Cedar Balls–”Grown in USA, Made in China”?

Yesterday I went shopping with my son Elliot. It was the tour of big box stores…we went to Best Buy for a computer bag for me, to Target for clothing for him, and then to Bed, Bath, and Beyond for a new tea pot for me.

Then I made an executive decision….we weren’t going to leave Bed, Bath, and Beyond until we found a nonfood product made in the U.S. It took a while, but we finally found some beer mugs and some coasters that were U.S-made, so we were free to go.

But along the way, I picked up something very odd…a bag of eco-friendly aromatic cedar balls that were labelled “Grown in USA, Made in China.” Grown in USA, Made in China???

If I’m interpreting the label correctly, cedar is grown in the U.S. (“100% eastern red cedar—a self-renewing, non-endangered resource” according to the website). Is it possible that the wood is shipped to China, turned into little cedar balls in Chinese factories, and then shipped back to the U.S.?

Something is very weird about the economics here. I’m going to contact the company and ask.

Business Investment Drought Worsens

To me, the big news in the first quarter GDP data is that the business investment drought has worsened.  I compare the actual level of real business investment with the long-term trend level (assuming that the ten-year growth rate as of 2007IV had continued). Here’s what we see:

As of the first quarter, real nonresidential investment is 23.1% below its long-term pre-crisis trend, slightly wider than in the fourth quarter of 2010. This is the clearest sign of the weakness of the economy, since no one can argue we had a bubble in nonresidential investment before the crisis started. The longer this investment shortfall last, the harder it will be to recover.

Incidentally, the business investment drought is far bigger than the shortfall in consumer spending. The chart below shows the shortfall in real PCE, relative to long-term pre-crisis trend

The consumption shortfall is only 9.2% relative to the ten-year trend. That’s widening too, as real PCE growth is still below the long-term trend. However, given the fact that the U.S. was supposedly over-consuming before the crisis, a 9.2% shortfall may not be big enough!

Here’s another comparison:

The Real Implication of the Niaspan Study (or why I’m going to boost my biosciences investments)

Yesterday we had bad news about Niaspan:

The NIH has stopped a study with Abbott Laboratories’ cholesterol fighter Niaspan 18 months early after results showed the drug failed to prevent heart attacks and even may have boosted stroke risk. And as Bloomberg notes, the results could heighten the debate over whether raising good cholesterol actually helps patients….

….In a study follow-up, participants who took Niaspan and simvastatin had increased HDL cholesterol and lowered triglyceride levels compared to participants who took a statin alone. But the combination treatment failed to reduce heart attacks, strokes, hospitalizations for acute coronary syndromen or revascularization procedures to improve blood flow in the arteries of the heart and brain.

Certainly Abbott stock will fall in the short run. But in the big picture, this is an important step forward in the long and excruciating process of sorting out fact from fiction.  It fits in with the stream of stories like this one, which finds yet another biochemical mechanism that people had not suspected. 
 
The central dogma in molecular biology states that DNA is copied into RNA, one nucleotide at a time. But it turns out that copy may be a lot less exact than scientists previously thought. ….A new paper, published today in Science,identifies widespread differences between DNA sequences and their corresponding RNA transcripts in human cells, and demonstrates that these differences result in proteins that do not precisely match the genes that encode them. 
When pharma companies embraced genomics, they thought they had a faster path to finding new drugs that would treat well-known and well-understood problems.  Unfortunately, the deeper they got in, the more they discovered was that the problems were actually not well-understood–that conventional medical understanding was simply not correct much of the time.  This fits in with the lesson of evidence-based medicine so far,  which is that we know less than we thought we did. For example,  here’s what a panel of experts recently concluded about diet, lifestyle, and Alzheimer’s:
Although numerous studies have investigated risk factors and potential therapies for Alzheimer’s disease, significant gaps in scientific knowledge exist,” Dr. Martha Daviglus of Northwestern University Feinberg School of Medicine, Chicago, and colleagues wrote in the Archives of Neurology.

“Currently, firm conclusions simply cannot be drawn about the association of any modifiable risk factor with Alzheimer’s disease, and there is insufficient evidence to support the use of any lifestyle interventions or dietary supplements to prevent Alzheimer’s,” the panel wrote.

