Recession Omen Lurking in Trade Data

March 9, 2016

I’ll get to the recession omen in a moment, but there’s something else about the January trade data released by the Bureau of Economic Analysis on Friday that I need to get off my chest first.  If you’ve followed this blog, you know that there may be nothing that galls me more than Obama’s broken promise to fix our trade problems.  In the wake of his spanking by Mexico when he tried to broach the subject early in his first term, Obama took the chicken’s way out and, instead of focusing on reducing imports – something that would make him a turd in the punch bowl at G20 meetings, he decided to focus instead on exports, vowing in January 2010 that, within five years, the U.S. would double its exports.

Well, that five year period lapsed a full year ago now, and we know how that turned out.  But I’m not letting it go because his failure is growing much worse by the month.  Exports fell again in January to their lowest level since July of 2011.  Manufactured exports (where the jobs are) led the way, falling by $3 billion to the same level of manufactured exports in December, 2010.  Instead of rising by 100% in five years, manufactured exports have now risen by only 17% in six years – and are falling fast.  Look at the chart:  Manf’d exports vs. goal.

If you pay attention to these sorts of things, you’ve heard the “experts” blame the decline on exports on the strong dollar.  But you’ve also heard me consistently maintain that currency valuations have virtually nothing to do with trade imbalances.  So why the decline in exports?  There are two explanations.  The first is the decline in the price of oil.  How has that impacted manufactured exports?  Oil is priced in dollars and because major oil exporters are then flush with American dollars, they repatriate those dollars by being major consumers of American-made products.  When they get fewer dollars for their oil, they have less to spend on imports from America.

The second reason – and now we get to the subject of this post – is that the rest of the world is slipping into recession.  There’s already been plenty of evidence of that in data coming out of China, Europe and Japan, where central banks are actually experimenting with negative interest rates in a desperate bid to prop up flagging economies.  So the rest of the world is importing less from us.

But look again at the above chart.  Not only are our exports declining, but so are imports.  Declining imports would be a good thing if the decline were matched by growing manufacturing activity in the U.S. – in other words, a shift of manufacturing back to the U.S.  But there’s no evidence of that.  American manufacturing remains mired in deep recession.  So the decline in imports is an ominous sign of a pull-back in consumer spending in the U.S. – a sign that the U.S. is teetering on the brink of recession like the rest of the world.

No surprise.  In January, our deficit in manufactured goods was $57.8 billion, hovering near the record worst level of $63.7 billion set ten months earlier.  Over the past twelve months, our deficit in manufactured goods was $682 billion.  Here’s a chart of our deficit in manufactured goods, dating back to when Obama vowed to double exports:  Manf’d Goods Balance of Trade.

Let’s do some math.  Approximately two thirds of the cost of manufactured products is labor (on average).  Two thirds of this deficit is $457 billion.  Manufacturing jobs pay well – about $50,000 per year.  Divide $457 billion by $50,000 and you find that our deficit in manufactured goods accounts for nine million jobs.  Nine million jobs lost to idiotic trade policy!  That’s enough to put nearly every unemployed American back to work.  Is it any wonder that our economy is struggling?

And, by the way, that represents a loss of federal revenue of $100 billion just in personal income taxes alone.  That’s matched by an increase in federal spending of an equal amount – another $100 billion – to cover unemployment and other safety net programs for the unemployed.  So if you’re a person concerned about federal deficit spending, you really need to turn your attention to the trade deficit.

Or maybe you’re someone concerned about climate change and greenhouse gas emissions.  Think about the fact that approximately five billion barrels of oil are consumed every year running ships back and forth across the ocean carrying products that could just as easily be made right in your neighborhood.  And those ships are powered by steam turbines that are, in turn, powered by oil-fired boilers burning heavy oil and virtually devoid of any emissions controls.  How much sense does that make?  (Oh, by the way, all trash generated by the crews of those ships is dumped overboard during the journey.)

OK, now I’m getting way off on a tangent.  The point is that running such a massive imbalance of trade (and we’ve been doing it for decades) is a massive drain on our economy, and the latest data contains signs that it’s about to bite us again.

 

 


The Effect of Currency Valuation on Trade? None!

