gross domestic product increased by a healthy 3.13 percent annualized.

Nor was the first quarter a fluke – at least not under the Trump administration. In the second quarter of 2018, the real Made in Washington trade shortfall sank sequentially by 5.90 percent annualized, while the overall economy surged by a price-adjusted 4.10 percent.

And an examination of the two during the current economic recovery produces an unmistakable pattern, which is best illustrated by looking at the far-right column (think of it as the multiple) of the table below: During the Trump years so far, good growth has resulted despite relatively modest increases (and, as we’ve just seen, despite some absolute declines) in the Made in Washington trade deficit. During the Obama years, Trump-like growth was only achieved when the Made in Washington trade deficit practically exploded. And when that trade deficit grew weakly, so did the gross domestic product.

Further, even though the multiple rose between the first and second years of the Trump administration, the quarterly 2018 figures show that this problem stemmed from the tariff front-running of the third quarter – when U.S. importers were scrambling to bring in products from abroad before they were hit with levies, principally on goods from China. Once this period of distortion ended, the multiple fell significantly (and probably overshot in the first quarter of this year).

Real Made in Washington trade deficit        Real GDP         Ratio of first to second

1Q 2019:              -6.09 percent                   3.13 percent                 -1.95:1

4Q 2018:               6.41 percent                   2.15 percent                  2.98:1

3Q 2018:             11.66 percent                   3.31 percent                  3.52:1

2Q 2018:             -5.90 percent                    4.10 percent                -1.44:1

1Q 2018:              1.35 percent                    2.20 percent                 0.61:1

2018:                  12.74 percent                    2.86 percent                 4.45:1

2017:                    6.75 percent                    2.22 percent                 3.04:1

2016:                    2.66 percent                    1.57 percent                 1.69:1

2015:                  22.63 percent                    2.88 percent                 7.86:1

2014:                  15.88 percent                    2.45 percent                 6.48:1

2013:                    6.15 percent                    1.84 percent                 3.34:1

2012:                 10.23 percent                     2.25 percent                 4.57:1

2011:                 11.92 percent                     1.55 percent                 7.69:1

2010:                30.71 percent                      2.56 percent              12.00:1

Another way to compare the Obama and Trump years in this respect: As previously noted on RealityChek, the constant dollar 3.21 percent GDP growth registered between the first quarter of 2018 and the first quarter of 2019 was the best such four-quarter growth stretch since the second quarter of 2014 and the second quarter of 2015 (when real growth was 3.37 percent).

Yet during that Obama high growth period, the real Made in Washington trade deficit shot up by 18.83 percent. During the Trump high growth period, this trade shortfall rose by only 4.99 percent.

The higher and broader tariffs on China threatened by the President to press Beijing in the current trade talks would represent the biggest test yet of the Trump policies’ impact on the health of America’s growth. But the March trade figures are the latest evidence that so far, they’ve passed such tests with flying colors.

Making News: National Radio China Trade Wars Interview Now On-Line…& More!

Tags

China, Gordon G. Chang, i24News, tariffs, Thaddeus McCotter, The Atlantic, The John Batchelor Show, Trade, trade war, Trump, {What's Left of) Our Economy

I’m pleased to announce that the podcast is now on-line of my interview last night on John Batchelor’s nationally syndicated radio show providing an update on President Trump’s threatened tariff hikes and their possible impact on the U.S.-China trade conflict.  Click here for an illuminating discussion with John, me, co-host Gordon G. Chang, and former Michigan Republican Congressman Thaddeus McCotter.

Also, it was especially great to receive from i24News a link to the video of last night’s China trade interview on that Israeli television network.  Click on it, and you should be able to access the segment via the download button and then opening it up.

Finally, a useful analysis of the trade conflict appearing in an Atlantic post today featured a recent RealityChek explanation of why it’s so unlikely that the negotiators can reach a deal that serves U.S. interests.  Click here to read it.

