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

x

x

x

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.

Comments

  1. And good riddance that manufacturing is going away. The market is sending a signal: largely low-skilled manufacturing labor should be sourced from the developing world, rather than relatively expensive, high-wage US workers. This is an opportunity to retrain and regroup, rather than bemoaning those industrial jobs. Unfortunately, there is a large swath of the populace, apparently including you and Krugman, who will wail and wring your hands about any change, simply because it is different than what came before.

    What’s funny is that the “progressives” made the same plaintive noises a century ago, complaining about dirty manufacturing jobs replacing the then-dominant farm work. Now that manufacturing has been well-integrated into the economy, complaining about a loss of manufacturing jobs takes its place, repeating the silly pattern. Hilarious how the “progressives” are always so reactionary. :D

    • CompEng says:

      So whatever is happening is good by definition: why worry?

    • Mike Mandel says:

      Where do you think the value-added is being generated today? Please point to data.

    • CompEng, where there is a properly functioning market not driven by investor mania, ie the dot.com bubble, and/or govt interference, ie the housing bubble, what the market determines is for the best, yes, so don’t worry. :) One could argue that offshoring is being overdone in some cases these days, but I don’t think you could call it a mania and the govt is only helping it in the sense that Obama keeps layering on more dumb regulations that drive US companies away.

      Mike, simple, I only have to look at where profits are being generated. Of the top 25 most profitable sectors, I count eight that are tech-related and tech is dominated by the US. Further, it is obvious that publishing, which takes some surprisingly high spots in that ranking, will undergo massive changes as it moves to the internet and becomes more tech-oriented.

      Now I’m sure you’ll argue that those tech companies aren’t producing as many “jobs” as the manufacturing sector did, but I think we are in the early stages of the widening process, where a lot more people enter these new fields. Any time a new sector is taking off, the early entrants are going to profit from that rise disproportionately. However, as tech and the internet get bigger and bigger, the pressure for some entrepreneur to make those gains available to a much larger field of entrants grows irresistible. We haven’t reached that breakout point yet but it is inevitable, and there will be a lot more people working in tech and with the new opportunities it creates than there are now. Look at the rabid competition in the mobile sector right now, that’s only a sign of things to come.

      The one move the govt could do is remove the patent roadblock that is slowing everything down, but the dummies in Congress are too stupid to even consider that. They will do it only after innovation renders patents worthless after which their actions are irrelevant, not before when they could actually do some good.

    • Right on cue, Mark Perry has written an excellent post comparing the blend of manufacturing and services in the US economy over the last 60 years. Why should we care about manufacturing when it has been a declining share of the US economy for decades, just because it’s been falling more quickly recently? The US economy is the most advanced market in the world, and it is that way because it is less geared around manufacturing, ie we make less things. In an information economy, which is what’s around the bend, you want to make information, not “things,” because that’s where the money is.

      I’ll note that the US still makes the most money from manufacturing, it’s just higher value stuff that requires less workers, while the value of manufacturing is dropping everywhere, not just here. Despite this falling trend, the protectionist dunderheads in Germany and Japan and other wannabe “industrial powers” cling to their manufacturing base. We shouldn’t emulate their stupidity here in the US, though we have done the same to some extent with GM and Chrysler.

Trackbacks

  1. [...] –Negative Trade: Mike Mandel is skeptical about claims of a manufacturing resurgence. “The real trade deficits in capital and consumer goods are both nearing all-time (negative) records. …. end of excerpt Article Source: http://blogs.wsj.com/economics/2011/05/24/secondary-sources-sentiment-millionaires-negative-trade/ This entry was posted in Millionaires and tagged Millionaires. Bookmark the permalink. ← Love, competitions keep cook creating [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Archives

Follow

Get every new post delivered to your Inbox.

Join 65 other followers

%d bloggers like this: