(What’s Left of) Our Economy: When Trade Reporters Can’t (Or Won’t?) Read Their Own Chart

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Bloomberg, CCP Virus, China, coronavirus, COVID 19, exports, global financial crisis, goods trade, Great Recession, imports, services trade, Trade, {What's Left of) Our Economy

I was going to focus this morning on the new U.S. official productivity data but then came across a chart about U.S.-China trade flows that was so ditzy that the data it portrayed completely belied a crucial part of the headline. So the productivity analysis will have to wait a bit. 

Here’s the chart, including the subtitle,”Despite heated rhetoric, trade with China shows no signs of slowing down,” which appeared in this version of a new Bloomberg report:

But unless I’ve suddenly developed real vision problems, it’s clear that that’s exactly what the chart shows since 2014 as compared to the years before. Here’s the actual data on annual changes in the value of bilateral goods exports and imports courtesy of the same U.S. Census Bureau figures on which the Bloomberg reporters in question based their conclusion:

Between 2014 and 2021, two-way Sino-American goods trade added up to $656.38 billion. Since 2014, it rose by 10.85 percent.

Between 2007 and 2014, this total rose by 77.08 percent. That’s not a slowdown – and a big one?

Yes, the Bloomberg chart only goes through November, 2022 (the latest data available). But two-way U.S.-China trade advanced by just 7.75 percent between the first eleven months of 2021 and the first eleven months of last year, so December’s results won’t make much of a difference.

Has the CCP Virus distorted the picture? Of course it’s affected the trade flows by significantly slowing the economies of both countries. But the 2007-2008 global financial crisis and ensuing Great Recession made a big difference, too. And although its impact on China’s economy didn’t remotely match the impact on America, the U.S. economy’s long recovery from that major slump was the weakest from a recession on record. And still bilateral goods trade (especially goods imports from China) surged.

Would counting services trade make a difference? No. Comparing changes in these sectors with those in goods sectors is complicated by the lag with which such exports and imports are reported officially. In fact, the latest numbers I could find go only through 2021. But as made clear by those 2021 figures supplied by the Congressional Research Service ($61.0 billion), and numbers from the U.S. Trade Representative’s office for the final pre-pandemic year 2019 ($76.7 billion), they’re far too small to change the trends notably.

It’s also crucial to observe that the headline claim about U.S.-China trade breaking records is fatally flawed, too. For it omits vital context.  Sure, in absolute terms, this commerce is at an all-time high. But much more important, as a share of the U.S. economy?  Not even close. In 2021, combined Sino-American goods imports and exports came to 2.82 percent of total U.S. output.  In 2014, just to use one comparison, this number was 3.37 percent.   

The big question raised by these discrepancies between the Bloomberg reporters’ claims and the facts is “Why were they ignored?” I’m not a mind-reader, but here’s my hunch: They stemmed from a desire – maybe witting, maybe not – to reinforce the economics and trade establishment tropes that (a) international trade is driven overwhelmingly by market forces; (b) that there’s nothing constructive or even significant governments can do (e.g., impose tariffs or tech controls) to intervene over any meaningful length of time; and (c) that because China’s become such an economic juggernaut (even with its current struggles) bilateral trade is nothing less than a force of nature that’s simply unstoppable in the larger scheme of things.

None of these contentions is crazy on its face. For example, as the pandemic has ironically demonstrated, literal forces of nature can play a huge role in impacting trade flows and their interpretation. (Unless the CCP Virus was produced by gain-of-function research?) So can non-policy-related influences like the Laws of Small and Large numbers, which tell us that big percentage changes are easier to generate from modest starting points than from less modest starting points.

But as of now, by the main measures, a major slowdown in U.S.-China trade unquestionably has taken place, and the possible policy implications shouldn’t be overlooked:  Since the erroneous conventional wisdom strongly supported the hands-off approach taken by pre-Trump administrations, this loss of momentum looks very much like an endorsement of the hands-on strategy pursued since. 

 

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(What’s Left of) Our Economy: Worker Pay Keeps Lagging, Not Leading, U.S. Inflation

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benefits, core services, cost of living, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, private sector, services, stimulus, wages, workers, {What's Left of) Our Economy

The Federal Reserve, the agency with the U.S. government’s main inflation-fighting responsibilities, has made clear that it’s paying special attention to worker pay to figure out whether it’s getting living costs under control or not, and that its favored measure of pay is the Labor Department’s Employment Cost Index (ECI).

Therefore, it’s genuinely important that the new ECI (for the fourth quarter of last year) came out this morning. Even more important, the results undercut the widespread beliefs (especially by Fed leaders) both that worker compensation has been a driving force behind the inflation America has experienced so far, and/or has great potential to keep it raging.

Consequently, the new numbers seem likely to influence greatly the big choice before the Fed. Will it keep trying to raise the cost of borrowing for consumers and businesses alike in the hope of slowing spending enough to cool inflation even at the risk of producing a recession? Or will it decide that it’s made enough inflation progress already, and can tolerate current levels of economic growth – which the latest data tell us are pretty good) rather than stepping on the brakes harder.

The central bank likes the ECI better than the hourly and weekly also put out by Labor for two main reasons. First, it measures salaries and non-cash benefits, too. And second, it takes into account what economists call compositional effects.

That is, the standard wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by stripping out the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

According to the new ECI report, when you adjust for the cost of living, “private wages and salaries declined 1.2 percent for the 12 months ending December 2022” and “ Inflation-adjusted benefit costs in the private sector declined 1.5 percent over that same period.”