It turns out we are building a bridge across a wide and deep canyon rather than a narrow ravine.  Researchers are on the canyon floor, putting in the foundations and supports that no one thought we needed.  It’s a long, expensive, depressing, and dangerous process.

But there will come a moment–maybe soon, maybe years from now–when the bridge  will be, not done, but usable.  Traffic across the once-impassable canyon will soar almost overnight, and the Biosciences Century will truly begin.  And I, for one, want to be invested in those companies when that happens.

“U.S. factories humming”?:Bad Journalism at the Associated Press

In today’s report on the fall in durable goods orders, Martin Crutsinger of the Associated Press wrote: (my emphasis added)

Strong demand domestically and overseas has kept U.S. factories humming, making manufacturing one of the strongest sectors of the economy since the recession ended in June 2009.

“Humming”? There is no sense in which U.S. factories are “humming”, unless you consider being buried underground the same as being aboveground. Industrial production of manufacturing, ex high-tech, is still 12% below its 2007 level.  (see chart below). Total manufacturing is about 9% below its 2007 level.

And last time I looked, manufacturing employment was still down 2 million jobs.

Argue if you want that manufacturing is not essential–I don’t agree, but at least it’s a position. But don’t engage in Orwellian double-speak by saying that U.S. factories are ‘humming’.

Real Trade Deficits in Capital and Consumer Goods Near New (Negative) Record

Many economists are racing to declare a ‘manufacturing revival.’  The latest to join the bandwagon is Paul Krugman. In his latest column, Krugman writes (my emphasis added)

Manufacturing is one of the bright spots of a generally disappointing recovery…..Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline…one piece of good news is that Americans are, once again, starting to actually make things.

Oh, how I wish Paul was right.  Unfortunately,  I still don’t see it in the trade numbers. In fact, the real trade deficits in capital and consumer goods are both nearing all-time (negative) records. Meanwhile, the real trade deficit for industrial supplies and materials has improved in large part because of an enormous surge in real exports of energy products, including coal, fuel oil, and other petroleum products (yes you read that right) and a sharp decline in imports of building materials. I don’t find either of these convincing proof of a resurgence of manufacturing.

As you might expect, time for some charts. Here’s a chart of the real trade balance in capital goods in billions of 2005 dollars, calculated on a 12-month basis.

Capital goods include computers, telecom gear, machinery, aircraft, medical equipment–the heart of U.S. advanced manufacturing. Within a couple of months, if current trends continue, the capital goods trade deficit will be at a record level. What’s more, there’s no sign of any great domestic capital spending boom that could suck in imports.

And not to digress, these figures probably substantially underestimate the deterioration of the capital goods trade balance because of the import price bias effect , where the government statisticians do not correctly adjust for rapid changes in sourcing from high-cost countries such as the U.S. and Japan to low-cost countries such as China and Mexico (for a good reference see the new paper “Offshoring Bias in U.S. Manufacturing” by Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel in the latest issue of the Journal of Economic Perspectives) .

Now let’s turn to consumer goods. Here’s the chart of the real trade balance in consumer goods, in 2005 dollars.

No sign of any real improvement here either, I’m afraid. The trade balance retreated a bit during the recession, but since then has surged back.  Once again, there’s no sign of a sustainable improvement in the trade balance

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he situation with motor vehicles is a bit more ambiguous. As the chart below shows, clearly there has been some gains in the motor vehicles and parts trade balance.  However, it has started deteriorating again.

Finally, we come to the one area, industrial supplies and materials, where there has been a clear improvement in the real trade balance. Industrial supplies and materials includes fuel imports and exports; steel and other metals; building materials; chemicals; and a grab bag of other things including newsprint, audio tapes, and hair.

