(What’s Left of) Our Economy: As Trump Tariffs Continue, U.S. Manufacturing Growth Steams Along

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

Claims keep getting made that President Trump’s tariffs-heavy trade policies have been hammering American manufacturing. (Here’s just one example from as recent as yesterday.) And government, economy-wide data keeps on coming out showing these claims to be complete bunkum.

Today it’s the Federal Reserve’s turn; its new industrial production report (covering December) make plain as day that metals-using manufacturing for the most part continues to out-perform the rest of manufacturing when it comes to inflation-adjusted output even though Trump metals are supposed to be crippling them with skyrocketing cost increases for key inputs. (As the latest producer price results made clear, almost none of that inflation per se can be detected, either.) And although the effects of the China tariffs are more difficult to unpack, what can be presented responsibly fails to reveal discernible damage since the first tranche was imposed.

Below are the numbers for manufacturing overall, and for industry’s main metals-using sectors. They show after-inflation output since April, since the steel and aluminum tariffs went into effect in late March. In addition to the April-through- December percentage changes, you can also see results through November as reported by the Fed last month, along with the revised through-November numbers, to provide a sense of the trends’ momentum. 

                                              old thru Nov       new thru Nov       thru Dec

overall manufacturing:        +0.80 percent       +0.94 percent  +2.02 percent

durables manufacturing:      +1.73 percent      +2.02 percent   +3.31 percent

fabricated metals products:  +1.61 percent      +1.94 percent   +2.05 percent

machinery:                           +5.11 percent      +5.55 percent    +4.93 percent

automotive:                          -1.46 percent       -1.32 percent    +3.36 percent

major appliances:                 -0.88 percent       -0.31 percent    +0.08 percent

aircraft and parts:                +3.27 percent      +5.29 percent     +6.80 percent

As you can see, the only category that’s experienced production growth problems has been the major appliance sector. February was the first full month during which these levies were in place, and since then, price-adjusted output has been off by 1.99 percent (versus a 3.93 percent improvement for manufacturing as a whole). But as the above table demonstrates, even they’ve been making a comeback lately. In cases like aerospace and automotive, the growth pace has quickened significantly, while in machinery, we see some growth fall-off.

Analyzing the impact of the China tariffs is tougher both because they started more recently (in early July), because they’ve been greatly expanded since then, and because Chinese inputs are used in and compete with such a huge number of domestically produced goods. Moreover, the government’s list of these levies uses a different industry classification system than the Fed uses for industrial production, and exact match-ups don’t abound.

So the below table, showing real output changes for some products tariff-ed since July, is a best guess, with the exception of farm machinery and equipment, and ball bearings. But more power to you if you see China tariff-related damage here.

overall manufacturing:                            +1.72 percent

aircraft engines and engine parts:           +5.42 percent

industrial heating equipment:                 +0.14 percent

oil and gas drilling platform parts:         +2.21 percent

farm machinery and equipment:             +3.29 percent

ball bearings:                                           -0.17 percent

“Tomorrow, tomorrow, I love ya, tomorrow. You’re always a day away!” is a well-known Broadway lyric. As the new Fed industrial production figures demonstrate, “tomorrow” is also the best hope for the tariff alarmists to show that the trade curbs are in anyway undermining the American economy on net.

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(What’s Left of) Our Economy: Mainstream U.S. Trade Policy’s Main Rationale Has Just Been Blown Up

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Bill Clinton, BRICS, China, emerging markets, EMs, Financial Times, globalization, Jim O'Neill, multinational companies, offshoring, Project-Syndicate.org, Sherrod Brown, The Race to the Bottom, Trade, trade agreements, {What's Left of) Our Economy

I’m always struck by how often in the news media or policy writing (e.g., in journals like Foreign Affairs), genuinely game-changing points are made in passing, and for folks with any interest in the trade and globalization issues raised to such prominence by President Trump. And two such instances dealing with this subject just came in the Financial Times newspaper and the website Project-Syndicate.org.

The observation they both made with mind-boggling offhandedness – economic growth in countries dubbed “emerging markets” (EMs) is slowing to rates no faster than those of the rest of the world, and thus rendering them incapable as far as the eye can see of replacing the United States as a global growth engine.

This claim matters decisively for trade policy because these EMs have dominated America’s approach in this field for more than two decades. First identified in the early 1990s, they consist of economies in the developing world that not only boasted enormous populations. But largely because communism and a heavy state role in economic policy had been so thoroughly discredited due to the end of the Cold War, they were steadily transitioning to more free market approaches, and thus were seen to have huge growth potential. China and Mexico were the leading examples, but various definitions of the main emerging markets also included India, Brazil, Russia, Turkey, South Africa, and others.