So for the last year, total compensation has risen more slowly, rather than faster, than inflation, That’s not the kind of fuel I’d want in my vehicle or home. (As known by RealityChek regulars, private sector trends are the ones that count because compensation levels there are set largely by market forces, rather than mainly by politicians’ decisions, as is the case for public sector workers.)

Blame-the-workers (or their bosses) types can argue that since late 2021, compensation has caught up some with inflation rates. Specifically, from December, 2020 through December, 2021, it had fallen in after-inflation terms by 2.5 percent. Between the next two Decembers, it had dropped by less than half that rate – 1.2 percent.

But it was still down – and this during a period when private business claimed it was frantic trying to fill unprecedented numbers of job openings in absolute terms.

Moreover, the new ECI release contained signs that even this modest compensation catch up could soon reverse itself. Between the first quarter of last year and the fourth, in pre-inflation terms, the total compensation increase weakened from 1.4 percent to one percent even. And for what it’s worth, both economists and CEOs still judge that the odds of a recession this year are well over 50 percent.

Fed Chair Jerome Powell has also expressed concerns about wage trends in what he calls the core service sector, because, as he put it at the end of last November:

“This is the largest of our three categories, constituting more than half of the core PCE index.[the Fed’s preferred gauge of prices]. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”

The ECI releases don’t contain figures for this group, but if you look at total compensation for private service sector workers, it’s tough to see how they’ve been en fuego lately, either. Between the first and fourth quarter of last year, their rate of increase dropped by the exact same rate as that for the private sector overall. And although most economic growth forecasts lately have been far too pessimistic, almost no one seems to expect the current expansion to strengthen.

And if workers haven’t been able to reap a major inflation-adjusted compensation bonanza in the conditions that have prevailed for the last few months, or during earlier strong growth bursts since the CCP Virus struck the United States in force, when will they?

I remain concerned that living costs could remain worrisomely high – though not that they’ll rocket up again – because consumers still have lots of spending power, which will keep giving businesses lots of pricing power. But that’s not because Americans’ pay has exploded. It’s because government stimulus has been so mammoth in recent years, and could well stay unnaturally high.

Further, since such government spending is politically popular – and will remain more tempting for politicians to approve as the next election cycle approaches – my foreseeable-future forecast for the U.S. economy remains stagflation.  In other words, growth will be rather stagnant, and inflation will stay way too high.  And as the new ECI release suggests, workers could be left further behind the living cost eight ball than ever.       

(What’s Left of) Our Economy: The U.S. Inflation Outlook Keeps Getting Curious-er and Curious-er

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baseline effect, core PCE, cost of living, energy prices, Federal Reserve, food prices, inflation, PCE, {What's Left of) Our Economy

Today’s official report on the measure for U.S. consumer inflation preferred by the Federal Reserve (covering December) looks awfully similar to the higher profile Consumer Price Index (CPI) figures released about two weeks ago. Both create portraits of price increases that keep clouding the inflation outlook.

These new results for the price index for Personal Consumption Expenditures (PCE) warrant great attention because the Fed is the government agency with the prime responsibility for controlling living costs. And of course, if the nation’s central bankers believe that prices are rising too fast, they’ll keep acting to slow economic growth to reduce the rate – and could even generate a recession if need be in their eyes.

The problem for them –and the rest of us: Although the figures revealing the most about what economists consider the economy’s underlying inflation rate are down on a year-on-year basis, they’re up on a monthly basis.

Such “core inflation” numbers strip out the prices of food and energy, because they’re supposedly volatile for reasons unrelated to the economy’s fundamental vulnerability to inflation.

The good news is that their increase between December, 2021 and December, 2022 (4.4 percent) was weaker than that between November, 2021 and November, 2022 (4.7 percent).

The bad news is that their monthly increase in December (0.3 percent) was faster than that in November (0.2 percent). So although annual core prices have been steadily and significantly decelerating (from a peak of 5.3 percent last February), their monthly counterparts may be picking up steam – although they’re still just half the rate they were worsening at their peak (0.6 percent) in June and August.

Compounding the bad news: The baseline effect for core annual PCE is still pretty strong. That is, its yearly increases are no longer reflecting much of a catch-up effect following a period when inflation was unusually weak. Instead, they’re coming on top of inflation for the previous year that was unusually strong.

Specifically, that 4.7 percent annual core PCE inflation rate in November was coming off an identical result between the previous Novembers that was that year’s hottest to that point. But December’s 4.4 percent annual core PCE increase followed a rise for the previous Decembers that was even worse – 4.9 percent.

Monthly December headline PCE inflation (which includes the food and energy prices) stayed at the same 0.1 percent pace as in November. Since they’re among the lower numbers for the year, they do signal that price increases are cooling. In fact, if this trend continues, or if monthly 0.1 percent headline PCE inflation continues, the annual rate would become 1.2 percent – well below the Fed’s two percent target. Therefore, if the central bank focuses here, it could well soon conclude that its economy-slowing moves so far are working, and that more won’t be needed.

The headline annual PCE story isn’t quite so encouraging, but does add modestly to evidence of waning inflation. The five percent yearly increase is significantly lower than the peak of seven percent hit in June. But the June baseline rate was only four percent. December’s was 5.8 percent.

Better news comes from the comparison between November and December. Between those two months this year, annual headline PCE inflation fell from 5.5 percent to five percent. The baseline figure rose – but not by as much (just 5.6 percent to 5.8 percent).

