Impressive nationwide employment growth during the last month of summer masked a smaller, yet ominous shift in an industry that President Trump has simultaneously supported and undermined: manufacturing.
Factory payrolls shrank by 3,000 in August, government data show, reversing a year of gains that had averaged 25,000 positions a month but relied heavily on new businesses optimistic about growth from relaxed regulations and tax cuts.
Their expansion is being eroded by Trump’s escalating trade war, according to economists, corporate executives and lawmakers on both sides of the aisle, and newer, smaller factories are the most threatened.
Since Trump took office, the White House has imposed duties on washing machines, solar panels, metals and $50 billion of Chinese tariffs. It’s considering levies on $467 billion more in goods from China along with 25 percent duties on automobiles.
“We see serious risks to the manufacturing outlook from tariffs,” said Samuel Coffin, an economist with the Swiss lender UBS. “Many of the recent manufacturing job gains occurred in new establishments. In our forecast, many of these firms are likely to fail as a result of higher costs associated with tariffs.”
Manufacturing and mining together probably would have added 43,000 jobs a month without Trump’s duties, Coffin said.
Instead, UBS now predicts their payrolls will be stagnant in October and lose 10,000 positions in November before flattening in December. As many as 10 percent of new manufacturers fail in their first year because they can’t withstand a cost shock, UBS noted.
Already, executives at small businesses have warned the duties will force them to pay more for raw materials, necessitating job cuts. Larger businesses are passing as much of the cost increases as they can on to customers, and adjusting production plans to blunt the impact.
Ford Motor Co., for example, canceled plans to import its Focus Active crossover from China in 2019 because of the duties. When Trump opined on Twitter that the carmaker could now build the vehicles in the U.S., Ford reiterated that doing so wouldn’t be profitable.
Apple, meanwhile, warned U.S. Trade Representative Robert Lighthizer — whose office is handling incremental increases in tariffs on Chinese goods that may expand 10-fold from the current $50 billion — that the charges amount to a tax that will hurt U.S. consumers most.
“Tariffs will increase the cost of our U.S. operations, divert our resources and disadvantage Apple compared to foreign competitors,” the Cupertino, Calif.-based company wrote. Prices for products like the Apple Watch and the wireless headphones branded as AirPods will increase.
“It is difficult to see how tariffs that hurt U.S. companies and U.S. consumers will advance the government’s objectives,” Apple said. “We hope, instead, that you will reconsider these measures and work to find other, more effective solutions that leave the U.S. economy and the U.S. consumer stronger and healthier.”
Ultimately, Trump maintains, his tariffs will do just that by yielding better trade deals for the U.S. It’s a process he described to aides as “starting with ‘no’ to get to ‘yes,'” according to investigative reporter Bob Woodward’s new book “Fear: Trump in the White House.”
While the president has largely dismissed concerns about the damage that might be inflicted before his goals are achieved, his administration has pledged $12 billion in aid to farmers hurt by Chinese retaliation.
Trump says the tariffs, working in concert with tax cuts that allowed U.S. businesses to move assets back into the U.S. with no penalty other than a one-time fee, will spur an investment renaissance, with new factories that offer high-paying jobs.
“The capital spending boom that we promised would happen if we passed the tax cuts is under way,” Kevin Hassett, chairman of Trump’s Council of Economic Advisers, told reporters this month. “The cool thing about capital spending is that people build factories — that’s what capital spending is — and they do that in the first half of the year. It’s up 10 percent since the beginning of the year.”
In the second half of 2018, those factories are starting production, so output is increasing, he added.
“It’s certainly not our plan to have small businesses or agriculture, or anyone else in America, feel the brunt of a trade policy that’s designed to make the U.S. stronger and richer,” Lighthizer told worried members of a Senate Appropriations subcommittee during a late July hearing.
The businesses and farms suffering from the trade war’s fallout were already suffering from “bad deals and bad trade policy over a long period of time,” conditions that he said led to an $800 billion goods-trade deficit with China.
“It’s clearly a very negative trade situation: If you don’t accept that, then everything we’re doing doesn’t make sense,” Lighthizer said. “I don’t want anyone to think that we had sort of a level playing field, and we decided to do something to move back.”
Committee members, however, expressed skepticism about the administration’s tactics, with Chairman Jerry Moran, a Kansas Republican, and Sen. Jeanne Shaheen, a New Hampshire Democrat, suggesting that the American companies and workers getting hurt are the very parties the Trade Representative’s Office was created to help.
Jay Timmons, head of the National Association of Manufacturing, a trade group representing companies that contribute $2.25 trillion to the U.S. economy and employ more than 12 million, has made the same point.
“The costs of a sustained trade war have the potential to be devastating for America’s manufacturers and workers,” he said.
The factory employment decline in August, coupled with reductions to figures from previous months, may be hints of those costs, said Michael Gapen, an economist with British bank Barclays Plc. A global drop in new export orders may be another manifestation, though Gapen noted there’s not enough evidence yet to draw firm conclusions.
To be sure, much of the manufacturing drop was at automotive plants, which typically experience a lull in late summer when reconfiguring factories to handle new designs for the next model year, said Joseph Song, an economist with Charlotte, N.C.-based Bank of America.
And detangling the decline related to such seasonal patterns from the effects of the tariffs is difficult, agreed Jan Hatzius, an economist with the New York investment bank Goldman Sachs.
Barclays’ Gapen, who predicts trade tensions between the U.S. and China will worsen before they get better, has modeled the effects on employment of each country imposing 20 percent tariffs on all imports from the other.
Doing so would ultimately curb the economies of both nations by at least 0.2 percent, costing 250,000 jobs in the U.S., he said.
In an even more dire scenario, with the U.S. raising tariffs on all imports by 2 percentage points and partners retaliating in kind, permanent economic losses could reach 1.5 percent of gross domestic product, or about $291 billion, based on 2017 numbers.
In the past, Gapen noted, economic ties between China and the U.S. served as a buffer for the thornier aspects of their relationship. Now that the overall relationship is deteriorating, it’s unlikely Washington will be satisfied with a deal that simply increases exports to China, he said.
“Looking ahead, we see the U.S. — and by this, we mean many Democrats and Republicans and not just the Trump administration — as wondering how to best handle a relationship with China that appears to be turning more combative in many dimensions,” Gapen said. “Trade policy, in our view, is stuck in this vortex.”
