Another month, another robust read on US services sector activity.
The flash print on S&P Global’s gauge for November came in at 57, not searing exactly, but probably straddling the line between warm and outright hot.
As the figure below shows, it was the best services update since March of 2022, which is to say the highest reading since the Fed started raising rates.
The manufacturing index remained mired in contraction, but at this point, that’s just par for the course. (“We’re going to bring back American manufacturing!” lied every US president, including the one who’s about to take office for a second time.)
Needless to say, businesses were optimistic following the election. “The business mood has brightened in November, with confidence about the year ahead hitting a two-and-a-half year high,” S&P Global chief economist Chris Williamson said Friday, adding that “the prospect of lower interest rates and a more pro-business approach from the incoming administration has fueled greater optimism, in turn helping drive output and order book inflows higher in November.”
People buy Donald Trump’s balderdash. Really they do. And while I think it’s silly (there’s a childish element to it), it’s important to note that business sentiment can be self-fulfilling. If businesses are optimistic, they hire and restock, which means plentiful jobs, which leads to more spending, and so on. The risk is inflation, and here again we’re confronted with the same potential incongruity: The Fed won’t be able to, or at least won’t have a reason to, cut rates aggressively if the services economy continues to steam along.
On the factory side, Williamson suggested some manufacturers are excited about “Tariff Man.” “The promise of greater protectionism and tariffs has helped lift confidence in the US good producing sector, which is already feeding through to higher factory employment,” he said.
Folks, listen: I get it. Globalization hollowed out American manufacturing and sowed the seeds for some of the country’s worst societal ills, including an opioid epidemic which, in the early stages, disproportionately impacted working class whites beginning in the late 1990s. If you want to suggest I’m some kind of aloof, liberal academic who doesn’t understand that or who’s somehow oblivious to sundry post-globalization socioeconomic catastrophes across the Rust Belt and Appalachia, I have one question for you: Where were you when I was in the trenches of the opioid wars? In business school or writing strategy notes on Wall Street or running a portfolio from an office somewhere?
As someone who not only gets it, but who’s actually seen it, let me say, definitively, that tariffs on everything from toys to turmeric aren’t going to solve anything. Really they aren’t. The naivety on this (and plenty of other things besides) is mind-boggling. Think about how long this problem has been going on. American manufacturing has been in decline for damn near half a century. The country needs massive and sustained industrial policy over decades to reverse that. Slapping a tax on everything America imports isn’t going to accomplish a thing other than pissing off anybody and everybody we trade with and pushing up prices for consumers.
I realize I’m preaching to the choir here, but I feel like I should (re)emphasize: The contention, promulgated explicitly by Trump, that China — or anyone else — writes a literal check to the US Treasury to cover trade duties is a bald-face lie. As in: It just isn’t true. It’s not an “alternative fact,” and it’s not something about which there are “different perspectives.” There is just the truth and a lie. And Trump’s selling the latter.
The reality — and this is underscored every, single month when PMIs like Friday’s betray a bifurcated American economy where “growth remains heavily reliant on services,” as S&P Global’s Williamson put it — is that America either needs to commit itself to a decade or more of intense investment in US manufacturing carried out in a systematic way by serious people, or else concede that this particular circle can’t be squared — that the most advanced economy the world’s ever known isn’t going to be a hub for basic manufacturing anymore. If that’s the case, guess what? America can’t adopt an overtly adversarial approach to countries where basic manufacturing takes place, because we need what those countries produce.
That’s the inescapable bottom line, and it should be contrasted with the pitch from Trump which is basically this: I’ll fix 50 years of negligence in four, with tariffs. If you bought that, and voted for it as a disaffected blue collar worker, come get some percs, because you’re gonna need ’em to get through these next few years. If tariffs are the best idea we have for resurrecting American manufacturing, the country’s left-behinds will have more luck serving Rusty Nails to the guy I used to be than finding a factory job in the Rust Belt that guy used to serve.
Rusty Nails are the wimp substitute for Dead Rats, though I’ll confess I did like them as well when I consumed such delectables.
BTW – DJT is promising a manufacturing renaissance within two years thanks to his tariffs.
On the entertainment front, I plan to stream Winter’s Bone again this weekend for a little Heisenberg-type fix.
Watch Miller’s Crossing instead. If you only ever trust one thing I’ve said, let it be this.
Greatest American film of all time in my opinion. Bar none.
I nominate Blue Velvet in that genre. Frank was a seminal character, though I associated with Ben most of all. What a mind trip!
I first saw it in a movie theater in Hong Kong where I was the only person laughing in quite a few scenes. Some locals moved Way from me which made the experience all the better!
Another in my Top 10 (and it borrows some elements from Miller’s Crossing): https://www.rottentomatoes.com/m/brick
Yeah, but I really like Wing and the contemporary setting of Bone. Nice white folks cookin’ up some meth.