January 30, 2016

Whenever some senator or congressman wants to appear tough on trade – usually during a campaign for re-election – they call on the president label a country like China or Japan a “currency manipulator.”  They do this because under the rules of the World Trade Organization a country that’s guilty of manipulating its currency can have tariffs levied against it.  Of course, it never happens.

The reasoning is that a nation that takes actions designed to weaken its own currency gives them an unfair trade advantage, making its own domestically-produced products cheaper for its citizens and for foreign buyers while making imports more expensive.  It all sounds perfectly logical.  But is it really valid?

In my recent posts, we found that there is a very powerful relationship between population density and trade imbalances in manufactured products.  Free trade with nations much more densely populated than our own is almost assured to produce a trade deficit, while free trade with nations less densely populated usually results in a trade surplus.  So strong is this relationship that it seems to be the dominant driving force in determining the balance of trade.  However, that then calls into question just how much of a role currency valuations have, if any.

I have done an exhaustive study of the subject, plotting the change in currency valuations for 159 nations vs. the U.S. dollar against the change in America’s trade imbalance with those nations over a ten-year period ending in 2014.  What I have found is that there is absolutely no correlation between the two whatsoever.

If there were some correlation, what we should see is that a strengthening of a nation’s currency vs. the dollar should yield an improvement in our balance of trade with that nation, since our exports become more affordable to the people of that nation while their exports are more expensive for our citizens.

Here’s what actually happened.  During the ten-year period from 2005 to 2014, the currencies of 80 nations rose vs. the dollar.  The currencies of 67 nations fell vs. the dollar.  And the currencies of 12 nations remained unchanged against the dollar.  Of the 80 nations whose currencies rose vs. the dollar, our trade imbalance improved with 44 of them.  That shows that the currency valuation theory is valid?  Not so fast.  Of the 67 nations whose currencies weakened vs. the dollar, our trade imbalance worsened with only 16 of them.  Add these together and our trade imbalance changed as the currency theory would have predicted with only 60 of the 147 nations, or 41% of the time.  (With the twelve nations where their currencies were unchanged, our trade imbalance improved with ten of them.)

In fact, if we plot the data for these 159 nations on a scatter chart, here’s what we see:  Currency Valuation vs. Balance of Trade2.  On a scatter chart such as this, if there is a correlation between the two variables – change in currency valuation vs. change in trade imbalance – the data points would tend to fall along a line.  As you can see, they don’t – not at all.  When I had Excel calculated a trend line with a “determination coefficient,” the coefficient (“R-squared”) came out to 0.002.  A perfect correlation would yield a coefficient of 1.0 and the data points would fall into a perfectly straight line.  Here, the coefficient is about as close to zero as you can get, meaning no correlation whatsoever.

Let’s take a closer look at our ten largest trade partners in 2014 and see how their currencies and our trade imbalances have fared over the past ten years.  Check this table:  Currency Valuation vs. Balance of Trade.  These ten nations accounted for nearly 73% of all U.S. trade in manufactured goods in 2014.  Their currencies increased in value vs. the dollar for seven of them, and fell for the other three.  But of these ten, our balance of trade changed as currency valuation would predict in only four cases.

Look at China.  In spite of the yuan appreciating in value vs. the dollar by 33%, our trade imbalance actually worsened by 82%.  Look at France and Germany.  In spite of the Euro rising by 12%, our balance of trade with these two nations worsened by 56% and 97% respectively.  (By the way, the next time you hear someone say that America needs to improve its productivity in order to be more competitive, ask them to explain why it is that the U.S. has a large trade deficit with France, arguably the least productive nation in the developed world.)

For anyone who bothers to actually study the matter, the real world data on currency valuation and trade imbalances proves beyond a shadow of a doubt that there is absolutely no correlation between the two.  It’s disparities in population densities that drives trade imbalances and currency valuation has nothing to do with it.


America’s Worst Trading Partners

January 12, 2016

I have finally finished tabulating the trade data for each country for 2014.  (2015 data won’t be released by the Bureau of Economic Analysis until sometime in March.)  What took me so long?  This is no small task.  Since the BEA doesn’t track “manufactured products” as a category, I have to take the data for hundreds of product codes for each of 165 nations and subtract out the categories of raw materials in order to arrive at a figure for manufactured products.  I maintain a massive spreadsheet for each nation and then compile the results for all on an even bigger spreadsheet.