According to trade enthusiasts, this combination of characteristics was going to make the EMs so important that accessing their vast current consumer markets and even greater consuming and importing potential needed to be Washington’s top trade priority. Their significance was portrayed as all the more important given America’s status as a “maturing” economy whose growth was bound to continue slowing. (Former President Bill Clinton used exactly this term while advocating for an emerging markets push in a document that’s not on-line but that’s cited in my book on globalization, The Race to the Bottom. The document was the 1995 Report of the President of the United States on the Trade Agreements Program and it was published by the Office of the U.S. Trade Representative at the start of 1996.)    

Yet however impressive and promising they seemed, the idea was a crock from the beginning – at least in terms of its importance in driving American trade policy for the foreseeable future. EM cheerleading suffered two fatal flaws. First, despite rapid growth and immense growth potential, the emerging markets were starting from such low bases – especially in terms of their populations’ consuming power – that they wouldn’t become significant markets in absolute terms for many years at best. Second, precisely because they remained so poor and under-developed, their governments invariably realized that their own best growth opportunities came from exporting to much wealthier countries like the United States – where the needed consumption power already existed.

So why the EMs euphoria? As documented exhaustively in The Race to the Bottom, the multinational corporations that dominated American trade policy-making never saw the emerging markets as final consumption markets. They viewed them as super low-cost production bases from which they could supply the U.S. market much more profitably than possible from their domestic factories. Which is exactly why, starting with the pursuit of trade expansion with Mexico at the onset of the 1990s, American trade policy almost exclusively targeted the emerging markets and other very low-income countries (like Vietnam and the countries of Central America) for negotiating new trade deals.

Ohio Democratic Senator Sherrod Brown (a possible 2020 Democratic presidential contender) described the multinationals sales pitch to leading EM China somewhat too charitably when he said in 2015, “while walking the halls of Congress, [lobbyists for the multinationals] talked about they wanted access to 1 billion Chinese customers. What they didn’t say is they also wanted access to 1 billion potential Chinese workers.”

As The Race to the Bottom also made clear, EM touting was star-crossed from the start – even embarrassingly so. As it peaked, in the mid-1990s, many of these same countries started experiencing problems that led to major financial crises even before the decade ended. That is, their markets became evaporating, not emerging, and in numerous cases they kept afloat only by cheapening their currencies, limiting their own consumption and importing still further, and making them more powerful exporters than ever.

Yet the multinationals’ power and influence remained so decisive throughout America’s political (and media) establishment that emerging markets hucksterism continued to justify trade agreements with such countries. Hence the continued repetition of wholly misleading contentions like “95 percent of the world’s consumers live outside the United States” (which I debunked here).

So that’s why I was so interested to see the following in a Financial Times blog post – and by no less than a former senior official at the International Monetary Fund and another leading international economic institution:  

“EM growth has slowed to about 4.5 per cent at present….In the long run, according to the OECD, the potential growth rate of the Briics (Brazil, Russia, India, Indonesia, China and South Africa — accounting for most of EM GDP) is expected to slow further, converging to mature market trend growth of 2 per cent. In other words, the growth advantage of more than 4 percentage points that EMs enjoyed over mature markets in the 2000-2010 period has narrowed to about 2 percentage points and will probably disappear in the long run.”

And guess what? Unlike in the United States, in particular, even much of this EM growth will rely on maximizing exports and minimizing imports. So their importance as markets for American-made goods and services will be even less impressive than this impeccably mainstream analyst suggests.

Equally startling: This Project-Syndicate column by Jim O’Neill. O’Neill, for the unitiated, was perhaps the highest profile EM cheerleader, and coined a popular acronym for those economies that described those he believed most promising: BRICS (Brazil, Russia, India, China, South Africa).

The former Goldman Sachs banker has remained a believer in China, and has actually added some countries to his list of economies he believes will loom much larger in this century. But in the column, he also argued that, if China falters in what he (wrongly, in my view) considers its role as a global growth engine, and the American consumer gets tapped out, none of the other emerging economies “is in a position to match the growth of Chinese consumption today, or even over the course of the next decade.” And by extension, the likelihood of these countries replacing the United States is even more infinitesimal.

Former French leader Charles de Gaulle once famously said that “Brazil is the country of the future…and always will be.” The two examples above show that the same solidly grounded skepticism is also finally seeping into the ranks of globalization cheerleaders. How long will it take before the American political, business, academic, and media establishments finally start paying attention?