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

(What’s Left of) Our Economy: Why Pre-Trump Trade Policies Really Were America-Last Policies

Tags

diplomacy, Finbar Bermingham, globalists, negotiations, South China Morning Post, Trade, Trump, U.S. Trade Representative, USTR, {What's Left of) Our Economy

I’ve often struggled to decide whether America’s dreadful trade policies over recent decades have stemmed more from incompetence (as President Trump sometimes charges) or corruption in the form of politicians and diplomats shilling for offshoring business interests or the often economically clueless national security community (as Mr. Trump also sometimes charges).

A report from Hong Kong’s South China Morning Post (which still publishes mostly reliable material even though the city is now part of China) didn’t settle the matter for me. But it once more valuably reminded that their country’s national interests have rarely topped U.S. trade negotiators’ priority lists. Why else would these officials have allowed themselves to be duped by the series of transparently cynical ruses and deceptions from their foreign interlocutors that they themselves describe in the article?

Correspondent Finbar Bermingham makes clear that his aim was to show how major “complications that can arise from issues of language, interpretation and translation during negotiations” and that as a result, “trying to iron out arguments over words, phrases or even grammar can be ‘worse than pulling teeth.’” Instead, what he (and the “experienced negotiators” he interviewed) demonstrated was how easily they could be snookered – and how thoroughly they either forgot or ignored America’s decisive leverage in all these dealings.

Take Elena Bryan. According to this 17-year veteran of trade negotiations with the Office of the U.S. Trade Representative (USTR), “it’s very hard to enforce anything under the Chinese because their system is both complicated and relatively opaque, and there aren’t that many Mandarin speakers around that have the requisite technical trade and legal skills.”

But with its new tariff hike threat (which has the Chinese scurrying back to Washington to try to restart talks), the Trump administration has just suggested how easily this allegedly formidable challenge can be overcome: Tell the Chinese to get serious – and work with standard English – or they get higher tariffs imposed on their goods heading for the U.S. market that their economy desperately needs to produce adequate growth and employment.

Ditto for the claim by Bruce Hirsh, “assistant USTR for Japan and South Korea under former US president Barack Obama,” that “Haggling over individual words was 90 per cent of the game. How much of that was a language and translation issue and how much of that was just the actual negotiation over the substance is hard to say.”

Indeed, if anything, Hirsh’s position – and that of his boss – was even less acceptable, since both Japan and South Korea have even less economic leverage over the United States than China, and they also depend on American nuclear guarantees for their defense. As soon as they started haggling over words, Hirsh should have walked out of the room and urged his President to lower the tariff boom.

Nicole Bevins Collinson, “a textiles negotiator for the USTR in the 1990s,” inadvertently let readers know just how pathetic such excuse-making can become:

“The issue of commas and where they’re placed, and whether you use the words ‘and’ or ‘or’ were always big sticking issues. The other big thing was ‘may’ and ‘shall’. In some languages, those words are the same – or maybe they would just tell us that. What we thought was ‘shall’, they translated into ‘may’ and we were told we can’t use the word ‘may.’”

No wonder the American textile industry has struggled so mightily in the face of often predatory global competition and grew only about a fifth as fast in real terms as U.S. manufacturing overall during the 1990s.

Another type of nonsense-enabling was served up by Jean Heilman Grier, “who between the USTR and US Department of Commerce, spent 25 years negotiating and advising on trade agreements for the US government.”

Grier told Bermingham that “The Japanese…prefer more ‘conceptual’ text. ‘They don’t want the exactitude that we’re often looking for. So that’s where you can kind of get into problems with some of the translations.’” Talk about a great stalling tactic, especially when the folks on the other side of the table seem too happy to play along.

About the kindest interpretation that can be put on this manifest incompetence is that these diplomatic veterans valued reaching any kind of deal, even a bad one, over risking a no-deal outcome. In the words of Mary Ryckman, “who spent 30 years with USTR negotiating a host of trade agreements,” “You have the ‘art of the being vague’ and you agree to be vague because you want to come to an agreement.”

Ryckman’s point underscores a critical truth about American trade diplomacy – the diplomats quoted above and most of their colleagues in the pre-Trump decades weren’t making trade policy. They were simply carrying out orders from the globalists above. So Ryckman, for example, can’t be blamed for the “agreement or bust” imperative she followed. That blunder was on the President at the time.