Anyway, the results are in and over the next couple of weeks or so, beginning with this post, we’ll break down and analyze the results.  I like to begin by listing America’s 20 worst per capita trade deficits in manufactured goods.  In essence, this is a list of America’s 20 worst trade partners.  These trade deficits are expressed in per capita terms in order to put the citizens of all nations on an equal footing.  For example, our trade deficit with China, when expressed in dollars, dwarfs that of every other nation because they represent one fifth of the world’s entire population.  But when it comes to trade, borders are meaningless and China could just as easily be 100 smaller nations instead of one.  It would have no effect on our total trade deficit whether we draw a line on a map around 1.3 billion people, or draw 100 lines around clusters of 13 million people each.  Expressing the deficits in per capita terms eliminates the sheer size of nations as a factor.

If you’re new to this web site, you probably expect to see this list populated with poor nations.  You’d be wrong and, by the end of this post, you’ll understand why.  So let’s take a look at the list for 2014:  Top 20 Deficits, 2014.  Some observations are in order:

  1. The key take-away from this list is that 18 of these 20 nations are more densely populated than the U.S.  Most are much more densely populated.  The average population density of this list is 539 people per square mile.  This compares with the U.S. population density of about 87 people per square mile.  This average is up from the average population density of 504 people per square mile on the 2013 list.
  2. Instead of poor, low wage nations, this list is populated by rather wealthy, high wage nations.  The average purchasing power parity (PPP) of the nations on this list is $40,700 per person, up from $35,330 in 2013.  Only one nation on this list has a PPP of less than $10,000 – Vietnam, at $5700 per person.  Only three other nations have a PPP of less than $20,000 – Costa Rica, Mexico and China.  By comparison, U.S. PPP was $54,400 in 2014.
  3. Though our trade deficit with China has exploded since they were first granted “Most Favored Nation” status in 2000, their position on this list has barely budged since I published Five Short Blasts in 2007.  They were 19th on the list in 2006 and have risen only one point to 18th in 2014.  That’s because our trade deficit with nearly all of these nations has grown just as rapidly.  To illustrate this, I’ve included a column on the chart that shows the percent change in our balance of trade with each nation over the past ten years.  Our deficit with China has grown by 82%.  But the results with some other nations have been even worse.  In 2006, Costa Rica didn’t even appear on this list.  In fact, in 2005, we had a trade surplus with Costa Rica.  That has now reversed into a large trade deficit, big enough to move them to number 8 on this list.  The same is true for Vietnam.  In 2005 they were nowhere close to being on this list but, in the past ten years, our deficit with Vietnam has worsened by almost 500%.  Our deficit with Switzerland has worsened by over 200% in the last ten years, moving them to 2nd on the list.  It’s worth noting here that Switzerland is the one nation on the list that is even wealthier than the U.S.  But the one thing all of these nations have in common is a high population density.
  4. In case you’re tempted to conclude that Costa Rica, Vietnam, Mexico and China are on this list because of low wages (low PPP), consider this.  In the past ten years, their PPPs have risen by 41%, 136%, 50% and 184% respectively.  If wages are a factor in trade imbalances, then such rapidly rising wages should tend to slow or even reverse our trade deficit with these nations.  Instead, each is accelerating.
  5. It’s also worth noting here than one of the only two nations on the list less densely populated than the U.S. – Sweden – is slowly sliding off of this list.  Our trade deficit with Sweden has actually improved by 44% over the past ten years – the only such improvement on this list.  As a result, they’ve slid from no. 2 on the list in 2006 to no. 12 in 2014.
  6. Another nation that has slid noticeably on this list is Japan.  They were no. 4 on the list in 2006, sliding to no. 10 in 2014.  Why?  Other nations, most notably South Korea and Germany (who have each risen on the list), have cannibalized their auto exports.  This explains why Japan’s economy has been mired in recession for years.

