More on Cedar Balls

Remember that about two months ago I put up a post entitled Cedar Balls–”Grown in USA, Made in China”?. It created a fair bit of discussion (see, for example, “Wood to China: Cedar balls and rum” ).

I recently had an extended phone conversation with  Howard Goldman, who owned and ran Cedar Fresh from 2003 until recently, when he sold it (yes, he’s looking for a new business opportunity). Goldman confirmed that the company does ship cedar logs to china in containers where they are made into cedar balls, cedar hangers, and the like. “We used to do all our production in the U.S.”, says Goldman, “but we couldn’t be competitive.” It’s much less expensive to manufacture in China, he says, even with shipping both ways.

I asked Goldman to estimate the difference between producing in China and the U.S. He replied that it varied significantly between items, but cedar hangers tended to be 20-30% less expensive when made in China, including shipping and customs duty.

Goldman pointed out that Cedar Fresh is one of the few (“if not the only”) cedar storage accessories companies that still does manufacturing here in the U.S., with his primary remaining U.S. facility being an adult handicapped day care center in rural Arkansas.

Finally I asked if he could reduce the cost of producing in the U.S. by using machinery to do the most labor intensive parts of the production process (such as packaging). Goldman noted that a lot of the machines he would buy are actually made in China, and a lot cheaper there. So China may be cheaper than the U.S. both for labor and for capital investment.

More on manufacturing

Karl Smith, writing on Ezra Klein’s Washington Post blog, has some good posts on manufacturing here and here. Karl writes:

It’s anathema in many economics circles to speak ill of international trade. Indeed, I am not even willing to go that far. What I am saying is that the story of this recession is a part of the larger story of globalization and its effects on the U.S. labor market.

Yes.

“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.

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…]

Air Force Certifies the Weakness of Domestic Manufacturing

I was just revising a portion of my textbook, Economics:The Basics and I happened to come across this March21, 2011 entry in the Federal Register where the Air Force is granting a waiver from the  Buy American requirements of the American Recovery and Reinvestment Act of 2009. This is what the waiver said:

The domestic nonavailability determination for these products is based on extensive market research and thorough investigation of the domestic manufacturing landscape. This research identified that these products are manufactured almost exclusively in China.

Which products are they talking about?

… the following construction items to be incorporated into the project FTQW094001 for the construction and replacement of military family housing units at Eielson AFB, Alaska under task order FA8903-06-D-8505-0019. The items are 1″ Collated Screws, Shank #10; 1-1/2″ (Taco) Air Scoops for Hydronic Heating Systems; 1-5/8″ Ceramic Coated Bugle Head Course Thread Screws; 2″ (Taco) Air Scoops for Hydronic Heating Systems; 2-1/2″ (Taco) Air Scoops for Hydronic Heating Systems; 2-1/2″ Collated Screws; 3″ Ceramic Coated Bugle Head Course Thread Screws; 3″ Spool Insulators;3/4″ Collated Screws, Shank #10; 3″;Bolt Guy Clamp; Ceiling Fan; Ceiling Fan w/Light Kit; Door Hinge Pin Stops; Exterior Wall Mount Two Head Flood Light w/270 Degree Motion Sensor & Brushed Nickel Finish; Ground Fault Circuit Interrupt (GFCI) Receptacles; Handrail Brackets; Maclean Power Systems Guy Attachment; Residential Style Satin Chrome Handrail Bracket; Satin Nickel Outdoor Sconce Light Fixture; Tamper-Resistant Ground Fault Circuit Interrupt (GFCI) Receptacles; Weather-Resistant Ground Fault Circuit Interrupt (GFCI) Receptacles; Pendant Bar Light Fixture; 24″ Bath Vanity Light Fixture; Pendant Chandelier Light Fixture; Linear Fluorescent Ceiling Lighting Fixture (48″ Lensed Fluorescent w/Dimming Ballast & Satin Aluminum Finish); 48″ Bath Vanity Light Fixture; 20″ Utility Shelf Bracket; Chrome Finish Residential Dishwasher Air Gap Cap Fitting; Satin Chrome Finish Convex Wall Mount Door Stops; Residential Microwave w/Range Hood; Residential Style Polished Chrome Towel Ring; Residential Style Polished Chrome Toilet Paper Holder; Residential Style Polished Chrome Double Robe Hook; Residential Style Bright Stainless Steel 60″ Curved Shower Rod & Flanges; Residential Style Polished Chrome 24″ Towel Bar; Residential Style Polished Chrome 30″ Towel Bar; Satin Nickel Finish Wall Mounted Spring Door Stop.

Hmmm…it’s pretty amazing, don’t you think, that the Air Force is certifying that none of these items are available from American manufacturers. It’s even more extraordinary given that the BEA reports that  the U.S. fabricated metal and electrical equipment industries were producing at very high levels as recently as 2007. Similarly, the BLS is reporting record levels of output in the ‘turned product, screw, nut and bolt’  industry as of 2007.

I see four possibilities.

First, the Air Force could be lazy. The parts are really available, but they can’t find them.

Second,   U.S. manufacturers only make sophisticated parts, not towel bars and door stops.

Third,  these industries were doing great through 2007,   and have only gone offshore since the recession.

Fourth,  the official data didn’t pick up the offshoring in the 2000s.

Take your pick.

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