Since 2006, there has been roughly a $150 billion improvement in the industrial supplies and materials trade deficit, measured in 2005 dollars (I say roughly because this is one case where the chain-weighted procedures used to construct the figures gives quirky answers that aren’t additive. So when I give the following numbers, please please don’t divide them into $150 billion to get a share of the improvement). Part of that is a decline in real imports of crude oil, which fell by roughly $30 billion (measured from 2006 to the 12 months ending in March 2011). But another $30 billion, more or less, came from an increase in real exports of petroleum products such as fuel oil and lubricants. I’m not sure whether a gain in exports of fuel oil really tells us much about the fortunes of manufacturing overall.

Another contributor to the improved trade balance is a decline in the imports of building materials. Once again, not a sign of strength.

So I see no sign in the trade data of a great manufacturing revival. The topline improvement in the real trade deficit has mostly come from industrial materials and supplies, and within that from a swing in the energy sector imports and exports.

Let me finish with a quote from a piece that Paul Krugman wrote back in 1994. In that piece, he scoffed at worries that foreign competition was hurting U.S. manufacturing. He argued that

A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country’s economic difficulties…. recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

I wonder if he still believes that today.

A Milestone in Trade

In 1987  the G6 countries (Canada, France, Germany, Italy, Japan, and the UK) accounted for 55% of U.S. goods imports. That same year, China, Mexico and Brazil only accounted for 8% of imports.

In 2010 the U.S. reached a milestone–for the first time, imports from China/Mexico/Brazil exceeded imports from the G6 countries. In the year ending March 2011, imports from China/Mexico/Brazil equaled 32% of goods imports, compared to 31% for the G^ countries. Here’s another way of seeing the same thing. Please note that OPEC’s share, and the share of “all other countries,” don’t change very much. It’s really the G6 versus a handful of  low-cost importers.

One final note. The shift in sourcing is most likely happening because the goods made in China/Mexico/Brazil are less expensive than the same goods made in France/Germany/UK. Unfortunately, the BLS import price statistics are not able to pick up the price drops from shifts in country sourcing.

Suppose for example that goods made in China are sold for one-third less than the same goods made in Japan. Then for the same physical quantity of imports, that shift in sourcing will cause the nominal value of imports to be one-third lower. This imparts a significant downward bias to the import penetration ratio.

What Manufacturing Profits Don’t Tell Us: A Response to Perry

Mark Perry, who I recently had the pleasure of meeting and who seems like a nice guy,  replies to my manufacturing revival post  by focusing on profits. He writes that

…real manufacturing profits have completely recovered from the recession, and reached an all-time high in the fourth quarter of last year

He then goes on to conclude:

In the end, it’s profitability that’s the most important gauge for the health of a company or industry, not the amount of shipments, output, or employment levels

With all due respect, Mark misses the point.  First, the measure of profits that he is using includes the profits from foreign subsidiaries of U.S. companies, so his measure of profits could be going up because  factories in other countries are expanding, By comparison, I am looking at the shipments by factories in the U.S.  I think my  scope better fits what people mean by the ‘revival of American manufacturing’.

Here’s a chart of real ‘domestic’ profits in manufacturing.* In fact, we see that 2010 real ‘domestic’ profits are about 20% below the latest peak in 2006.  So much for all-time high.

But I’m not done yet. Why do I keep putting ‘domestic’ in quote marks?  It’s because ‘domestic’ profits don’t really mean what you think they do. Suppose that a large manufacturer closes a U.S. factory that makes parts, and starts buying from a foreign supplier that offers lower prices.  In this situation, the entire gain in corporate income is counted as an increase in domestic profits, even though manufacturing production was actually decreased in the U.S.

Or consider this example. A U.S. manufacturer is buying components from a Japanese supplier for use in a domestic factory. The manufacturer shifts sourcing of the components to a Chinese supplier which offers a lower price. As the result of this change–which affects absolutely nothing about production in the U.S.–domestic profits rise

In other words, domestic profits can be affected by changes in the global supply chain that have nothing to do with production in the U.S.  In general,  in a supply chain world, domestic profits don’t give you a clear measure of the health of domestic manufacturing, in the conventional sense.  

Added: See also FT Alphaville’s quick note.

*Domestic manufacturing profits from table 6.16D in the national income accounts, deflated by the GDP deflator.