But the South China Morning Post piece also indicates that none of the officials quoted had the slightest problem with their instructions, even though they all but guaranteed failure from the U.S. standpoint, at least defined commonsense-ically. Despite decades of experience, and of clear failure to achieve the stated goals of their efforts (usually meaningful foreign market opening), they apparently were content to play the dupe. Whether witting or unwitting, though matters much more when it comes to the intentions and records of their superiors than to their own.

(What’s Left of) Our Economy: Are Trump’s Metals Tariffs Starting to Backfire?

Tags

aluminum, China, Jobs, manufacturing, metals, metals-using industries, steel, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Friday’s monthly U.S. jobs report (covering April) not only included the third straight month of weak manufacturing employment gains. It contained the first notable evidence that President Trump’s tariffs (at least on imports of steel and aluminum) contributed to a payroll slowdown.

Industry created only 4,000 new jobs sequentially in April. The February and March revisions were positive (the latter from an increase of 1,000 to 8,000, and the latter from a decrease of 6,000 to no change. But these single-digit (at best) results represented manufacturing’s poorest three-month employment performance stretch (producing a cumulative net gain of 12,000 since January) since the September-December, 2016 period (when the increase was 11,000).

At least as important, the greatest weakness came in those manufacturing sectors that most heavily use the metals for which tariffs have been imposed by Mr. Trump since April, 2018. Whereas until the April, 2019 data, these industries (the main ones are listed in the table below) were generally creating jobs at a faster pace than less metals-reliant manufacturing sectors and even the private sector economy overall, that out-performance came to an end for the industries where April figures are available.

                                                 Old thru March      New thru March      Thru April

entire private sector:                +1.78 percent          +1.79 percent      +1.98 percent

overall manufacturing:            +1.48 percent          +1.58 percent      +1.61 percent

durable goods:                         +1.85 percent          +1.92 percent      +1.92 percent

fabricated metals products:     +1.60 percent          +1.82 percent      +1.80 percent

non-electrical machinery:       +2.76 percent          +2.68 percent      +2.44 percent

automotive vehicles & parts:  +0.40 percent          +0.42 percent     +0.27 percent

household appliances:              not available           -4.10 percent      not available

aerospace products & parts:     not available          +6.56 percent      not available

In other words, as the private sector and manufacturing in general both generated greater employment increases in April than in March (the latter just barely), the metals-using sectors’ April gains were smaller than March’s, and the durable goods super-sector in which they’re all found could only match its March jobs improvement rate.

Further, one point to bear in mind about the numbers for household appliances. This sector includes the large household laundry machines that saw a separate set of tariffs imposed starting in February, 2018.

As usual, the impact of the President’s tariffs on products made in China are more difficult to judge for at least four reasons. First, an enormous number of manufacturing industries use Chinese inputs – and to greatly varying extents. Second, these levies only began in July, and then on a relatively small scale. Third, the list of products tariff-ed beginning in July matches up imperfectly at best with the sectoral classification scheme used by the Labor Department to track manufacturing employment. And fourth, most of the affected products are found in relatively narrow categories of manufactures, where the jobs data is one month behind.

To muddy the waters further, in late February, the President decided to suspend an increase slated to go into effect March 1 on tariffs that began in late September on $200 billion in imports from China. His stated reason: progress in the bilateral trade talks. The levies were to rise from 10 percent to 25 percent.

This morning, however, came another apparent about-face: Mr. Trump announced that the tariff hike suspension would end this coming Friday, and that 25 percent tariffs would go into effect on the remaining $325 billion worth of imports from China “shortly.”

So with all those provisos, here are the latest available employment statistics for some major manufacturing sectors that use the Chinese parts, components, and materials that have been slapped with tariffs since July. As far as I can tell, no clear trend jumps out.