Because for the trends, anyway, these PCE inflation figures so closely resemble their CPI counterparts, my outlook for future price increases has remained the same as when I posted most recently on the latter:  a shallow recession followed by a (possibly long) period of 1970s-style stagflation (with twenty-first century characteristics, as the Chinese might say, to be sure).     

(What’s Left of) Our Economy: A Glass Half Empty or Full Story for the Inflation-Adjusted Trade Deficit?

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exports, GDP, goods trade, gross domestic product, imports, real GDP, real trade deficit, services trade, Trade, trade deficit, {What's Left of) Our Economy

The trade highlights of yesterday’s first official estimate of U.S. economic growth in the fourth quarter of last year and full-year 2022 provide a great lesson on how the pictures drawn by data can vary greatly depending on which time frame you’re looking at – even within the span of a single year.

The quarter-to-quarter numbers look rather good – in terms of deficit reduction – but the annual numbers are pretty discouraging.

We’ll start with those quarterly data, which show that the inflation-adjusted trade deficit shrank for the third consecutive time in the fourth quarter – by 2.87 percent, from $1.2688 trillion at annual rates to $1.2324 trillion. This first such stretch since the year between the second quarter of 2019 through the second quarter of 2020, brought the quarterly shortfall down to its lowest level since the second quarter of 2021 ($1.2039 trillion annualized).

These results also confirmed that the fourth quarter was the second straight to see the economy expand as the deficit contracted. This marked the first time that’s been the case since the period between the second and fourth quarters of 2019, and signals that the economy has been growing healthily, relying more on investment and production than on borrowing and spending.

One sign of regression along these lines: The trade deficit declined in the previous two quarters because exports rose and imports dropped. In the fourth quarter, however, both decreased.

Moreover, the after inflation combined goods and services trade deficit is still 47.98 percent above its level in the fourth quarter of 2019 – just before the United States and its economy began suffering the full effects of the CCP Virus. As of the third quarter, this increase was 52.35 percent.

But overall, the new quarterly statistics still warrant a so-far-so-good interpretation.

Trade’s contribution to the fourth quarter’s growth was much smaller than in the third quarter. Then, it fueled 2.86 percentage points of the 3.20 percent real annual advance – the biggest absolute total in 42 years (but far from a long-term high in relative terms). Without that trade ooost, all else equal, the economy would have grown by a measly 0.34 percent after inflation at annual rates – just a little over a tenth as fast.

In the fourth quarter, trade’s growth contribution was just 0.56 percentage points of 2.86 percent real annualized growth. That’s still positive, though. And if not for this narrowing of the gap, constant dollar GDP would have still expanded, but just by a so-so 2.30 percent.

Drilling down, the new GDP report pegs fourth quarter sequential total exports at $2.5955 trillion in constant dollars at annual rates. This drop was the first since the first quarter of last year, but the slip was just 0.33 percent from the third quarter’s record $2.6041 trillion and the second best total ever.. At the same time, real exports are still only 0.92 percent higher than in the last pre-pandemic quarter. As of 3Q, these sales were 1.26 percent higher.

Total price-adjusted imports retreated, too – and as indicated above for the second consecutive quarter. That’s the longest such streak since the year between the second quarter of 2019 and the peak pandemic-y second quarter of 2020. The actual decrease was steeper than that of exports – 1.16 percent, to $3.8729 trillion at annual rates. Yet these purchases are fully 13.75 percent higher than just before the CCP Virus’ arrival stateside in full force. – roughly where they stood as of te third quarter.

The real deficit in goods sank by 2.84 percent on quarter, from $1.4324 trillion at annual rates to $1.3916 trillion. This sequential decrease was the third straight (the first such span since the peak CCP Virus-dominated period between the fourth quarter of 2019 and the second quarter of 2020). And it pushed this trade gap down to its lowest total since the first quarter of 2021’s $1.3809 trillion. Since just before the pandemic’s fourth quarter 2019 arrival stateside in force, the goods trade deficit is up by 27.54 percent. As of the third quarter, this increase was 34.20 percent.

The longstanding surplus in services jumped by 12.78 percent sequentially, from a price adjusted $163.5 billion annualized to $184.4 billion –the highest such level since the $187.50 billion of the fourth quarter of 2020. Yet reflecting the outsized hit taken by services industries since the virus struck the nation, this surplus is still 21.80 percent lower than in that immediately pre-Covid fourth quarter of 2019. As of this year’s third quarter, that decrease was 30.66 percent.

After-inflation goods exports dipped by 1.77 percent in the fourth quarter, from the $1.9101 trillion annualized total in the third quarter (marking the third straight quarterly record) to $1.8673 trillion. Real goods exports are now 4.51 percent greater than in the fourth quarter of 2019, versus the 6.41percent calculable as of the third quarter.

Constant dollar goods imports in the fourth quarter fell for te third consecutive time, too – a firs stnce the fourth quarter, 2019 through second quarter, 2020 period. The decrease of 1.43 percent, from $3.3334 trillion at annual rates to $3.2856 trillion, produced the lowest such goods import figure since the $3.2582 in the fourth quarter of 2021. In inflation-adjusted terms, goods imports are now 14.21 percent higher than in the immediate pre-pandemic-y fourth quarter of 2019, versus their 16.83 percent increase as of the third quarter.

Services exports in the fourth quarter expanded from $722.5 billion after inflation at annual rates to $740 billion, a 2.42 percent improvement that represented the tenth straight sequential increase in thse sales. But real services exports are still down by 5.44 percent since the fourth quarter of 2019, versus 8.17 percent off as of the third quarter.