New Manufacturing Data Show Weaker Factory Recovery, Deeper Recession

There’s been a lot of happy talk recently about the revival of U.S. manufacturing .  According to an article in the New York Times,  “manufacturing has been one of the surprising pillars of the recovery. “  In a Forbes.com column entitled “Manufacturing Stages A Comeback,”  well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.”  The Economist writes that “against all the odds, American factories are coming back to life.”* 

Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense,  is an essential part of the U.S. economy, and any good news would be welcome.  

Unfortunately,  the latest figures do not back up the cheerful rhetoric.

Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments,  incorporating the results of the 2009 Annual Survey of Manufacturers.  The chart belows shows the comparison between the original data and the revised data (three-month moving averages):

 The decline in shipments from the second quarter of 2008 to the second quarter of 2009 is now 25%, rather than 22%. And the current level of shipments in the first quarter of 2011 is now 9% below the second quarter of 2008, rather than only 5%. In other words, the new data shows that factory shipments, in dollars, are still well below their peak level.

The manufacturing recovery looks even more  tepid when we adjust shipments for changes in price.   Here are real shipments in manufacturing, deflated by the appropriate producer price indexes.**

Now that hardly looks like a recovery at all, does it?  Real shipments plummeted 22% from the peak in the fourth quarter of 2007 to the second quarter of 2009.  As of the first quarter of 2011, real shipments are still 15% below their peak.  To put it another way,  manufacturers have made back only about one-third of the decline from the financial crisis.

And while U.S. manufacturers have struggled, imports have coming roaring back.  Here’s a comparison of real imports (data taken directly from this Census table) and real U.S. factory shipments (my construction, using Census and BLS data).

This chart shows that imports have recovered far faster and more completely than domestic manufacturing.   Goods imports, adjusted  for inflation, are only about 1% below their peak.  That’s according to the official data. If we factored in the import price bias, we would see that real imports are likely above their peak (I’ll do that in a different post).

In other words,   this so-called  ‘revival of U.S. manufacturing’ seems to involve losing even more ground to imports.  That doesn’t strike me as much of a revival.

[Read more...]

Investment Heroes: Top Companies for Domestic Capital Spending.

As we know, the U.S. is still stuck in a capital spending drought. According to my calculations, nonresidential business investment in the first quarter of 2011 was still 23% below its long-term trend.   By contrast, nonfarm employment is about 8% below its long-term trend.

But there are some companies that are still investing in the U.S.  As part of a new paper for the Progressive Policy Institute,  I identified America’s “investment heroes”: The companies which are the leaders in domestic capital spending. Here’s the table from the paper:

In 2010 AT&T was the domestic capital spending leader, by a wide margin.  Verizon was next, followed by Wal-Mart. These are companies that invested  huge sums into the domestic economy, at a time when many other companies were still holding back.  Out of the top seven “investment heroes,” 3 were telecom companies, 3 were energy companies, and 1 was a retailer.  [Before you ask, I'm not ready to release the rest of the list yet. Some companies break out their U.S. vs non U.S. capital spending, but many don't,  so it takes time to estimate and verify the breakdown based on other financial data  ].

Why is this important? We at PPI see long-term economic prosperity as resting on a three-legged stool: Investment in physical capital, human capital, and knowledge capital.  Higher levels of  investment improve the productivity of U.S. workers, which in turn should show up as higher real wages and greater international competitiveness.  Or to put it another way: Without strong  capital spending at home, the U.S. economy will sink into irrelevance. * 

 The overarching aim of economic policy should be to encourage all three types of investment, since all are essential for long-term prosperity.  In particular, those companies which continue to invest in the U.S. need to be acknowledged for their contributions to the domestic economy, especially when other companies of equal size  are investing much less at home.  I wouldn’t go as far as to give them a medal, but let’s give them their due.  Rather than resorting to financial trickery, these investment heroes are making money the old-fashioned way–by spending on productive long-lived assets which will generate economic benefits for years to come.

*Some might argue that the U.S. has been able to generate good productivity gains since 2007 without capital spending.  But as regular readers of this blog know,  I am skeptical of the stunning productivity gains that the official statistics seem to report for many industries in 2007-09, the middle of the financial crisis (see this post here, for example).

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