(What’s Left of) Our Economy: Tariffs-Led Inflation Remains a Manufactured Crisis

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China, inflation, metals, metals tariffs, producer prices, tariffs, Trade, trade war, wholesale, {What's Left of) Our Economy

Economy followers who are fans of facts have ample reason to be grateful that the partial federal government shutdown has left the Labor Department open. As a result, the Bureau of Labor statistics can keep churning out data showing that the next valid claim of tariff-led damage to the U.S. economy that’s supported by authoritative statistics will also be the first. And today’s producer price numbers (for December) are the latest case in point.

The Department’s producer price index (PPI) measures price changes at the wholesale level, and neither the results for products heavily affected by President Trump’s metals tariffs or by his tariffs on goods from China show any evidence of contributing to inflation that will at some point be passed on to consumers.

Let’s start with metals-using products supposedly vulnerable to the U.S. levies on imports of steel and aluminum, which began to be imposed in late March. As with the situation as of last month, steel itself continues to demonstrate strong pricing power on an annual basis, starting with a 7.4 percent increase in April that’s since soared to 18.5 percent in December.

Even so, on a monthly basis, steel prices have actually fallen on net since August (by 0.36 percent), and dropped by 0.63 percent on month in December. So its price momentum seems to be cooling significantly – and possibly at an accelerating rate.

Further, much weaker pricing power – and therefore inflation – can be seen in various goods that use lots of steel. On the one hand, the December figures still showed robust price increases in products like pumps, compressors, and related equipment; and mining machinery and equipment. Wholesale inflation was 4.1 percent in the former on month in December, and 8.5 percent in the latter. By contrast, in the super-category in which both products are found (“final demand goods”), yearly wholesale inflation was only 2.5 percent in December.

Switch over to “intermediate demand” goods and you find big annual price hikes in sectors like metal containers (6.5 percent), fabricated wire products (16.4 percent), and certain kinds of valves (six percent). Yearly December inflation in that super-category was three percent.

But as in steel itself, the latest monthly figures are generally much lower – e.g., since August, 1.57 percent cumulatively for pumps, compressors, and related equipment; -0.55 percent for metal containers; 0.12 percent for fabricated wire products; and 2.32 percent for the valves.

Mining equipment is a conspicuous exception: Its prices were up 6.21 percent from August through December. But it was a strange exception, since all of the increase took place from October to November.

And the tariff alarmists still need to account for all the steel-using goods where wholesale inflation has been weak for the entire year and looks to be going nowhere: machine tools; oil and gas field machinery; agricultural machinery; motor vehicles; motor vehicle parts; ships; railroad equipment.

It’s true that the markets for all these producer goods vary tremendously, as does their dependence on steel. But that’s the point: Tariffs are only one of many trends and developments that influence their prices.

As for aluminum, its pricing momentum has slowed considerably – from 11.9 percent on an annual basis in April, to 6.3 percent in December. And since August, aluminum wholesale prices are off by fully 3.20 percent.

The first Trump China tariffs weren’t imposed until early July, so the sample size is smaller. But the case for tariff-led wholesale inflation on this front is just as weak as in the metals-related sectors.

Here are the PPI changes for some of the leading products found on the Trump administration’s initial China tariff list. They were imposed on July 6, so the numbers show the cumulative price changes since August. (Note: Because the administration’s Trump announcement used a different classification system than that used in the PPI reports, the below data don’t match up exactly with that tariff list. But the following goods are all at the least main parts of the items on the Trump list, or vice versa.)

aircraft engines and engine parts: 0.04 percent

industrial heating equipment: 1.15 percent

oil and gas drilling platform parts: 0.46 percent

farm machinery and equipment: 2.26 percent

paper-making machinery: -0.13 percent

ball bearings: 1.01 percent

electric generators: 1.85 percent

electricity transformers: 0.35 percent

medical, surgical, and personal aid devices: 0.33 percent

X-ray and electro-medical equipment: 0 percent

As with the metals-using products, some strong price increases are apparent. But so are some very weak increases, a flat-line, and a price drop. So it’s tough to argue that the tariffs have been make-or-break in the wholesale pricing sphere. I’ll keep tracking the China angle with unusual alacrity, though, since the number of tariff-ed imports expanded greatly later in 2018.

Lastly, there are the tariffs on large household laundry machines. Their retail prices keep increasing strongly, as shown in the latest (December) consumer price data – though not as strongly as in the immediate aftermath of the product-specific tariffs slapped on their imports in late January.

But at the wholesale level, inflation has been much weaker lately – a 0.84 percent monthly December increase for “household appliances” (the laundry equipment isn’t broken out), but only a 1.61 percent advance since August, and a comparatively meager 3.7 percent increase year-on-year. Call me a cynic, but it looks like consumers have been paying much more for these products this past year mainly because the retailers have been making a killing, not because of tariff hikes.