In 2014, the U.S. suffered a total trade deficit in manufactured goods of $539.9 billion.  The trade deficit in manufactured goods with just the twenty nations on this list was $728.3 billion.  In other words, these twenty nations account for our entire trade deficit in manufactured goods, and then some.  It should be clear to anyone that it’s the large disparity in population density between the U.S. and these nations that drives our trade deficit.  It’s just as clear that low wages play no role whatsoever.  Any trade policy that fails to take into account the role of population density in driving trade imbalances is doomed to failure, just as U.S. trade policy has been for decades.

Those who blame trade imbalances on low wages either don’t understand trade or are simply lying.  So too are those who blame currency valuations – something we’ll examine later.  And those who tell you that we simply need to be more competitive are playing you for fools.  The only way to restore a balance of trade is by applying tariffs to counteract the effect of population density.

Not enough proof?  Stay tuned.  In my next post we’ll take a look at the opposite end of the spectrum – America’s twenty best trade partners – and see if population density is a factor there too.

 

 


Where has the vanishing labor force gone? Now we have a clue.

November 11, 2015

http://www.pnas.org/content/early/2015/10/29/1518393112.full.pdf

Each month I criticize the Bureau of Labor Statistics (BLS) report on employment for using the “mysterious vanishing labor force” trick to keep the government’s official unemployment rate artificially low.  Since Obama took office in January, 2008, the U.S. population has grown by 19 million.  Yet, according to the BLS, the labor force has grown by only 3 million, an employment-to-population ratio of only 16% while the same ratio for the overall population is 46%.  It seems that some six million workers have gone missing.  These are the long-term unemployed that the BLS explains away as having “given up looking for work.”

So where have they gone?  How are they supporting themselves?  Well, the above linked study published by Princeton last week gives us an inkling about what’s become of them.  They’re living in despair.  And they’re dying.  As the study found, the mortality and morbidity among middle-aged whites in America has taken a very dramatic turn for the worse since 1998.

This may be the first concrete evidence that the theory I proposed in Five Short Blasts – that the worsening unemployment driven by a rising population density and by trade with overpopulated nations will increase poverty and, ultimately, will begin to drive up death rates.

Your first reaction may be similar to mine – that when you hear of increased mortality among Americans, obesity and all of its related problems are probably the leading cause.  Americans are paying the price for living the good life.  However, this study found that that’s not the case at all.  Worsening obesity contributed only a small fraction to the death rates among this group.  The increase in the death rate is heavily driven by suicides, drug overdoses and alcoholism.  These are the afflictions of people whose dreams have been destroyed and who have lost hope.  So dramatic is the increase in mortality, that the study compares it the AIDs epidemic:

“If it (the death rate) had continued to decline at its previous (1979-1998) rate, half a million deaths would have been avoided in the period 1999-2013, comparable to lives lost in the US AIDS epidemic through mid-2015.”

Why hasn’t this trend shown up in any of the mortality data published by the Center for Disease Control (CDC)?  As the study points out, this data is lost in the “disaggregation” done by age and race in the CDC reports.

The study discusses possible causes for this trend:

“Although the epidemic of pain, suicide, and drug overdoses preceded the financial crisis, ties to economic insecurity are possible.  After the productivity slowdown in the early 1970s, and with widening income inequality, many of the baby-boom generation are the first to find, in midlife, that they will not be better off than were their parents. Growth in real median earnings has been slow for this group, especially those with only a high school education. However, the productivity slowdown is common to many rich countries, some of which have seen even slower growth in median earnings than the United States, yet none have had the same mortality experience.  The United States has moved primarily to defined-contribution pension plans with associated stock market risk, whereas, in Europe, defined-benefit pensions are still the norm. Future financial insecurity may weigh more heavily on US workers, if they perceive stock market risk harder to manage than earnings risk, or if they have contributed inadequately to defined-contribution plans (31).

So why did this begin in 1998 or soon after?  In 2000 the U.S. granted “Most Favored Nation” trading status to China, opening the door to a flood of imports that has decimated what remained of American manufacturing.