Inflation-adjusted services imports were up for a tenth straight quarter, too, in the fourth quarter, but inched up just 0.11 percent, from an annualized $559 billion to $559.6 billion. As a result, their now 15.61 percent larger than just before the pandemic’s arrival in force, versus 14.52 percent as of the third quarter.

Many of the annual figures, however, showed deterioration. Between 2021 and 2022, the combined goods and services trade gap hit its ninth straight yearly record in real terms, as the gap widened by 9.87 percent, from $1.2334 trillion annualized to $1.3551 trillion.

In addition, as a share of real gross domestic product (GDP – the standard measure of the economy’s size), the trade gap set its third straight all-time high, worsening from 6.29 percent to 6.77 percent.

The trade shortfall’s yearly rise subtracted 0.40 percentage points from 2022’s 2.08 percent price -adjusted inflation adjusted growth – a share smaller in both absolute and relative terms than in 2021, when the larger trade deficit sliced 1.25 percentage points from 5.95 percent growth. Both figures are far from records.

Total real exports climbed for the second straight year in 2022, from $2.3668 trillion to 2.5384 trillion, with the 7.25 percent growth rate the strongest since 2010’s 12.88 percent in 2010 – when the economy was recovering from the Great Recession that followed the Global Financial Crisis.

Total real imports posted their second consecutive gain, too, as well as their second straight record. The 8.15 percent increase brought the total to $3.8935 trillion.

Another new all-time annual high in 2022 was set by the constant dollar goods trade deficit, and the record in this case was the fourth in a row. By widening by 11.50 percent, the gap hit $1.5220 trillion.

And continuing the bad news, the real services trade surplus slumped by 5.23 percent in 2022. Moreover, the $162.8 billion figure was the lowest since 2010’s $158.6 billion.

On the export front, constant dollar overeas sales of goods grew by 6.33 percent, from $1.7289 trillion to $1.8383`trillion. The increase was the second straight and the total a new record – topping 2019’s $1.7915 trillion by 2.61 percent.

Yet real goods imports rose even faster. The 6.91 percent advance brought them from $3.1430 trillion to $3.3603 trillion – a second consecutive all-time high.

After-inflation services exports jumped by 9.90 percent from 2021-2022, the biggest such increasesince 2007’s 13.08 percent. And the totals expanded from $656.9 billion to $717.3 billion..

As for price-adjusted services imports, their annual surge of 14.52 percent – from $484.2 billion to $554.0 billion was the fastest ever, surpassing even last year’s robust 12.27 percent.

As always with pandemict or post-pandemic (take your pick) U.S. economic data, the outlook for real trade flows is murky, and dependent on many big unknowables – mainly how much faster and higher the Federal Reserve will hike interest rates in order to fight inflation by slowing the economy, whether it will succeed, how long its inflation-fighting moves will take to impact economic growth and consumer spending fully, how China’s reopening after months of a lockdown-heavy Zero Covid policy will proceed, and whether growth in the rest of the world will perk up or slacken.

My hunch, for the short-term anyway, is that worse inflation-adjusted trade results may keep coming. For example, the quarterly real trade deficit decrease was the smallest of that current three-quarter string. Indeed, it was much smaller than the 11.30 percent plunge between the second and third quarters – which was the greatest since the 17.95 percent nosedive between the first and second quarters of 2009, when the economy was still mired in the Great Recession that followed the Global Financial Crisis.of 2007-08.

In addition, the latest government report projection for the monthly trade deficit (measured in pre-inflation dollars) shows a significant increase in the goods gap, which makes up the lion’s share of both total U.S. trade flows and the deficit. And even if the price-adjusted trade gap continues to fall, such results will be all the less impressive against the backdrop of the economic slowdown and even contraction that’s still being widely predicted.

More specifically, I suspect that American economic growth will either at least weaken as the trade deficit moves up, or that GDP will keep plowing ahead because personal consumption remains resilient, which will keep the trade shortfall on a rebounding course.  

(What’s Left of) Our Economy: U.S. Manufacturing Remains Stuck in Pandemic Aftermath Mode

Tags

CCP Virus, coronavirus, COVID 19, durable goods, global financial crisis, Great Recession, manufacturing, nondurable goods, recession, {What's Left of) Our Economy

‘Tis still the season – and it will continue for a while to be the season – for year-end 2022 economic data, and today we’ll examine the list of the production growth winners and losers in domestic manufacturing. The big takeaway is that U.S.-based industry’s output patterns are still being shaped by the fading but ongoing aftermath of the CCP Virus pandemic. The main evidence? The unusual  fluctuations in manufacturing ouput.

But before getting to the results from the twenty widest manufacturing categories tracked by the Federal Reserve, let’s review the even bigger picture results, which provide an indication of the dramatic ups and downs experienced recently by industry.

Manufacturing’s overall production last year dipped by 0.41 percent after adjusting for inflation (the measure most closely followed by students of the economy). So by the standard definitions (two straight quarters of contraction) the sector is in recession. Moreover, excepting the peak pandemic year of 2019-20, this latest annual output showing was U.S.-based manufacturers’ weakest since the 2.43 percent yearly drop in 2019.

At the same time, this decrease followed 2021’s 4.19 percent gain in constant dollar manufacturing production – the best such showing since the 6.48 percent registered in 2010, early during the recovery from the Great Recession triggered by the Global Financial Crisis of 2007-08.

Narrowing the focus slightly, production in the durable goods super-category climbed between 2021 and 2022 by 0.85 percent. But that relatively feeble expansion came right after the 4.79 percent price-adjusted growth the previous year – its best such performance since 2011’s 5.96 percent.