(What’s Left of) Our Economy: It’s Still the Same Old (Dreary) Story for Real U.S. Manufacturing Wages

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inflation-adjusted wages, manufacturing, manufacturing wages, private sector wages, wages, {What's Left of) Our Economy

Could anything be more revealing about the recent situation with America’s manufacturing wages than this development? Adjusted for inflation, industry’s wages were flat on a year-on-year basis. And that was their best such performance since July, 2017, when they rose by 0.65 percent over July, 2016’s levels.

Not that the news reported last Friday by the Bureau of Labor Statistics (BLS) was all bad for manufacturing workers. In December, their real wages increased by 0.28 percent on month – a pretty good performance by recent standards. Yet even that improvement represented a slowdown over the November sequential advance of 0.37 percent. (Both these monthly numbers are still preliminary.)

Moreover, not even the welcome advances of these last two data months was enough to lift manufacturing out of a long real wage recession. Price-adjusted hourly pay for its employees is still down a cumulative 0.28 percent since March, 2016.

In addition, the December data still left manufacturing a serious real wage laggard when compared with the private sector economy as a whole. (BLS doesn’t include government workers’ wages in these reports, since their wages are set by politicians’ decisions, not market forces, and therefore say almost nothing about the fundamentals of the U.S. labor market.)

Month-on-month, inflation-adjusted private sector wages advanced by 0.46 percent – their biggest such increase since the 1.05 percent spurt of January, 2015, and a much bigger increase than in after-inflation manufacturing wages.

On an annual basis, constant dollar private sector wages in December were up 1.12 percent – the strongest such rise since September, 2016’s 1.13 percent and, again, a much larger improvement than for real manufacturing wages.

And adding insult to injury, the gap between inflation-adjusted wages in manufacturing and in the private sector overall keeps widening. From the beginning of the current economic recovery (June, 2009) to last month, after-inflation private sector wages were up 7.24 times more (5.43 percent) than price-adjusted manufacturing wages (0.75 percent). As of the previous December, the gap was 5.69-to-one, as real private sector wages had risen by 4.27 percent, and real manufacturing wages had improved by the same 0.75 percent.

(What’s Left of) Our Economy: Can We (Finally) Start Deflating the Tariffs-Led Inflation Claims?

Tags

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

Good luck to you if you’re looking for signs of tariffs-led inflation in yesterday’s U.S consumer price data from the Labor Department.

It’s not that goods that used tariff-ed products (either steel and aluminum, or inputs from China) or that are tariff-ed themselves (final products from China) haven’t become more expensive since the relevant levies were imposed. It’s that the prices of many goods completely unaffected by the tariffs have gone up as well – and in many cases, faster than those that have been affected by the trade curbs. So there’s no evidence that the tariffs themselves have had any notable impact.

In fact, these latest figures (bringing the story up through December) underscore how many forces and developments influence price changes.

A great example is provided by canned fruits and vegetables – presented below in the table showing price changes over various key periods of time (including for the post-March tariff period) for metals-using products. Their costs of course include the cost of either the aluminum or the type of steel used in their cans. When you look at the numbers for most of these time frames, it’s clear that the prices of these foods have risen faster than the overall rate of what’s called “core inflation” – the inflation rate minus the costs of food and energy, which are considered too volatile price-wise to yield an accurate understanding of what economists regard as the nation’s underlying, most fundamental, inflationary performance.

Interestingly, the prices for canned fruits and vegetables have increased much faster during these periods than the prices of food overall. So what’s driving the big price increases in these canned foods must be the cans, right – and presumably what they’re made of? Not if you look closely.

For the real problem is clearly vegetables. Both month-to-month and clearly for the entire year, fresh vegetable prices have soared. Largely as a result, the prices of canned vegetables have jumped unusually strongly, and significantly boosted the numbers for the overall canned fruits and vegetables category.  

The special role being played by vegetable prices is also clear from looking at the trends in food prices – which aren’t included in the core inflation number. Except for December, these prices have risen considerably more slowly than those prices in the core grouping, or in the economy as a whole. 

If you’re still skeptical, look at the price trends for several other food products that often come in cans – like beverages of all kinds, and soup. There’s simply no consistent pattern of their increasing faster than core inflation over any time period. 

Similarly, although the prices of metals-using auto parts have risen more robustly than core inflation, the prices of metals-using vehicles have risen much more weakly. In fact, from December, 2017 to December, 2018, they’ve fallen in absolute terms. So something, or somethings, other than metals prices and tariffs count for much more in the total prices of these goods.