President Obama took office in 2008 on a promise of “hope and change,” and on a promise to fix the trade policies that were wreaking havoc on the middle class.  He broke that promise and even exacerbated the trade problem.  Well, it seems that for many Americans, that “hope” that he promised was their last hope.  Americans are literally paying with their lives for America’s idiotic trade policies.


Americans Growing Poorer

September 19, 2015

http://www.census.gov/content/dam/Census/library/publications/2015/demo/p60-252.pdf

The above-linked report – “Income and Poverty in the United States:  2014” – was published by the Census Bureau a couple of days ago.  The news isn’t good.  In spite of the supposed decline in unemployment and all the talk of economic recovery, the median household income fell once again and the poverty rate remained at or near the highest level in fifty years.

There’s tons of data to sift through in the report, so I’ll simply quote a few of the key findings of the report:

“Median household income was $53,657 in 2014, not statistically different in real terms from the 2013 median of $54,462 (Figure 1 and Table 1). This is the third consecutive year that the annual change was not statistically significant, following two consecutive years of annual declines in median household income.”

“Median household income … in 2014 … 6.5 percent lower than the 2007 (the year before the most recent recession) median ($57,357), and 7.2 percent lower than the median household income peak ($57,843) that occurred in 1999.”

“In 2014, the official poverty rate was 14.8 percent. There were 46.7 million people in poverty.”

“The 2014 poverty rate was 2.3 percentage points higher than in 2007, the year before the most recent recession (Figure 4).”

Median household income has declined every year since 2007, and even the median income in 2007 was less than the median income in 1999.  This is the longest period of decline since the Census Bureau began tracking the data in 1967.  From 1967 to 1999, the median household income (for all races) rose from approximately $42,000 to $57,843 – a increase of 38%.  Since 1999, however, it has declined by 7.2%.

This is exactly what the inverse relationship between population density and per capita consumption would predict – that as our population density (including our “effective” population density) rises beyond a critical level, worsening unemployment and poverty is inescapable.

So what was it that happened after 1999 that threw median incomes into what increasingly appears to be a permanent state of decline?  Our population density has been rising by about 1% a year for decades but our “effective” population density – the population density that we take upon ourselves when we combine with another nation through “free” trade – skyrocketed in 2000.  That was the year that the Clinton administration granted China “permanent normal trade relations” satus, opening the door to “free” trade with China.

Look back at Chapter 7 of Five Short Blasts (especially Figure 7-5 on page 130), where we examined what happened to our effective population density as we combined our economy with other nations through “free” trade.  The effect of trading with Ireland – the nation with whom we have the largest per capita trade deficit in the world – is negligible.  They’re so small that it makes no change to our effective (combined) population density.  Add Mexico to the list, and our density rises from 85 people per square mile to 118.  Add Germany and it rises to 132.  But, when China, with one fifth of the world’s population, is added to the mix, our effective population density rockets to 242!  The downward pressure on our labor market and incomes suddenly becomes overwhelming.

As long as we continue to blindly apply “free” trade policy to all nations with no consideration of the effect of population density, the resulting downward spiral in our economy is inescapable.  With each passing year, the data on incomes and poverty in America bears this out.

 

 

 

 

 


Employment Level Falls 56,000 in June; Unemployment Edges Up to 8.8%; 432,000 Discouraged Job-Seekers Give Up

July 2, 2015

The headline for today’s employment report for the month of June reads “Employment Increased by 223,000 in June, and the unemployment rate declined to 5.3%.”  It’s hard to believe that that headline, and the headline of this blog post were both taken from the same report, isn’t it?  Well they were.  And I could have added to my headline a couple more facts:  that the employment figures for April and May were revised downward by 60,000 and that there were no wage gains in June.

In fact, that headline figure of 223,000 jobs added in June, taken from the establishment survey, is probably the only positive in the whole report.  (If it can even be believed.)  The positive from the household survey – a drop in unemployment to 5.3% – falls apart when you see why it dropped.  It seems that 432,000 long-term unemployed have simply given up looking for work.  Put them back in the equation, along with the other workers who previously and mysteriously vanished from the work force, and unemployment actually rose to 8.8%.