                                July-Feb     Old July-March    New July-March    July-April

private sector:     +1.11 percent   +1.24 percent      +1.25 percent     +1.44 percent

overall mfg:        +1.00 percent   +0.90 percent      +1.00 percent     +1.03 percent

aircraft engines   +0.93 percent    not available       +1.39 percent      not available

  & engine parts:

industrial            +2.46 percent    not available       +2.46 percent      not available 

  heating equip:

oil & gas            +5.83 percent    not available       + 6.11 percent     not available

  drilling platform parts:

farm mach         +1.67 percent     not available       +0.33 percent     not available

   & equipment:

ball bearings:    +1.82 percent     not available       +1.42 percent      not available

Anyone seeking to evaluate the economic effects of the Trump tariffs in a serious manner should recognize that a useful verdict may not be visible for years. But all trends (and their reversals) begin at specific points in time. Further, until the release of the April jobs numbers, tariff supporters could easily demonstrate that the apocalyptic predictions of tariff opponents had not yet come close to appearing. At least for now, that particular case has become somewhat harder to make.

(What’s Left of) Our Economy: A Sort of Mixed U.S. Productivity Report

Tags

labor productivity, manufacturing, non-farm business, productivity, {What's Left of) Our Economy

This morning’s government report on labor productivity for the first quarter of this year contained a valuable reminder that this measure of the economy’s efficiency – and indirectly, its success in fostering healthy growth and sustainably rising living standards – can improve for good and not-so-good reasons. And the complicating factor in an otherwise strong set of data came in manufacturing.

Labor productivity, as RealityChek regulars know, is the narrower of the two productivity gauges regularly published by the Department of Labor. As opposed to multi-factor productivity, which measures how much in the way of a variety of business inputs is needed to generate a unit of output, labor productivity only tells us how much each hour of work put in by an employee achieves that result. But the labor productivity figures come out on a timelier basis, so they’re understandably watched closely.

As suggested above, the overall figures were encouraging. For non-farm businesses (the Labor Department’s U.S. economy universe), labor productivity rose by 2.40 percent between the first three months of 2018 and the first three months of this year. That was the best such performance since the third quarter of 2010 (2.70 percent), and especially good news since that previous mark came much earlier in the current business cycle (i.e., much sooner after the end of the last severe recession), when robust productivity gains are generally easier to generate.

Moreover, these labor productivity advances have accelerated sequentially since the third quarter of last year.

In addition, on a quarter-to-quarter basis, the first quarter’s 3.60 percent increase at an annual rate was this metric’s best performance since the 3.70 percent rise in the third quarter of 2014.

Manufacturing’s 1.20 percent productivity improvement over the first quarter of 2018 wasn’t stellar, but pretty much in line with recent readings. The new quarter-to-quarter reading, though, was solid; industry’s labor productivity was up 1.70 percent annualized – the best such performance since the 4.40 percent pop in the fourth quarter of 2017. And the rate of increase here had sped up since the third quarter of last year as well.

The fly in the ointment concerns why first quarter manufacturing labor productivity even rose at that solid quarter-to-quarter pace. A big part of the reason was that manufacturing output fell during this period – by one percent at an annual rate. In other words, the sector reduced the number of hours its workers worked, but it also saw production fall – just more slowly. That result is certainly better than output falling just as fast or faster than hours worked. But it doesn’t qualify as “good.”

The latest sequential manufacturing annualized output decrease is the first since the 1.50 percent decline in the third quarter of 2017 (when the sector’s productivity sank by a recessionary 4.40 percent at an annual rate). Industry’s labor productivity rebounded sharply in the following quarter (by 4.20 percent annualized, while output shot up by 5.70 percent). So maybe this latest lousy output number is just another bump in the road.

But it’s that combination that represents the best possible labor productivity outcome: Both output and efficiency rising at the same time.

It’s also important to remember, however, that both the economy overall and the manufacturing sector still aren’t close to returning to their labor productivity performances of the recent past. Here are the updated comparisons between the current recovery, and its two most recent predecessors:

                                                                 Non-farm business     Manufacturing

1990s expansion (2Q 1991-1Q 2001):       +23.74 percent         +45.86 percent

bubble expansion (4Q 2001-4Q 2007):      +16.59 percent        +30.23 percent

current expansion (2Q 2009 to present):    +12.17 percent          +9.96 percent

The newest quarterly figures brighten the picture slightly. But boasting about the U.S. economy should definitely be muted until these productivity numbers start turning around dramatically.