                                     Nov.-Dec.       Since April        y/y April           y/y Dec.

core inflation:            0.21 percent   +1.39 percent   +2.12 percent   +2.22 percent

overall inflation:       -0.06 percent  +1.09 percent   +2.43 percent   +1.95 percent

food:                         +0.37 percent  +0.98 percent  +1.39 percent    +1.58 percent

fresh fruits & vegs:  +1.94 percent  +1.82 percent   -0.45 percent    +1.75 percent

fresh fruits:              +1.33 percent    -1.73 percent  +1.35 percent     -0.73 percent

fresh vegetables:      +2.63 percent   +6.05 percent   -2.53 percent    +4.63 percent

processed fruits        +0.67 percent    -0.64 percent   -0.59 percent    +0.87 percent

& vegs:

canned fruits            +1.48 percent    +0.99 percent   -0.07 percent    +3.12 percent

& vegs

canned fruits:           +1.44 percent    +1.39 percent   -1.50 percent    +2.29 percent

canned vegs:            +1.30 percent    +1.12 percent   +1.04 percent   +4.18 percent

soups:                      +2.49 percent    +2.28 percent     -0.54 percent   -1.43 percent

malt beverages         -0.04 percent    +1.82 percent    +0.84 percent   +1.87 percent

consumed at home

alcoholic bevs          -0.04 percent     +1.34 percent    +2.17 percent   +2.25 percent

consumed away

juices & non-         + 0.13 percent     +1.77 percent     -0.25 percent  +2.51 percent

alcoholic drinks

carbonated drinks:  +0.41 percent     +3.01 percent     +0.03 percent  +4.07 percent

non-frozen, non-     +0.18 percent    +1.37 percent       -0.53 percent  +1.46 percent

carbonated non-

alcoholic drinks

new cars & trucks:        0 percent     +0.78 percent      -1.62 percent    -0.24 percent

auto parts:              +0.42 percent     +1.58 percent      -0.74 percent   +2.20 percent

Tariffs on goods from China have been in effect for fewer months than the metals tariffs. And since July, they’ve been imposed in phases, which were followed by a decision by President Trump to delay increases in a big tranche as part of the latest cease-fire in the trade conflict with China. So the data is less definitive. But thus far, at least, the prices of the goods below – which represent some of the main imports from China subjected to tariffs by the first rounds of these levies, which were imposed in July – have mainly rising more slowly than the rest of core inflation sectors. (The sportswear numbers are dicey, since such apparel is not broken out from the rest of the category as such. So the figures below represent results from a women’s apparel category that includes sportswear.)

                             Nov.-Dec.          Since Aug.        Aug. y/y           Dec. y/y

core inflation:   +0.21 percent   +0.73 percent    +2.19 percent   +2.22 percent

furniture:          +0.55 percent   +0.90 percent     -0.66 percent   +1.68 percent

auto parts:        +0.42 percent   +0.82 percent    +0.39 percent    +2.20 percent

tires:                 +0.98 percent  +1.50 percent      -1.64 percent    +1.29 percent

appliances:       -0.33 percent   +1.25 percent     +2.31 percent    +4.74 percent

sportswear:       -0.89 percent   -2.14 percent       -0.86 percent    -1.33 percent

As for appliances, their out-performance is due largely to a separate set of tariffs imposed on large household laundry equipment starting in February. As shown below, however, even in this case, price increases are starting to moderate. That’s clear from the decline in the year-on-year figure between February and December, and from very slow price increase recorded between November and December.

                                 Nov.-Dec.        Since Feb.          Feb. y/y           Dec. y/y

core inflation:       +0.21 percent   +1.67 percent   +1.86 percent   +2.22 percent

appliances:            -0.33 percent   +3.41 percent   +0.25 percent   +4.74 percent

major appliances: +0.19 percent  +11.59 percent   -4.22 percent   +9.02 percent

I know that I may be starting to sound like a broken record on the (negligible) impact of tariffs on the American economy so far. But until globalization cheerleaders in politics and business, and their mouthpieces in the Mainstream Media, start telling the story accurately, I’ll keep correcting the record.

(What’s Left of) Our Economy: New U.S. Jobs Report Delivers (Another) Face Slap to Trump’s Trade Critics

Tags

China, durable goods, global supply chains, Jobs, manufacturing, metals, metals tariffs, metals-using industries, tariffs, trade war, Trump, {What's Left of) Our Economy

My deepest sympathies to the nation’s tariff fear-mongers, who keep insisting that President Trump’s levies on imports have been decimating America’s domestic manufacturing sector. This morning’s Labor Department report on the U.S. employment situation in December reveals that they’re still as pathetically wrong as ever.