In nondurable goods,after-inflation production sank last year by 1.72 percent. But the previous year’s 3.58 percent expansion was the strongest since the 3.89 percent way back in 2004.

Big fluctuations can be seen in the statistics for the aforementioned “Big 20.” In the left-hand column below is how their constant dollar output grew or shrank last year in percentage terms, listed from best to worst. In the right-hand column are the counterpart numbers for 2021, in the same order.

1. aerospace & misc, transportation:  10.87    petroleum and coal products:   13.99

2. apparel and leather goods:              10.11   machinery:                                 11.98

3. nonmetallic mineral product:            5.69  computer & electronic product:  9.20 

4. automotive:                                       5.05 miscellaneous durable goods:      6.38

5. fabricated metal product:                  1.75  chemicals:                                   6.37

6. miscellaneous durable goods:           1.60  primary metals:                          5.87  

7. food, beverage and tobaco:                0.11  fabricated metal product:          5.84 

8. elec equip, appliances:                      -0.44 aerospace,misc transportation:  5.39

9. plastic and rubber products              -1.07 elec equip., appliances:              5.35

10.printing                                            -1.19 textiles & products:                   4.56

11. chemicals:                                       -2.01 furniture:                                   4.11

12. petroleum & coal products:            -2.33 apparel & leather goods:           4.11

13. primary metals:                               -2.83 printing:                                    3.26

14. machinery:                                      -2.89 plastics & rubber products:      1.99

15. computer & electronic product:      -2.91 paper:                                       0.90 

16. misc.nondurable goods:                 -3.56 wood product:                           0.13

17. furniture:                                        -5.19 nonmetallic mineral product:   -0.17  

18. wood product:                                -6.14 food, beverage & tobacco:       -0.35 

19. paper:                                             -8.23 automotive:                              -4.29    

20. textiles & products:                     -11.98 misc nondurable goods            -6.00

The weakness of 2022 comes through from noting that of these twenty industries, inflation-adjusted production fell in fully 13.  In 2021, such losers nubeed only five.

As for the fluctuations, in 2022, the after-inflation growth for five of the twenty were the worst since the Great Recession years of 2008 and 2009:  wood product, computer and electronic product, furniture, textiles and products, and paper. And for the latter two, that “worst since the Great Recession” description includes their results for the terrible peak pandemic year 2020. In 2021, no sectors achieved that dubious distinction.     

But in 2021, five sectors recorded their best annual price-adjusted production increases since 2010 – the first full year of recovery after the Great Recession:  primary metal, fabricated metal product, machinery, computer and electronic product, and electrical equipment and appliances.   

From the perspective of today, domestic manufacturing looks like it’s been on a roller-coaster, with 2021 being a sizable leg up followed by a small leg down last year. The big question facing U.S.-based manufacturing (assuming no more pandemics or new conflicts breaking out in Europe or Asia or or other black swan events) is how deep a dive that leg down will become if the broader economy slows meaningfully or falls into a new recession – as domestic industry already has.     

                                                       

(What’s Left of) Our Economy: Still More Evidence of Weakening U.S. Manufacturing

Tags

capacity utilization, durable goods, manufacturing, nondurable goods, {What's Left of) Our Economy

On top of lousy new job and output results, we can now make it a discouraging trifecta for U.S. domestic manufacturing: The new output figures released by the Federal Reserve Wednesday also show that capacity utilization keeps falling, too.

This is a statistic I haven’t followed for a while, but many students of the economy see capacity utilzation as a key barometer of industry’s health, and when you consider the definition, it’s easy to see why. Capacity utilization measures the share of the nation’s factory equipment that’s actually in use, and not sitting idle. So it says lots about what kind of demand manufacturers are seeing for their goods.

Therefore, it can’t possibly be good news that for manufacturing overall, capacity utilization fell to 77.53 percent – the lowest such figure since September, 2021’s 77.14 percent.

Moreover, capacity utilization is down from its post-pandemic peak of 80.10 percent last April. And it’s back below its historic average between 1972 and 2021 of 78.20 percent. Moreover, the monthly sequential drop of 1.39 percent was one of several recent manufacturing results that have hit their worst since the peak of the CCP Virus’ devastating first wave, in April, 2020. In that case, capacity utilization cratered by 15.31 percent sequentially.

As far as the super categories are concerned, utilization in durable goods was down monthly in December by 1.21percent to 76.10 percent – also the lowest figure since September, 2021 (which was 74.84 percent). In addition, this gauge of durable goods activity has dropped by 3.32 percent since last peaking (also in April) at 78.72 percent

Non-durable goods’ capacity utilization rate in December rate was higher in absolute terms (79.20 percent) than that for either manufacturing generally or durable goods. But it tumbled from November’s read by a steeper 1.58 percent. Since its peak last March, it’s decreased by 3.27 percent.

These December results are still preliminary. And optimists can note that capacity utilization in all three categories is still slightly higher than in February, 2020, the last full data month before the pandemic’s arrival in the United States in force.

But the recent trend is unmistakably gloomy, and entirely consistent with the likelihood that, like the entire economy, domestic manufacturing is in for some tough sledding over the next few months.

(What’s Left of) Our Economy: Signs of the Wrong Kind of Inflation Progress

Tags

baseline effect, Biden administration, core PPI, cost of living, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, producer prices, recession, SPR, stimulus, Strategic Petroleum Reserve, wholesale inflation, {What's Left of) Our Economy

Yesterday’s official U.S. report on wholesale price inflation (for December) finally contained some modest signs of genuine cooling, but that’s not necessarily good news. The biggest reason seems to be a significant slowing in the nation’s economic growth and further confirmation that America remains far from creating a truly healthy economy – one that can expand adequately without either racking up towering debts or, more recently, igniting decades-high price increases.