(What’s Left of) Our Economy: Is the Middle Class Killing It Under Trump?

Tags

average hourly earnings, Barack Obama, ECI, election 2020, Employment Cost Index, hourly earnings, Labor Department, middle class, salaries, Trump, wages, working class, {What's Left of) Our Economy

Is the economy under President Trump producing outsized wage gains for working- and middle-class Americans, as the chief executive claims? Or have his policies betrayed the workers who gave him so many votes in the 2016 race for the White House, as his critics charge?  (See this piece for typical views from both vantage points.) 

The latest data say loud and clear that there’s some evidence that every day Americans are faring better in the Trump years. But it’s far from a slam dunk.

The first set of figures comes from this morning’s Employment Cost Index (ECI), a quarterly measure of worker compensation trends published by the Labor Department and the second is the Department’s newest monthly wage numbers.

One complication that emerges right away is that the middle class and the working class are two different groups each of whose composition is anything but homogeneous and each of whose definitions can vary widely. For example, manufacturing includes employees at opposite ends of the skills and therefore wages levels. And managers in numerous service industries earn pretty modest  salaries. (See, e.g., here.) Moreover, don’t forget gaping gaps among different regions of the country. In many major metropolitan areas, families earning six-figure incomes arguably are hard-pressed financially.

In this post, I try to distinguish between “the rich” and the rest by comparing trends for managerial and executive-type workers on the one hand (including professionals and keeping the above qualifications in mind), and non-supervisory workers on the other. As usual with compensation reports, I exclude government workers, because their wages, salaries, and benefits stems from politicians’ decisions, as opposed to the private sector, where compensation has much more to do with the economy’s fundamentals. And in the first table below, presenting calculations from the ECI data, I zero in on wage and salary costs. The reason? The ECI doesn’t directly measure what workers’ receive – instead, it gauges various costs businesses incur to keep them on their payrolls. And unlike benefits costs, wage and salary costs are much likelier actually to wind up in workers’ pockets.

What’s presented here is a number that shows the degree to which increases in wages and salaries for various classes of workers have been rising at a faster or slower pace (or actually fell) between the last nine quarters of President Obama’s administration and the first nine quarters of President Trump’s administration. (I chose these periods because they’re as close as possible to each other in the nation’s current economic cycle.) Call this figure the “wage and salary acceleration rate.” So for example, if a group of workers’ wages and salaries grew by 10 percent during the Obama period used and by 15 percent during the Trump period, the acceleration rate would be 50 percent.

And just FYI, I identify the last quarter of 2016 as Mr. Obama’s final full quarter, and the first quarter of 2017 as Mr. Trump’s first full quarter (since he took office on January 20).

Obama-Trump acceleration rate

All workers: +31.09 percent

Management/professional/related: +15.05 percent

Management/business/financial: -15.78 percent

Professional & related: +32.06 percent

Office/admin support: +15.51 percent

Construction/extraction/ +9.05 percent

farming/fishing/forestry:

  installation/maintenance/repair: +25.57 percent

Production/transportation/ +25.55 percent

  material moving:

Production: +18.26 percent

Transportation & material moving: +33.33 percent

To me, these result are a wash, in large part because the spreads between the results for the second, third, and fourth categories (the upper income categories) and those for the remaining, lower income categories are both pretty wide. Interestingly, only one group within each of these broad categories beat the workforce average of 31.09 percent – professional and related workers, and transportation and material moving workers.

The second table, presented below, compares the hourly earnings (including salaries calculated on an hourly basis) Obama-Trump accelerators for the entire private sector workforce, and for the non-supervisory portion of that workforce. Because these data come out monthly, the two time periods are the final 26 months of the Obama administration (ending in December, 2016) and the first 26 months of the Trump administration (starting in January, 2017).

These results look more clear-cut, with hourly pay for the non-supervisory workers increasing faster during the Trump presidency so far than during the final slightly more than two years of the Obama presidency.