Let’s start, as usual, with the impact of the President’s tariffs on steel and aluminum, which started to be imposed in April, and which allegedly have been hammering metals-using industries. This Trump decision is supposed to epitomize the folly of such protectionist policies in general, and metals tariffs in particular, since metals-using industries generate much more output than metals-producing indusries, and employ many more workers.

Yet has been the case since the onset of these levies, the data makes abundantly clear that the metals-using sectors generally have been outperforming not only the rest of manufacturing jobs-wise, but the private sector economy as a whole. Here are the numbers for April through the last three data months (keeping in mind that the November and December figures are both still preliminary):

                                                   thru October     thru November     thru December

entire private sector:                +0.99 percent      +1.13 percent      +1.37 percent

overall manufacturing:           + 0.99 percent      +1.20 percent      +1.45 percent

durable goods:                         +1.25 percent      +1.43 percent      +1.67 percent

fabricated metals products:     +1.33 percent      +1.30 percent      +1.75 percent

non-electrical machinery:       +1.66 percent      +1.90 percent       +2.20 percent

automotive vehicles & parts:  +0.73 percent      +0.58 percent      +0.77 percent

household appliances:             -1.25 percent       -1.41 percent        not available

aerospace products & parts:   +4.45 percent      +5.47 percent        not available

Notably, even in one major sector that’s been lagging – automotive – the pace of net new job creation has quickened a bit lately. And the industry that’s genuinely taken it on the employment chin – appliances – has been dealing both with a separate set of tariffs on large household laundry machines along with a major slump in the American housing sector.

The impact of the Trump administration’s wide-ranging China tariffs is tougher to identify, partly because they only began in July, and partly because Chinese inputs are found in so many manufacturing industries. But here are the data for sectors with extensive global supply chains that often pass through China:

                                                           July thru November     July thru December

entire private sector:                             +0.66 percent              +0.90 percent

overall manufacturing:                         +0.66 percent              +0.93 percent

chemicals:                                            +1.54 percent              +1.40 percent

non-electrical machinery:                    +0.66 percent              +0.96 percent

computer & electronics products:        +0.50 percent              +0.83 percent

automotive vehicles & parts:               +0.90 percent              +1.08 percent

With one exception – computer and electronics products – these globalized industries have outperformed, too. And even in that lagging sector, employment has been growing faster lately.

These results still don’t prove that President Trump was right in claiming that trade wars are “easy to win.” But they sure add to the evidence that, for the United States, they’re eminently winnable. And that the President’s critics are losing. 

(What’s Left of) Our Economy: Orwellian Economic Reporting from Dow Jones

Tags

Chris Williamson, Dow Jones, IHS Markit, manufacturing, Micah Maidenberg, {What's Left of) Our Economy

Everyone should agree that journalists should be skeptical of authority and its claims. In fact, all of us should be. But there’s clearly a point when skepticism goes way over the top, and today’s Dow Jones Newswires coverage of a new report on manufacturing in the United States is a perfect example. And P.S. It’s thrust mirrors that of way too much coverage of the Trump economy.

The subject of the article was the research firm IHS Markit’s survey of American industry in December. I’ve previously written that these reports suffer some significant limitations, mainly because they use a very different methodology than the federal government’s various releases on the economy. But although I hardly take them as gospel, I track them if only because so many other students of the economy – along with investors – follow them to a fault.

And here’s how reporter Micah Maidenberg described the results:

> “An index that gauges manufacturing production declined last month and business confidence looking a year out dropped to its lowest point in more than two years.”

> “The pace of new-order growth was the weakest since September 2017, IHS Market found.”

> “Output and backlogs rose but the pace of job creation last month hit a level last seen in September 2017.

“Business confidence fell to its lowest level since October 2016.”

> “IHS Markit Chief Business Economist Chris Williamson said the weaker pace of economic expansion caused manufacturers to become less upbeat about 2019.

“Companies reported difficulties in finding workers and inputs, but the December survey the index is based on also ‘revealed signs of slower demand growth from customers, as well as rising concerns over the impact of tariffs.'”

“Two-thirds of respondents reporting higher costs attributed the increase to tariffs, he said.”

Apparently the only positive news in the survey? “New export orders grew at an accelerated pace last month, amid stronger demand from foreign customers.”

So clearly, the U.S. domestic manufacturing sector is headed for big trouble, right? Well, as that famous used car company commercial put it, “Not exactly.” Because here’s what IHS Markit also said about the subject:

> “December data indicated a slower, albeit still solid, improvement in the health of the U.S. manufacturing sector.”

> “[I]nflationary pressures eased at the end of 2018.”

> “Production growth remained solid in December, and at a rate that matched that seen in November. The rise in output was attributed to greater new order volumes.”

