What happened? How did American industry contract in an era in which it receives the support and attention of the leader of the free world?
In this case, there may have been such a thing as too much support and attention. In part, U.S. manufacturing growth was slowed by Trump’s efforts to aid it: an ongoing trade war and the dissipation of a small boost from the Tax Cuts and Jobs Act. But it also was hit by forces that aren’t entirely within Trump’s control, such as oil prices and a global economic slowdown.
An industrial president in a postindustrial country
As a country develops, it tends to pass through stages. A nation of farmers (and miners, loggers and hunters) evolves into a nation of manufacturers, which transitions into a nation of service workers and consumers.
When Trump was born in 1946, factories employed more than a third of the American workforce. In July, they tied a record low of 8.5 percent. One of the benefits of this transition? The strength of domestic consumers provides the United States with a steady economic engine that is less reliant on other economies. There is, however, a difference between less reliant and independent.
Manufacturing last turned south in 2015 and early 2016, just as Trump was attracting thousands of Rust Belters to campaign rallies at which he vowed to make Made in America great again. You can argue, as New York Times reporter Neil Irwin did in 2018, that this “mini-recession” explained “some of the economic discontent evident in manufacturing-heavy areas during the 2016 elections.”
In the first quarter of 2017, as Trump’s term began, manufacturing posted its best quarter since 2014. The turnaround appears to have started under President Barack Obama and accelerated under Trump.
For a while, it looked as though regime change had aroused what economists call animal spirits, or the hard-to-quantify psychological forces that compel consumers and corporations to spend and invest. But at the end of 2018, the boom had peaked and began to decline. Industrial production still hasn’t recovered.
It’s not much of a bust, as these things go. Manufacturing has fallen 1.2 percent over two quarters, compared with as much as 12.4 percent over a similar period during the Great Recession. It may have escaped wider notice if Trump hadn’t brought so much attention to the sector.
To put the decline in context, manufacturing climbed 5.3 percent during the boom, which ran from the end of 2016 to the end of 2018. Manufacturing hadn’t grown like that since the early days of the recovery, when a faster, longer Obama-era boom was aided by a surfeit of excess capacity.
A low-energy economy
Manufacturing is sensitive to changes in demand from its customers and changes in the cost of goods from its suppliers. Some factors influence both. The Trump boom came as oil prices recovered from about $45 a barrel (West Texas Intermediate crude) in November 2016 to more than $70 a barrel in October 2018.
Relatively small swings in oil prices can send business-investment numbers spiraling. The most recent survey by the Federal Reserve Bank of Kansas City shows that drillers can eke out a profit at current prices but that they won’t substantially ratchet up drilling until oil fetches $66 per barrel. Producers have been pulling rigs offline, and Jason Brown, an economist at the Kansas City Fed, said the more profitable move right now is probably to leave the oil in the ground until prices rise.
During the boom, most growth in U.S. industry — a broader sector that includes resource extraction — came in its largest and fastest-growing category: energy. The biggest drags during the bust have been in categories such as automobiles, transportation equipment and auto parts, which are sensitive to steel and aluminum tariffs, and to oil prices.
Should the president get credit for the oil-fueled Trump boom? His supporters will point to deregulation and the opening of more land to drilling. But drillers saw more sustained growth during the Obama administration, before regulations were slashed. And although oil drilling on public land has increased 24 percent this year from its 2016 average, overall drilling in the United States is up even more (36 percent) over the same time period, Energy Department data show.
Even more telling is that on at least 11 occasions, Trump has tweeted either to celebrate low oil prices or pressure producers into pumping more oil and forcing prices down. Lower oil prices tend to lead to lower oil and gas investment. This lower investment helped kill the Trump boom. This alone should suggest that he had little responsibility for energy’s rise.
Businesses invested more. Was it the tax cuts?
Energy’s wild swings obscure that every broad manufacturing sector, from defense to consumer goods, grew during the boom, and that most fell during the downturn. The rapid up-and-down investment cycles in the oil industry ripple across the economy, but they’re not the only source of volatility.
“We can’t say this is all because of oil and gas; it’s probably not,” Brown said. “Trade issues and weaker global growth seem to be slowing industrial production more broadly." He added that many folks don’t realize just how much the booming fossil-fuel sector can drive changes in U.S. industrial production.