Obama-Trump acceleration rate

All workers: +20.54 percent

Non-supervisory workers: +27.16 percent

As election 2020 so far makes clear, inequality and middle- and working-class-related trends are shaping up as major campaign issues. So far, the bottom line is that neither backers or opponents of President Trump deserve to make major political hay of them.

(What’s Left of) Our Economy: The Latest Sign of Trump Success on Trade

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exports, GDP, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, non-oil goods trade deficit, real exports, real GDP, real growth, real imports, real non-oil goods trade deficit, real trade deficit, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

It’s still not possible to say confidently that the impact of tariff-related distortions are over (at least for the foreseeable future), and that President Trump’s trade policies are once again enabling the U.S. economy to grow strongly faster than its debt-producing trade deficits (i.e., more healthily and sustainably). That moment won’t arrive until May 9, when the last of the monthly trade figures for the first quarter of this year will be reported (at least in a preliminary form).

But Friday’s initial first quarter results for the gross domestic product (GDP – the main measure of the economy’s size and its growth), bring the moment a good deal closer.

Just to recap the main issue: I’ve explained on RealityChek (e.g., here) and elsewhere (e.g., here) that the real measure of Mr. Trump’s trade policy success or failure isn’t the level of U.S. trade deficits presented in isolation. It’s whether the economy can grow at adequate rates without pulling in ever more imports – which are both bought by consumers and used by producers as parts, components, and materials for their final products. Either way, though, their increases on net plunge America deeper and deeper into debt.

With anything as big as the American economy, trends don’t reverse themselves quickly. So the best evidence of change would indicate that the relevant arc is starting to bend in the right direction. In this case, that means signs that growth becomes or remains adequate as the growth of the trade deficit slows. That’s exactly the story that could be told convincingly with some of the latest releases of trade-related numbers (see, e.g., here and here), and that the new first quarter GDP results strengthened further.

First, it’s important to note that the new advance data show that, after adjusting for inflation, as of the first quarter, the U.S. economy grew at its fastest pace over a four-quarter period (3.21 percent) since the second quarter, 2014-second quarter, 2015 period (3.37 percent).

But the first sign that the new growth has been healthier growth emerges when the change in the real trade deficit is examined. During that previous, somewhat faster, growth period, the price-adjusted trade gap widened by 21.55 percent. During the last growth period, which was only slightly slower, the trade deficit actually shrank slightly – by 0.34 percent.

As known by RealityChek regulars, though, changes in the overall real trade deficit have only limited utility for judging the usefulness of American trade policy because the total flows include oil and services trade. The first is rarely the subject of trade diplomacy or policy-making, and liberalization of the latter has made only embryonic progress so far.

The portion of the trade shortfall most heavily influenced by trade policy decisions is that in non-oil goods – what I’ve called the Made in Washington trade deficit. Unfortunately, exact comparisons between the 2014-15 and 2018-19 growth periods can’t yet be made because even the preliminary results for the first quarter of this year won’t be published until the March trade data are released on May 9.

But between the second quarter of 2014 and the second quarter of 2015, the Made in Washington trade deficit jumped by 18.83 percent. Between the first two months of 2018 and the first two months of 2019, it increased by only 3.17 percent. And because of the fading of the tariff front-running effect (described in this post), it’s highly unlikely that the March and full first quarter numbers will change this arc significantly.

The improving trade deficit and its contribution to healthier economic performance also can be seen by examining the contribution made by that better balance to quarterly growth. In the first quarter of 2019, the 5.90 percent sequential shrinkage of the trade gap was responsible for 1.03 percentage points of the 3.13 percent annualized sequential growth. That’s 32.91 percent of the total – and the highest such figure since the fourth quarter of 2013, when the trade deficit’s decrease fueled 1.23 percent points of the 3.19 percent annualized sequential growth (38.56 percent).

Some other trade-related highlights of the new GDP report:

>Combined goods and services exports in the first quarter hit a new record of $2.5765 trillion at an annual rate.

>Real goods exports were up, too, quarter-to-quarter. But their $1.7598 trillion annualized first quarter total was only the second all-time highest (after the $1.8092 trillion in the second quarter of 2018).

>After-inflation services exports represented a fifth straight quarterly record ($783.2 billion annualized).