It’s possible that Maidenberg accentuated the negative because that’s the tack taken by that IHS Markit economist Chris Williamson in his individual comments. He emphasized that:

“Manufacturers reported a weakened pace of expansion at the end of 2018, and grew less upbeat about prospects for 2019. Output and orders books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years. The month rounds of a fourth quarter in which manufacturing production is indicated to have risen at only a modest annualised rate of about 1%.”

The “key findings” highlighted by IHS Markit were comparably gloomy.

But the overall IHS Markit headline number came in at a decidedly expansionary 53.8 (any figure above 50 is regarded as expansionary). IHS Markit itself said that this number “suggested a weaker, but still strong, improvement in operating conditions across the goods producing sector” and that although “ending the year with a softer overall expansion, the final quarterly average of 2018 was strong and quicker than that seen in 2017.”

Overall, manufacturing output kept rising in December. New orders kept increasing. And payrolls kept expanding. For good measure, not only did the prices manufacturers needed to pay for their parts, components, materials, and other inputs ease to an eleven-month low (to a level still deemed higher than average). But the prices manufacturers received for the goods they made “rose at a solid rate.”

Yes, momentum matters, and signs that it’s slackening somewhat are newsworthy. But so is the evidence that U.S.-based manufacturing keeps trucking along – whether reporters, and their editors, want to recognize this or not.

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

Tags

Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

(What’s Left of) Our Economy: Don’t Forget About the Quality of U.S. Growth

Tags

business spending, Financial Crisis, GDP, Great Recession, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, recovery, Trump, {What's Left of) Our Economy

One of the biggest economic questions facing Americans this holiday season – whether they’re heavily into the roller-coaster stock market or not – is whether the nation will slide into recession. I’m skeptical on that score, but I’m still wondering more about what I’ve long regarded as an even more important question: Will the quality of America’s growth start improving meaningfully?

As I’ve often explained, I prioritize this issue because, as significant as maintaining economic growth is, not all growth is created equal. In particular, unhealthy growth eventually tends to produce terrible results – the prime lesson Americans should have learned since the bubble-ized expansion of the previous decade collapsed into a terrifying financial crisis and the worst recession since the Great Depression.

So this looks like a good time once again to check into whether the U.S. growth recipe has changed since then, and if so, how much. As known by RealityChek regulars, the main indicator is how heavily increases in the inflation-adjusted gross domestic product (the growth measure most widely followed by knowledgeable students of the economy) depend on personal consumption and housing. For these are the parts of the economy whose bubble-decade bloat directly sparked the crisis. And the big takeaway as of last week’s release of the final (for now) figures on third quarter GDP? The situation is turning around, but at supertanker-like (i.e., painfully slow) speed.

Specifically, what I’ve called the toxic combination of personal consumption and housing (parts of the economy dominated by spending and borrowing, rather than saving and investing) came in at 72.66 percent of real GDP in the third quarter. This means that it’s decreased consistently since the first quarter of 2017 – the first quarter of the Trump administration’s stewardship of the economy – when it stood at 73.01 percent. For the record, as of the last quarter of the Obama economy (the fourth quarter of 2016), this figure stood at 72.93 percent

So that’s cause for encouragement. It’s also crucial, however, to recall that at the start of the last recession – at the end of 2007 – personal consumption plus housing as a share of real GDP was 71.49 percent. As a result, over that key time-span, the economy has evolved exactly the way we shouldn’t want. But at least by this measure the economy isn’t nearly as bubbly as at its peak during that bubble decade – when the toxic combination reached 73.74 percent of after-inflation GDP.

Another measure of America’s progress toward recreating an “economy built to last” (a wonderfully on-target phrase used by former President Obama) is the share of real GDP devoted business spending. Here, however, the trends show some troubling recent signs of backsliding.

At the start of the current economic recovery, in the middle of 2009, such spending represented 11.19 percent of price-adjusted GDP. The annual numbers since then, through 2017, are presented below:

2010: 11.42 percent

2011: 12.22 percent

2012: 13.08 percent

2013: 13.37 percent

2014: 13.95 percent

2015: 13.80 percent

2016: 13.65 percent

2017: 14.06 percent

Through 2014, in other words, business spending (or investment, if you prefer) as a share of the economy rose healthily. But this growth shifted into reverse in 2015 and 2016, before rebounding in 2017.

For the third quarter of 2018, business investment as a share of real GDP reached 14.61 percent – which represents further improvement. But the quarterly story isn’t as positive:

1Q 18 14.48 percent

2Q 18 14.64 percent

3Q 18 14.61 percent

That is, business investment as a share of inflation-adjusted GDP dipped between the second and third quarters. Is this dip a blip? Or the start of a longer-term decline? I’m not in the crystal ball business; that’s why I’ll be watching these numbers closely going forward – and why I believe you should, too.

