Economists usually are inclined to trust the data coming out of the Federal Reserve Board and the government statistical agencies, but the NYT told us they are wrong in an article on trade negotiations with China. The article refers to a disputed promise by the Chinese government to reduce its annual trade deficit with the United States by $200 billion.
The piece explicitly dismisses the significance of this promise. It tells readers:
"Economists say that the purchase by China of $200 billion more in American goods per year — an amount equivalent to more than half of the annual American trade deficit with China — simply is not practical. 'The short answer is these are unrealistic numbers,” said Chad Brown, a senior fellow at the Peterson Institute for International Economics.'
"Even if the Chinese stopped buying other foreign products, like Airbus airplanes from the European Union or soybeans from Brazil, and purchased solely American products, it would add up to only a small fraction of the $200 billion total they are promising to purchase.
"'It would even be a stretch to get it to $50 billion,' Mr. Bown said.
"That is because the United States economy is already running near its full productive capacity, meaning it would not be able to produce enough new goods to meet Chinese demands, especially in the short term.
"In that scenario, the United States would probably stop selling airplanes, soybeans and other exports to other countries and sell them to China instead — shrinking the United States trade deficit with China but leaving the United States trade deficit with the entire world unchanged."
The claim advanced by Mr. Brown, which the piece implies is shared by all economists, implicitly assumes both that the US economy is at full employment and that the manufacturing sector cannot expand its output. Government data would indicate that neither claim is true.
In terms of being at full employment, the idea is that if we got additional demand, say from increased exports to China or a new Amazon headquarters, it could not lead to increased output and employment, since pretty much everyone who wants a job already has a job. In that story, increased demand will just lead to higher inflation.
While some economists may make that assertion about the US economy at present, the fact is there is essentially zero evidence to support it. Inflation, excluding fluctuations from energy and food prices, has been pretty much flat the last three years, as has been wage growth. While 3.9 percent is a historically low unemployment rate, there is little reason to believe that it cannot go still lower.
It is also worth noting that many of the people asserting that the economy is at full employment with 3.9 percent unemployment also claimed it was at full employment at 4.5 percent unemployment and in many cases even 5.5 percent unemployment. There is little reason to believe their understanding of the economy today is better than it was at those prior dates.
The other key point is that even if it were true that the economy is at full employment at its current level of output, there could still be a shift in the composition of output. Specifically, if we had a lower trade deficit, we could produce more manufactured goods and perhaps have fewer people working in fast food restaurants and convenience stores. Since manufacturing jobs tend to pay more than these other jobs, this shift would be good for workers.
While Mr. Brown is arguing that the manufacturing sector can't expand further, in the most recent data, the Federal Reserve Board reports that the manufacturing sector was operating at 75.8 percent of capacity in April. This is below the 78.3 percent average of the last fifty years and well below the 85.6 high over this period.
There also seems to be little problem for manufacturers in finding new workers. The average hourly wage in manufacturing increased by just 1.4 percent over the last year. This is well below the 2.6 percent pace for the private sector overall, indicating that manufacturers are not having an especially hard time attracting workers.
While it is not clear whether China is serious about reducing its trade deficit with the United States by $200 billion (its leadership denied the claim and the source for the piece is "people briefed on the deliberations"), if it did reduce its surplus by this amount it could have a substantial impact on US manufacturing output and the labor market.