In November of 2007, 48.4% of the U.S. population participated in the labor force.  Since then, the U.S. population has grown by 19 million, but only 16% of them have been added to the labor force.  This is how the Obama administration has been able to claim a sharp drop in the unemployment rate – by understating the size of the labor force.  Here’s a chart of per capita employment since November, 2007:  Per Capita Employment.  While per capita unemployment has improved from the depths of the recession, it’s still at a deeply recessionary level.

One of the less-noticed statistics in the report, but perhaps the most telling about the state of the economy, is that employment in manufacturing was flat yet again in June.  In a separate report this morning, factory orders fell for the ninth time in ten months, and new factory orders and shipments are running 6% and 4% behind year-ago levels.

The Obama administration has continued the practices of previous administrations that exacerbate the demise of the middle class through immigration policy that floods the labor force with unneeded workers and trade policy that is detached from the realities that drive trade imbalances and turns a blind eye to a $600 billion/year trade deficit in manufactured goods.


The Problem with TPP

June 14, 2015

On Friday, the House of Representatives dealt a major blow to what would have been a crown jewel in President Obama’s economic plan – the “Trans Pacific Partnership” (TPP) trade deal that he has worked for his entire presidency.  It’s a good thing.  Had he gotten the fast track trade authority he was seeking in order to steamroll this trade deal through Congress, it may well have sounded the death knell for the American auto industry, and perhaps even American manufacturing in general.

The problem with TPP can be summed up in two words – population density – and its failure to take this factor into account.  The TPP is a deal that has been negotiated between the U.S. and eleven other countries:  Australia, Brunei , Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Of these eleven nations, five are less densely populated than the U.S. – Australia, Canada, Chile, New Zealand and Peru.  The United States enjoys a surplus of trade in manufactured goods with every one of them – a surplus totaling almost $103 billion.

Of the remaining six nations, one – Brunei – is a net oil exporter.  The U.S. enjoys a surplus of trade in manufactured goods with all net oil exporters since oil is priced in dollars, and dollars can only be spent in the U.S.  Another – Singapore – is a tiny city-state and the U.S. enjoys a surplus of trade with nearly all such city-states.  Why?  Because manufacturing requires some serious real estate, something that city-states lack.  Their dense populations necessitate an economy built around services, like banking, for example.  That leaves four nations more densely populated than the U.S. – Japan, Malaysia, Mexico and Vietnam.  The U.S. suffers a trade deficit in manufactured goods with all four nations – a deficit totaling almost $155 billion.

A surplus with all five less densely populated nations of $103 billion vs. a deficit with all four more densely populated nations of $155 billion.  This is no coincidence.  It’s yet another demonstration of the power of population density in driving global trade imbalances.  It dwarfs all other factors in international trade.  Low wages, currency manipulation, lax labor and environmental standards – none of these things amount to a hill of beans in comparison to the effect of population density.  Compared to the citizens of less densely populated nations, those living in intensely crowded conditions such as you find in these four nations consume comparatively nothing, but are every bit as productive.  The result is that these nations come to the trade table with massive labor forces desperate for work, but offer nothing in return except puny markets emaciated by low per capita consumption.  Huge trade deficits with such nations are inescapable without the use of tariffs.

Many believe that globalization and free trade has already wiped out tariffs.  It has eliminated and reduced many, but consider this:  the American truck market, unlike the automobile market, is still protected by a 25% tariff.  Because of this, virtually every pickup truck and every larger truck, up to and including semis, are built in the U.S.  Take away that tariff, as TPP has vowed to do, and you can kiss the U.S. truck industry goodbye.  One might argue that that isn’t so – that the U.S. auto industry still thrives without the tariffs.  However, it thrives not because of tariffs but because of quotas, something else that will vanish under TPP.  If the American truck-building industry and what’s left of the auto industry vanishes, there’s a good possibility that a domino effect may very well lead to the collapse of virtually all of American manufacturing.

Trade policy that fails to account for the effect of population density has proven to be an unmitigated disaster for the U.S. economy for decades.  President Obama seems hell-bent to make matters worse, just as he did with the deal with South Korea that, in only a couple of years, has cost thousands of Americans their jobs.  Let’s pray that our congressmen will continue to stand fast against any further such hare-brained deals.


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