As I’ve written previously, changes in this Producer Price Index (PPI) influence changes in consumer prices, but the relationship is more complex than often thought. Because wholesale prices represent costs for producing the goods and services that businesses sell to each other and to consumers, companies understandably try to pass increases on to their final customers – but can’t always do so.

That’s because the final result depends on these customers’ buying power. If they’ve got lots of it, chances are they’ll pay up, enabling businesses to preserve and even boost profits. If they don’t, they won’t, and margins will suffer with one big caveat – the ability of the sellers to become more efficient, and generate cost-savings elsewhere.

At the same time, if final customers feel flush with cash and/or credit, the businesses that supply them won’t necessarily, or even often, cut their selling prices if their costs decrease or stabilize. Why should they? With certain exceptions (like a prioritizing gaining market share), they’ll naturally charge whatever their customers seem willing to pay. 

And because some major signs of mounting economy-wide weakness have appeared recently (especially falling consumer spending), that new evidence of softer wholesale prices seems to add to the evidence that a recession of some kind is looming.

The best wholesale inflation news came in the new monthly numbers. The headline figure actually fell by 0.50 percent between November and December. That’s the most encouraging such result since this PPI dropped 1.29 percent sequentially in April, 2020 – when the CCP Virus’ first wave plunged the economy into a short but steep slump.

The core figure (which strips out food, energy, and a category called trade services, supposedly because they’re volatile for reasons largely unrelated to the economy’s fundamental vulnerability to inflation), did rise month-to-month, but only by a tiny 0.09 percent. That was the best such result since a fractionally lower figure in November, 2020.

Almost as good, the revisions for both for recent months didn’t meaningfully change this picture – though they do remind that PPI data can change non-trivially during the several months when they’re still considered preliminary.

The annual headline and core PPI figures did exhibit something of the baseline effect that always should be kept in mind when evaluating economic trends. That is, it’s essential to know whether improvements of worsening of data merely represent returns to a longer-term norm after stretches of abnomality. In the case of post-CCP Virus inflation readings, the big spike in price increases that began in early 2021 largely reflected a (ragged) normalization of economic activity and business pricing power that followed many months in 2020 when both were unusually subdued.

But for both measures of wholesale prices, the baseline effect appeared to be fading. For headline PPI, the December annual increase was 6.22 percent – the best such result since March, 2021’s 4.06 percent, and a big decline from November’s downwardly revised 7.34 percent. The baseline figure (headline annual PPI from December, 2020 through December, 2021) was a terrible 10.18 percent. But it was only slightly higher than its November counterpart of 9.94 percent.

Since the scariest aspect of inflation is its tendency to feed on itself, and keep spiraling higher, that feeble increase in the baseline figure over the last two months could well signal a loss of momentum. 

The annual core PPI statistics tell an almost identical story. The latest annual December increase of 4.58 percent was considerably lower than November’s upwardly revised 4.91 percent, and the best such result since May, 2021’s 5.25 percent. But the December baseline increase of 7.09 percent was barely faster than November’s 7.03 percent.

At the same time, the same kinds of big questions that hang over the consumer inflation figure hang over the wholesale inflation figure. For example, the annual increase in wholesale energy prices nosedived last year from 57.05 percent in June to just 8.58 percent in December. On a monthly basis, they’ve plummeted in absolute terms since June by 21.18 percent.

But these impressive results stemmed mainly from historically large releases of oil from the nation’s Strategic Petroleum Reserve (which of course expanded supply) and the Chinese economic growth that was severely depressed by dictator Xi Jinping’s wildly over-the-top Zero Covid policy. and therefore dampened global oil demand enough to affect prices in the United States.

The petroleum reserve, however, is now down to its lowest level in 39 years, which explains why far from contemplating further sales, the Biden administration is now slowly starting to refill it. Morever, China has now decided (for now) to reopen its economy, which will again put upward pressure on energy prices.

In addition, one lesson that Americans should have learned from this latest spell of inflationis that wages and other forms of income (including investment income) are hardly the only sources of consumer buying power. The government can supply oceans of it, too, and as I wrote yesterday, it’s entirely possible that U.S. politicians and Federal Reserve officials become recession-phobic that they decide to subsidize Americans’ buying power again. Hence my medium-term forecast of stagflation – a stretch of uncomfortably low growth and stubbornly high prices. 

That’s certainly better than a future of continually rising inflation. But anyone describing the current and likely economic situation facing Americans as “good” is using a depressingly low bar.

(What’s Left of) Our Economy: Today’s Really Recession-y U.S. Manufacturing Production Report

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aircraft, aircraft parts, Federal Reserve, machinery, manufacturing, medical devices, medical equipment, miscellaneous transportation equipment, nonmetallic mineral products, output, petroleum and coal products, pharmaceuticals, primary metals, printing, production, real output, recession, semiconductors, soft landing, {What's Left of) Our Economy

A U.S. recession is either imminent or already here – that’s the main message being strongly suggested by today’s release by the Federal Reserve on inflation-adjusted manufacturing production (for December).

Not only did industry’s real output sink by 1.30 percent sequentially – the worst such result since February, 2021’s 3.64 percent weather-affected plunge. But November’s initially reported 0.62 percent retreat was revised down to one of 1.10 percent.