(What’s Left of) Our Economy: Could Trump’s Business Tax Cuts Be Working (Kind of) as Advertised?

Tags

capex, capital spending, dividends, Factset.com, mergers and acquisitions, research and development, Standard & Poor's 500, stock buybacks, tax cuts, taxes, Trump, Washington Post, {What's Left of) Our Economy

One of the biggest stories in economics and politics over the past year has been the tax bill championed successfully by both the Trump administration and the Republican-controlled Congress. Economically it’s widely judged to have failed in its primary stated mission: encouraging more productive investment in the U.S. economy. And because it supposedly did little more than shower cash on already profit-rich corporations that overwhelmingly put it to supposedly unproductive uses like share buybacks and dividend payments (see, e.g., here and here), the American public rightly recognized it as a giveaway to tycoons and The Rich generally, and viewed it as one big reason to vote GOP candidates out of office in the recent midterm elections.

What a surprise, then, to come across evidence that the $1.5 trillion in business tax cuts so far have done a respectable job of working as advertised.

According to the Washington Post‘s Michael Heath, new research from Standard and Poor’s shows that since the tax package was passed, the firm’s well-known group of the 500 largest publicly traded U.S. companies have performed as follows:

>Through the first three quarters of this year, they’ve boosted share buybacks – which support the value of company stock and in the process enrich executives paid largely based on the increase (or decrease) in these stocks’ value – by 11.84 percent.

>During the same period, they’ve hiked capital spending (on new plant and equipment) by 19 percent.

>Over this span, they’ve boosted research and development spending by 34 percent.

>During the first eleven months of the year, their dividend payouts have been virtually unchanged.

When the entire American business universe is examined, the picture looks somewhat different – at least through the first half of this year. According to this summary of research from Goldman Sachs:

>buybacks rose 48 percent

>capital spending rose 19 percent

>research and development spending rose 14 percent.

What’s noteworthy about these figures, though, is that they indicate that the larger, indeed multinational U.S.-based companies spent their tax windfalls more productively than smaller, largely domestically focused firms. That’s noteworthy because one of the principal objectives of the tax cuts was to persuade the multinationals to stop stashing so much of their earnings abroad and bring these monies back home to stoke growth and jobs. So it appears that, to a significant extent, that’s what they’ve done.

Of course, the real results of the effects of the tax cuts (or any other policy initiative) can only be assessed accurately not simply by comparing year-on-year rates of change in various metrics, but examining how these rates of change have differed (if at all) from those of years before the initiative went into effect. I haven’t yet located the data for most of these indicators, but the chart below combined with the Washington Post figures for capital spending for the S&P 500 makes clear that it’s been growing much faster since the cuts were passed than before.

One area the Post didn’t look at, though, can’t be neglected: mergers and acquisitions. The numbers indicate that, measured by value, such activity increased much faster between 2017 and 2018 (for the first three quarters of the year) than between 2016 and 2017 – by 33.47 percent to 1.05 percent. (My sources are the 2016-18 data published by Factset.com.  Here’s its latest report.) The absolute numbers are sizable, too – the value of these transactions rose by more than $387.5 billion from January-through-September, 2017 to the same period this year. (Note: These figures are only authorized expenditures – but reportedly there’s evidence that 85 percent wind up getting made.)

But here (as elsewhere, for that matter) is where we run into a big complication that comes up whenever a policy initiative is judged: What changes are attributable to this move, and what changes to other factors? These other factors include other policies (like interest rate movements both announced and suggested by the Federal Reserve, or regulatory or trade policy changes), or existing or evolving business decisions on deploying capital (based on corporate judgments regarding likely customer demand that stem from the overall state of the economy or particular markets, and on how these situations are considered likely to change).

But all the same, a reasonable, defensible bottom line conclusion seems to be that productive business spending since the tax cuts’ passage is rising at a faster rate than before passage, and that the tax package has played a discernible role. Moreover, some of the other plausible reasons for this acceleration also are arguably attributable to Trump administration policies – at least in part.  Faster overall economic growth and regulatory reform are two examples. Trade policy might be a third.

Moreover, I’m making these points as someone who’s argued that President Trump’s prioritization of the tax cuts and Obamacare repeal was a major first-year mistakes, at least politically. Both should have taken a backseat to infrastructure building in particular. I’ve even expressed skepticism about the cuts’ likely economic impact.

But economically, the administration and its supporters seem to have had (and still have) a pretty good story to tell about the tax cuts – which could have bolstered their political appeal. Which means that a bigger mystery than the cuts’ actual effects could be why the administration told it so ineffectively.