Manufacturing Decline Follows Unaddressed Inequality And Trade Wars.
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The economy is slowing while manufacturing already appears in a recession. President Trump’s trade wars over the past two years or so have massively contributed to the recent downturn. But his economic policy failures go beyond that. Most importantly, rather than addressing glaring economic inequalities that had held back growth for almost two decades, President Trump exacerbated them with a massive and massively wasteful tax cut in 2017.
The economy and the labor market have performed subpar since the recession of 2001. Since the stock market crash of 2001, corporations have been prioritizing profits even more than before by squeezing workers. They used those extra profits to keep shareholders happy rather than to hire more people and invest in new manufacturing plants, office buildings and new equipment like trucks and computers. Consumption and investment spending have been slow for much of the past two decades as a result, while income and wealth inequality soared to new, excessive heights.
President Trump inherited an economy that had been on the mend for the better part of a decade after the economy experienced the worst recession since the Great Depression. Efforts by the Obama administration to boost investments, for instance, through incentives for more spending on renewable energy as well as attempts to reign in runaway inequality by boosting workers’ wages through a higher minimum wage and better overtime protections had been blocked by a recalcitrant Republican-controlled Congress. Economic growth was still below-average and income and wealth inequality neared record highs by the time President Trump took office in early 2017.
He promoted disproven trickle-down tax cuts as the salvation for both slow growth and excessive inequality. The idea was that giving cash-rich corporations and wealthy Americans even more money would lead companies to finally invest more and those additional investments would boost workers’ wages by a promised $4,000 a year. Predictably, neither faster growth nor the wage bump have happened. Instead, income and wealth inequality reached and stayed near record highs.
To make matters worse, President Trump pursued ad-hoc trade wars with a range of countries from Canada to the European Union to China. U.S. exports have plummeted, firms have pulled back on investments and economic growth has slowed for more than a year now (see figure below).
The result has been a decline in manufacturing activity. Industrial production in manufacturing has fallen by 0.4% from August 2018 to August 2019 after weakening since the spring of 2018 (see figure below). And manufacturing job growth has also markedly slowed to a monthly average increase of 11,500 jobs from August 2018 to August 2019, down from an average monthly increase of 21,300 for the 12 months prior – a drop of 46% in just one year.
Manufacturing production has slowed markedly since spring 2018.
Calculations Based On Federal Reserve, Industrial Production And Capacity Utilization
The decline in manufacturing since the spring of 2018 has put a recovery of manufacturing production to the levels before the Great Recession even harder. For the entire business cycle, which started at the end of 2007, industrial production in manufacturing is down by an annualized monthly average of 0.4% (see figure below). More importantly, the period before the Great Recession was already marked by a substantial slowdown in manufacturing activity as industrial production only grew by 2.0% during that business cycle, from March 2001 to December 2007 after expanding by 3.3% in the 1990s (see figure below). The current slowdown in manufacturing made a bad situation in manufacturing worse.
Manufacturing Production Is Still Below Levels Before The Great Recession.
Calculations Based on Federal Reserve, Industrial Policy and Capacity Utilization
But the problem of slowing economic growth extends beyond manufacturing and thus is not all due to fewer exports. Construction job growth has also substantially declined since mid-2018. Buying a new house is often out of reach for middle-class families who are mired in costly credit card, student loan and car loan debt. Construction employment growth fell to a monthly average of 14,800 new jobs from August 2018 to August 2019, down from 29,100 jobs in the preceding 12 months. Importantly, mortgage interest rates fell during that time. The slowdown in construction instead is the result of massive economic inequality that has held back America’s middle class for two decades.
Income and wealth inequality have reached or stayed near record highs in the past year or so. Income inequality, for instance, soared to its highest level in 50 years in 2018. And the concentration of wealth at the very top has grown to its highest level on record dating back to 1989. And the wealthiest one percent of households owned 32.2% of all wealth in the United States since the end of 2016, exceeding all previous levels of wealth concentration. As the top has pulled away, families in the middle have struggled with slow wage growth and rising debt for two decades now.
The current economic slowdown should focus the president’s and Congress’ attention on what really ails the economy. Massive and persistent economic inequality have held back families and communities for too long. Doubling down on the ineffective supply-side tax cuts of 2017 is not the answer. They didn’t work then, so why would a repeat work now? Policymakers instead should invest in a crumbling infrastructure, while also pursuing measures that boost wages for working-class Americans. These measures should include a higher minimum wage, making it easier for people to join a union, giving workers more power in negotiating for better wages, and more widespread overtime protections as a start. The economic slowdown will linger and possibly turn into a recession, unless the problem of persistent economic inequality is finally and meaningfully addressed by boosting middle-class families’ fortunes.