>Constant dollar total imports in the first quarter fell on-quarter but they still represented the third highest total on record – $3.4758 trillion at an annual rate.

>After-inflation goods imports also fell sequentially to their third highest all-time level – $2.9131 trillion.

>Real services imports dropped quarter-to-quarter to their second highest all-time level – $563.3 billion.

(What’s Left of) Our Economy: U.S. Manufacturing Trade Seems Back on a Winning Track

Tags

manufacturing, manufacturing output, Trade, trade deficit, Trump, {What's Left of) Our Economy

Even as the Mueller Report and its aftermath and the intensification of the 2020 presidential campaign  suck up most of the media oxygen, evidence keeps coming in that President Trump’s trade policies are achieving many of the successes they’ve targeted.

A little over a week ago, I reported on how the overall U.S. trade data have resumed showing that the nation’s economy is closing the gap between its growth and that of its trade deficit – a feat accomplished way too seldom in recent decades, and that indicates that domestic production is beginning to replace imports. That development in turn mean that such output is starting to replace spending as the main engine of expansion. If the trend continues, American prosperity will gain a much stronger foundation.

The same week that those encouraging combined goods and services trade numbers came out, the federal government also released data confirming that manufacturing is making similar progress. That’s important because industry still dominates U.S. trade flows, because its historic (though not recent) productivity growth has been so strong, because it’s so crucial to the nation’s high tech future. Manufacturing also boasts a healthy jobs multiplier – that is, the creation of each new manufacturing position adds many more jobs throughout the rest of the economy. And it’s long displayed the potential to enable working class Americans to live middle class lives (even though its recent wage performance has been relatively weak.)

The statistics showing the narrowing gap between the growth of the huge, chronic manufacturing trade deficit and the expansion of manufacturing output came out in the Commerce Department’s April 19 findings on “Gross Domestic Product by Industry.” They bring the story through the end of 2018, and here’s the bottom line:

Last year, domestic manufacturing output rose by 7.11 percent before adjusting for inflation. (The growth measure being used here is value-added, which minimizes the double-counting that can occur when economists calculate the production increases of final products, and of the parts, components, and materials comprising them.) That’s incidentally the best such figure since 2006’s 5.93 percent.

Even more important, though, in 2018, the current-dollar manufacturing trade deficit widened by 10.98 percent. So it increased 1.54 times faster than manufacturing production. But the difference between the two was less than in 2017. That year, pre-inflation manufacturing output improved by 4.53 percent, but the manufacturing trade deficit worsened by 7.31 percent, or 1.61 times faster.

That doesn’t sound terribly impressive. But recall that the 2018 results clearly have been distorted by the front-running of import purchases produced by the Trump tariffs in the second half of the year – i.e., by U.S. businesses seeking to buy products from China in particular before previously announced levies went into effect and boosted their prices. As a result, imports surged, and brought to a temporary halt the progress on this front that represented a major contrast with the figures for the Obama administration years, as shown in this post.

The front-running effect can easily be seen in the numbers for each quarter of last year:

                                   mfg output           mfg trade deficit (both at annual rates)

4Q 17-1Q 18:         +1.20 percent                         -7.49 percent

1Q 18-2Q 18:         +2.51 percent                        +4.42 percent

2Q 18-3Q 18:         +1.03 percent                      +10.81 percent

3Q 18-4Q 18:         +1.34 percent                      +10.05 percent

The good news for domestic manufacturing and for the economy in general: The early 2019 monthly trade figures show that the front-running is over. Indeed, the February manufacturing trade deficit of $71.29 billion was the lowest monthly total since April, 2017’s $70.15 billion. And manufacturing imports in February fell on month by a very big 9.14 percent while exports eaked out a 1.85 percent sequential gain.

It would be great to compare the manufacturing trade and growth numbers for the first quarter of this year with those of spring, 2017. But the former won’t be out until May 9 and we’ll need to wait until July for the latter.

For now, though, the latest statistics make clear that the Trump trade strategy is back on a winning track. And logic at least indicates that, all else equal, it should remain so, provided the President stays the general course.