Two straight monthly drops of one percent or more each haven’t been recorded by U.S.-based manufacturers since the February through April, 2020 period – when the arrival of the CCP Virus began roiling American life and the national economy, and indeed threw the latter into a deep downturn.

The new figures pushed price-adjusted U.S. manufacturing production into contraction for full-year 2022 – by 0.41 percent. That’s a major deterioration from the 4.19 percent constant dollar gain in 2021 – the strongest such showing since the 6.48 percent achieved in 2010, during the recovery from the Global Financial Crisis and ensuing Great Recession.

Moreover, since just before the pandemic arrived in force in the United States (February, 2020), after-inflation manufactuing has now grown by just 1.21 percent. As of last month’s industrial production release, this figure stood at 3.07 percent.

Of the twenty broadest manufacturing sub-sectors tracked by the Fed, only three boosted monthly inflation-adjusted production in December: aeropace and miscellaneous transportation equipment (0.96 percent), primary metals (0.84 percent), and nononmetallic mineral products (0.65 percent).

The biggest losers among their 17 other counterparts were machinery and printing and related support activities (3.37 percent each), and petroleum and coal products (3.13 percent).

Especially concerning, and continuing a pattern identified last month – for machinery and printing, these results were the worst since April, 2020, at the peak of the CCP Virus’ devastating first wave, when their real output collapsed month-to-month by 18.64 percent and 23.10 percent, respectively. Meanwhile, the monthly decrease in petroleum and coal products was its biggest since weather-affected February, 2021.

And as known by RealityChek regulars, machinery’s tumble last month is a particularly bright red flag. Because its products are used so widely in sectors inside and outside of manufacturing – including by growing companies or firms counting on continued or faster growth – its fortunes are seen as a good predictor of the economy’s future. Therefore, a big machinery production decrease (the second in a row) could well mean that business activity across the national board is at least slowing markedly and won’t be reviving any time soon.

The December numbers were only somewhat better for sectors of special interest since the CCP Virus’ arrival stateside. Sequential increases were registered in pharmaceuticals and medicine (by 1.10 percent) and aircraft and parts (by 1.49 percent). But price-adjusted output fell in automotive (by 1.03 percent), the shortage-plagued semiconductor industry (by 1.20 percent), and the medical equipment and supplies sector that encompasses products heavily used to fight the pandemic (by 2.50 percent).

In addition, the slippage in medical equipment and supplies was one of those that was the greatest since the peak of the CCP Virus’ first wave (when it nosedived by 17.76 percent).

Since manufacturing is only about fifteen or sixteen percent of the total U.S. economy (depending on how you count output), a downturn in industry doesn’t necessarily presage an overall recession. But the new industrial production statistics aren’t the only signs of shrinkage. Consumer spending comprises nearly 71 percent of the economy according to the latest (third quarter, 2021) data, and today’s advance official retail sales report (for December) indicates that they’ve now fallen consecutively for two months. Possibly weaker inflation (indicated most recently by today’s wholesale price report, which I’ll post about tomorrow), also signals gloomy times ahead.

Since the new Fed manufacturing production results will be revised several times over the next few months, it’s possible that the real picture in industry could brighten somewhat. But likelier, in my view (as I wrote yesterday), is for a recession-averse Washington to move to stimulate consumer spending without seeking similar results for production – in other words, a time-tested formula for stagflation at best for the foreseeable future.

P.S. As alert readers may have noticed, this post contains many fewer manufacturing production details than its recent predecessors. My aim is to ensure that I can get this info to you on a same-day basis. Do you like this simpler format better? Or should I return to going deeper into the weeds? Please let me know if you get a chance.         

        

(What’s Left of) Our Economy: Why the Really Tight U.S. Job Market Isn’t Propping Up Much Inflation

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CCP Virus, consumer spending, consumers, coronavirus, cost of living, COVID 19, Federal Reserve, headline PCE, inflation, inflation-adjusted wages, interest rates, Jerome Powell, monetary policy, PCE, personal consumption expenditures index, prices, recession, stagflation, stimulus, wages, {What's Left of) Our Economy

It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.   

(What’s Left of) Our Economy: Why the U.S. Inflation Outlook Just Got Even Cloudier

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CCP Virus, China, consumer price index, consumers, core CPI, coronavirus, cost of living, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jerome Powell, prices, recession, stagflation, stimulus, supply chains, Ukraine War, Wuhan virus, {What's Left of) Our Economy

If the big U.S. stock indices didn’t react enthusiastically to yesterday’s official American inflation figures (which were insensitively released the very day I had a minor medical procedure), that’s because they were too mixed to signal that consumer prices were finally being brought under control.

Lately, good news on inflation-fighting has been seen as good news for stock investors because it indicates that the Federal Reserve may at least pause its campaign to hike interest rates in order to slow economic growth significantly– and even trigger a recession. That’s because a weaker economy means consumers will have less money to spend and that businesses therefore will find it much harder to keep raising prices, and even to maintain prices at currently lofty levels. And all else equal, companies’ profits would take a hit.

So already softening inflation could convince the central bank that its efforts to date have been good enough, and that its goal of restoring price stability can be achieved without encouraging further belt tightening – and more downward pressure on business bottom lines.

Of course, stock investors aren’t always right about economic data. But their take on yesterday’s figures for the Consumer Price Index (CPI), which cover December. seems on target.

The data definitely contained encouraging news. Principally, on a monthly basis, the overall (“headline”) CPI number showed that prices actually fell in December – by 0.08 percent. That’s not much, but this result marks the first such drop since July’s 0.02 percent, and the biggest sequential decline since the 0.92 percent plunge recorded in April, 2020, when the economy was literally cratering during the CCP Virus’ devastating first wave. Further, this latest decrease followed a very modest 0.10 percent monthly increase in November.