“Oil and gas has strong linkages back to manufacturing. They need steel, and they need pumps, and they need trucks,” said Timothy Fitzgerald, an economist at Texas Tech University’s Rawls College of Business. Fitzgerald served on the president’s Council of Economic Advisers during much of the recent boom.
Business spending on equipment was one of the strongest non-energy contributors to the boom. Its effect was about one-fourth that of energy and about equal to durable goods, particularly automobiles and parts.
“The administration gave firms of all different stripes a huge incentive to upgrade their business equipment through the tax reform package,” Fitzgerald said.
He left in late 2018. A May report from the nonpartisan Congressional Research Service found that a limited boost in business investment was possible, but that “it would be premature to conclude that the higher rate of growth … was due to the tax changes.”
Trade war turbulence
By linking his political success to the success of American manufacturing, the president has exposed himself to the gyrations of international markets at the very time that he’s throwing them into turmoil with his keep-them-guessing approach to foreign trade.
“Almost all industrial production, with the exception of defense-related activities, is pretty trade sensitive,” said Michael Hicks, an economist at Ball State University in Indiana.
New tariffs are being announced all the time. It will be years before we can measure their full effects, but we’re starting to get data on one of the first. When Trump imposed tariffs on steel and aluminum in spring 2018, it boosted the fortunes of companies such as U.S. Steel as prices rose. But the honeymoon didn’t last. The nation’s second-largest producer has since idled two blast furnaces. It recently announced that it would lay off “less than 200” employees in Michigan. Its customers are squeezed by a global slowdown linked, in part, to the president’s trade wars.
The president has repeatedly professed his love for John Deere, and he recently blamed the Federal Reserve for making it difficult for the Illinois equipment manufacturer to compete. But on an August earnings call, Luke Chandler, the company’s chief economist, listed “uncertainties caused by trade disputes” alongside weather and disease as drags on the agriculture sector. He did not mention interest rates. The company, meanwhile, has lowered expectations and vowed to cut costs.
This summer, a Houston-based pipeline firm announced that it would charge users an additional fee to cover a tariff-related rise in steel costs, as originally reported by Collin Eaton at Reuters.
In the September beige book, a regular report on local economic activity from regional Federal Reserve officials, businesses remained optimistic, but tariffs and trade were cause for concern almost everywhere.
In the Boston region, officials reported that an electrical equipment business “said that the tariffs had led them to invest more in automating factories in the U.S.” In the New York region, a major retailer said sales had slowed in early August, in part because it had to raise prices because of tariffs. In the Kansas City region, trade uncertainty weighed on incomes in an already weak agriculture sector. And everyone from manufacturers in the Cleveland region to service-industry firms in the Richmond area said they had delayed investments because of trade tensions.
An uncertain world
It’s difficult to discern where the fallout from the trade war ends and where the global slowdown begins. Especially because one helped beget the other.
According to Hicks, the true price of Trump-related trade disruptions will be seen in the reordering of the global supply chain. “That process of moving commerce around to avoid tariffs becomes very costly, it delays production,” he said. “That sort of disruption is enough to significantly slow growth,” he added later.
Hicks noted that recreational-vehicle manufacturers’ sales have begun to fall. RV sales have tended to drop in advance of the coming recession — they’re the sort of middle-class luxury that gets cut first when budgets tighten, as recently reported by the Wall Street Journal’s Shayndi Raice. One Texas manufacturer said steel prices have risen 22 percent since the tariffs bit, Raice reported.
Fitzgerald said the uncertainty driving the economic slowdown can’t all be blamed on the president’s trade war with China. There’s chaos in Venezuela, escalating disputes with Iran, Brexit and even an upcoming election in Canada. According to one widely watched index, global policy uncertainty is hovering near its highest levels on record.
“There are a lot of people who want to hang all of that on trade,” Fitzgerald said. “Trade’s part of it, but it’s not all of it. There are a lot of other things going on.”
Traditionally, Hicks said, when the U.S. economy tips into recession, manufacturing is hit first and hardest. Right now, it’s showing signs of weakness, but it’s still unclear how far a downturn might go.
Manufacturing employment growth is slowing, production is down and factory owners are cutting hours. In July, the most recent month for which the Labor Department has data, overall hours worked by nonmanagerial factory employees declined at the fastest rate since early 2010. Similarly, the average factory worker is getting less overtime than at any point since 2011.
Trump has promised that a range of elusive trade deals, particularly with China, will revive U.S. manufacturing. But there is no sign of a breakthrough. And in the interim, many U.S. companies are waiting to see what happens.