American manufacturing – RIP

I was pleasantly surprised to read in ‘The Economist’ a news-story on the much touted revival of American manufacturing. I had been a sceptic of it  and I was happy to find some confirmation. The continued rise in the non-Petroleum trade deficit of the United States was a clear sign to me that America was nowhere near reclaiming competitiveness in manufacturing. In 2014, US real non-petroleum trade deficit as a % of real GDP hit 3.43% (data up to December 2014 now being available and with 4QGDP available). It is only slightly below the peak of 3.76% seen in 2005 and in 2006.

Look at the reasons cited in the Wall Street Journal article on March 10, 2015:

 The US trade deficit, excluding oil, hit a record high in January, according to the latest Commerce department data. It’s likely to continue widening since two major trends aren’t expected to disappear soon: A strong dollar and weak growth overseas. [Link].

There is only one small problem with this game of blaming the strong dollar and weak global economy. It is not consistent with facts. Over the last two decades, come hell or high water, rain or shine, American trade deficit had kept rising. It has been the only constant. In the first six years of the new millennium, even as the U.S. dollar plunged and global growth recovered after 2002, American non-petroleum trade deficit kept rising in dollar terms and as a % of GDP. Between 1994 and 1997, the real non-petroleum trade deficit stayed mostly constant in dollar terms and as a proportion of GDP. The US dollar had weakened substantially up to the Spring of 1995 and American productivity had a brief period of renaissance, thanks to advances in information and telecommunication technology, including the widespread diffusion of internet. That was the only time.

Other than looking at its own fundamental weaknesses, America is doing other things. In the latest semi-annual US Treasury Department Report on global currencies, it is blaming Korea for weakening the Won, it is asking Germany to spend more and save less and it wants China to do more to strengthen its currency. On fundamental grounds, there is a strong case for Yuan to weaken this year and next. I have not read the full report.

The hard truth is that America is no longer competitive and has not bothered to fix its productivity and excess consumption. Zero interest rates translate into zero incentive to save. Without savings, there is no investment. With zero interest rates, there is speculation. America refuses to look into the mirror and the real non-petroleum trade deficit is only one of the mirrors. It is an important one, however.

For the more proximate future, the prognosis is no good either. Bloomberg reports that

Sales of durable goods at U.S. distributors in January and February suffered the biggest two-month drop since the recession’s last gasp in early 2009, figures from the Commerce Department showed Thursday in Washington. As demand weakened, stockpiles built up, sending the inventory-to-sales ratio for those long-lasting goods up to an almost six-year high. [Link]


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