So maybe inflation is showing some genuine signs of faltering momentum? Maybe. But maybe not. For example, that CPI sequential slip in July was followed by three straight monthly increases that ended with a heated 0.44 percent in October.

Moreover, core CPI accelerated month-to-month in December. That’s the inflation gauge that strips out food and energy prices because they’re supposedly volatile for reasons having little or nothing to do with the economy’s underlying inflation prone-ness.

December’s sequential core CPI rise was 0.30 percent – one of the more sluggish figures of the calendar year, but a rate faster than a November number of 0.27 percent that was revised up from 0.20 percent. Therefore, these last two results could signal more inflation momentum, not less.

In addition, as always, the annual headline and core CPI numbers need to be viewed in light of the baseline effect – the extent to which statistical results reflect abnormally low or high numbers for the previous comparable period that may simply stem from a catch-up trend that’s restoring a long-term norm.

Many of the multi-decade strong year-to-year headline and core inflation rates of 2021 came after the unusually weak yearly results that stemmed from the short but devastating downturn caused by that first CCP Virus wave. Consequently, I was among those (including the Fed) believing that such price rises were “transitory,” and that they would fade away as that particular baseline effect disappeared.

But as I’ve posted (e.g., last month), that fade has been underway for months, and annual inflation remains powerful and indeed way above the Fed’s two percent target. The main explanations as I see it? The still enormous spending power enjoyed by consumers due to all the pandemic relief and economic stimulus approved in recent years, and other continued and even new major government outlays that have put more money into their pockets (as listed toward the end of this column).

(A big hiring rebound since the economy’s pandemic-induced nadir and rock-bottom recent headline unemployment rates have helped, too. But as I’ll explain in an upcoming post, the effects are getting more credit than they deserve.)

And when you look at the baselines for the new headline and core CPI annual increases, it should become clear that after having caught up from the CCP Virus-induced slump, businesses still believe they have plenty of pricing power left, which suggests at the least that inflation will stay high.

Again, here the inflation story is better for the annual headline figure than for the core figure. In December, the former fell from November’s 7.12 percent to 6.42 percent – the best such number since the 6.24 percent of October, 2021, and the sixth straight weakening. The baseline 2020-2021 headline inflation rate for December was higher than that for November (6.83 percent versus 7.10 percent), and had sped up for four consecutive months. But that November-December 2020-2021 increase was more modest than the latest November-December 2021-2022 decrease, which indicates some progress here.

At the same time, don’t forget that the 6.24 percent annual headline CPI inflation of October, 2020-2021 had a 2019-2020 baseline of just 1.18 percent. Hence my argument that businesses today remain confident about their pricing power even though they’ve made up for their pandemic year weakness in spades.

In December, annual core inflation came down from 5.96 percent to 5.69 percent. That was the most sluggish pace since December, 2020-2021’s 5.48 percent, but just the third straight weakening. But the increase in the baseline number from November to December, 2021 was from 4.59 percent to that 5.48 percent – bigger than the latest November-December decrease. In other words, this trend for core CPI is now running opposite it encouraging counterpart for headline CPI.

Finally, as far as baseline arguments go, that 5.48 percent December, 2021 annual core CPI increase followed a baseline figure the previous year of a mere 1.28 percent. Since the new annual December rate of 5.69 percent comes on top of a rate more than four times higher, that’s another sign of continued business pricing confidence.

But the inflation forecast is still dominated by the question of how much economic growth will sink, and how the Fed in particular will react. And the future looks more confusing than ever.

The evidence for considerably feebler expansion, and even an impending recession, is being widely cited. Indeed, as this Forbes poster has reported, “The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters indicates the highest probability of a recession over the next 12 months in the survey’s 55-year history.”

If they’re right, inflation may keep cooling modestly for a time but still remain worrisomely warm. And the Fed may react either by keeping interest rates lofty for longer than expected – as Chair Jerome Powell has already said – or even raise them faster. 

Nonetheless, although the recession that did take place during the first and second quarters of last year convinced numerous observers that worse was yet to come, the third quarter saw a nice bounceback and the fourth quarter could be even better. So if a downturn is coming, it will mean that economic activity will need to shrink very abruptly. Hardly impossible, but hardly a sure thing.

And if some form of economic nosedive does occur, it could prompt the Fed to hold off or even reverse course to some extent, even if price increases remain non-trivial. A major worsening of the economy may also lead Congress and the Biden administration to join the fray and approve still more stimulus to cushion the blow.

Complicating matters all the while – the kind of monetary stimulus added or taken away by the central bank takes months to ripple through the economy, as the Fed keeps emphasizing.  Some of the kinds of fiscal stimulus, like the pandemic-era checks, work faster, but others, like the infrastructure bill and the huge new subsidies for domestic semiconductor manufacturing will take much longer.

Additionally, some of the big drivers of the recent inflation are even less controllable by Washington and more unpredictable than the immense U.S. economy – like the Ukraine War’s impact on the prices of energy and other commodities, including foodstuffs, and the wild recent swings of a range of Chinese government policies that keep roiling global and domestic supply chains. 

My own outlook? It’s for a pretty shallow, short recession followed by a comparably moderate recovery and all accompanied by price levels with which most Americans will keep struggling. Back in the 1970s, it was called “stagflation,” I’m old enough to remember that’s an outcome that no one should welcome, and it will mean that the country remains as far from achieving robust, non-inflationary growth as ever.