Marc Levinson

Tag: Economics

  • A Different Forecast

    Those who follow international trade pay close attention to forecasts of economic growth, consumer spending, and business investment. No surprises there: it seems obvious that if consumers are spending freely, imports will be in greater demand, while if a country’s economy is headed downward, its appetite for foreign goods will wane.

    A new report from the United Nations Conference on Trade and Development, released in early December, requires a rethinking of the forces driving trade in goods. Since the global financial crisis struck in 2008, UNCTAD finds, the volume of trade has generally moved in tandem with the global financial cycle, except during the COVID-19 pandemic.

    UNCTAD’s findings draw a measure of the global financial cycle developed by economists Silvia Miranda-Agrippino and Hélène Rey. Their measure incorporates hundreds of time series covering things like interest rates, cross-border capital flows, and leverage of major banks. UNCTAD finds it to be highly correlated with the volume of trade, showing that “Global financial conditions and world trade are heavily interlinked.” It adds, “many economic textbooks do not consider this dimension when they discuss the determinants of trade flows.”

    This work yields some surprises. It shows, contrary to conventional wisdom, that when the U.S. dollar strengthens against other currencies, the impact on U.S. imports is negative, not positive. It also finds that a rise in the VIX index of U.S. share-price volatility triggers an immediate global decline in trade as firms hunker down in the face of unstable economic policies. While trade in commodities and energy products doesn’t move with the financial cycle, trade in containerized freight and motor vehicles is highly correlated — suggesting a relationship between financial markets and freight rates that trade watchers might want to examine more closely.

  • About That Manufacturing Renaissance

    The Biden Administration asserts there’s a “manufacturing renaissance” underway in the United States. Before it, the Trump administration claimed much the same. The federal government has certainly handed out a good deal of money to support manufacturing, in addition to aiding it with tariffs put in place by both Trump and Biden. But while manufacturing capacity, as measured by the Federal Reserve Board, has increased about 2.3 percent since Biden took office in 2021, labor productivity in manufacturing — basically, output per work hour — is down, according to figures released in early December. Total factor productivity, a measure of how industries improve technology and production processes to squeeze more output from a given quantity of inputs, fell in manufacturing in 2023 even as it rose in most other U.S. industries. These facts help explain why the Fed’s Industrial Production Index has been flat since the Obama years, save for a dip during the COVID-19 pandemic.

    How does this square with the boom in factory construction and the many newspaper articles about new factories reviving down-at-the-heels communities? What seems to be going on is less a manufacturing renaissance than a restructuring. According to the Census Bureau, the computer, electronic, and electrical manufacturing sector has accounted for well over half of manufacturers’ construction spending this year, and construction in the transportation equipment sector is also strong. Meanwhile, construction in other manufacturing sectors has barely grown or even declined after accounting for inflation.

    This is relevant to the much-discussed “reshoring” of manufacturing. To the extent that “reshoring” is underway, it seems to be concentrated in a handful of sectors, notably semiconductors, electric vehicle batteries, pharmaceuticals, and medical equipment. There are few signs of U.S.-made goods supplanting imports of industrial machinery, plastics and rubber products, synthetic fibers, paper, textiles, and any number of other products. Despite all the government support and the talk of tariffs, many manufacturers don’t seem to see the future in the United States.

  • The Value of Value Chains

    Usually, the action at the American Economics Association’s annual meeting revolves around weighty pronouncements by prominent economists. What I found striking about this year’s meeting, which was held in New Orleans the first weekend in January, was the considerable attention devoted to value chains. These sessions didn’t attract the huge crowds of the ballroom speeches about inflation and innovation, but they did offer some interesting insights.

    One important development is the use of data about individual firms to understand how value chains actually work. Some of the most useful data comes from tax records, which may provide a detailed picture of business-to-business relationships. One such study, presented by Felix Tintelnot of the University of Chicago, uses Belgian tax and customs filings to show that imports account for a far greater share of domestic consumption than the government estimates. A study presented by Yuhei Miyauchi of Boston University, using tax data from Chile, shows how COVID-19 quickly disrupted relationships among domestic firms, forcing value chains to be forged anew. A paper offered by Nitya Pandalai-Nayar of the University of Texas, based on firm-level data, reports that 44% of U.S. factories export, more than twice the rate estimated from government surveys. One consistent finding: traditional trade statistics don’t offer an accurate picture of how value chains work.

    Other presentations discussed such matters as firms’ responses to input shortages, ports’ responses to shipping delays, the use of inventories to manage supply-chain risk, and the role of interest rates as a driving force behind globalization. The common thread is that time-worn two-country, two-commodity models of international trade have given way to the understanding that trade is undertaken by firms engaged in complex relationships, not by countries exchanging cloth for wine.