I recall watching Brick at my wife’s behest. I’ll cue it up again. Thanks.
I taught my my strategy students a little trick to use when seeking to unravel cause and effect chains. I told them to take any fact you feel is part of a chain you are intent on understanding and ask two questions. The first question is “why?” The answer will be the reason that fact exists. The second question is “so what?” Here’s a problem no one but true insiders really understand. American manufacturing is often said to have become “hollowed out.” Why do they say this? Because in a chase to raise profits we did not just outsource labor, but many critical functions have been moved to locations characterized by lower costs and special expertise. Not only have we asked firms in other countries to build our products or critical inputs to those products. We have also outsourced design and engineering offshore. A major global manufacturer for whom I consulted in the area of resource-based strategic planning, conducted some internal research discovered that the firm no longer had a single employee who had the requisite knowledge of one of its most important product inputs. It turned out that the firm had outsourced all its required expertise. Further research showed that the firm no longer controlled needed knowledge or expertise for several of its most important critical skills and components.
The second question here is, of course, so what? The answer to that is going to prevent Trump from making good on his promise to use tariffs to force American industry back onshore. Never happen. We just don’t have enough of the talent we need to accomplish that. The other guys have it. Look at the head engineers, designers, and even marketers and CEOs in our top companies. What proportion are so-called native Americans? Why is that important? Pretty obvious. The founder and CEO of NVDA can take that company anywhere he wants. Around fifty percent of the engineers, PhDs, doctors and scientists graduated from American schools in the last 30 years+ were not from here. We don’t decide what they do, where they take their expertise, etc. This problem will take generations to fix. No emperor or person of the ilk that will undoubtedly make up Trump’s cabinet can do anything about this. And today we see that Musk, and his buddy will be hooking up with MTG. Oh my! Our drive to make more money is not about politics, it’s about knowledge, expertise, people, training, and experience. We gave half of that to our global competitors. Tsk, tsk. This big Trump strategy will not be accomplished because our companies are still sending our work out of town to keep their stock prices up. Sorry, but tariffs are just another “wall” project. One more so what; deporting all the workers we will need to do the work here is stupid when we consider that we already have the lowest unemployment in decades. Who will do the work? And way too many of our experts have aged out or died.
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theoretical comment … I am getting less and less convinced that globalization had much to do with our current social ills (just a symptom imho) … I am coming around to seeing the social / cultural shift from a moral framework to a transactional framework the vector to understand. Circling back to globalization, in search of better and better transactions (margin?), … cheapest total PRODUCT cost (regardless of social, environmental costs)
Apologies in advance for the factless ramble.
I was about to say “the worst part is”, but with Trump, I have no idea what the worst part will be. Anywho, the point I was going to make was that Trump will try to kill the initiatives Biden put in place to develop the manufacturing capabilities that we do need to onshore.
The only silver lining I see is that we hopefully stop importing so much cheap plastic garbage. Less consumption would be a good thing.
Myself and 3 neighbors have decided to stop spending beyond basics and target Dem owned businesses for exceptions. We have grown to 8. Why should we spend and help DJT economy? This is incredibly tactical, pissing in the wind. We have no leader guiding our mass response. Besides, we could very well need the savings near future!
Tariffs on china raise prices on the poor who are compelled to demand more pay, thereby igniting inflation which then provides more money to import the same quantity as before. If tariffs were focused in luxury products then consumption might drop. However that would not accomplish the unstated goal of raising taxes on the poor and cutting taxes on the wealthy. About all tariffs on china do is to transfer liability to the poor creating more dissatisfaction? I wonder how much the poor being squeezed created demand for Donnie’s lies. Is that the real appeal of right wing extremism if not fascism? The poor voting against their very interests? If so it is a jig that ends one day, with no chairs at all left to sit in.
Hit the nail on the head. Notwithstanding your point that delusional thinking can actually manifest the delusions it wrongly believes are possible (RIP irony), the c-list trading celebs on the podcast circuit are excited over DJT and his band of clowns are going to change America forever (“the whole system of how we force people to be obese” and other such farcical logic that makes me remember why listening to those shows is worse than pointless), which makes me think that at some point this whole Trump trade is a massive fade. Like pfizer at a ten-year low after an earnings blowout yielding 7% on fears that brain worm bob is going to change the structure of U.S healthcare and our food system. I don’t know, man. Granted, I legit thought Harris was going to win, so I should probably get the message: stop thinking you’re smarter than idiots. But I can’t help but think that as we watch Trump yolo his “mandate” on wild cabinet picks that his whole presidency could be a nothing burger. With tax cuts. For big pharma. Minus regulations. On big pharma. And the environment. Sorry bob. Anyway what do i know (ht mm) but if i remember correctly trump is actually stupid and incompetent at everything except lying.
I edited this comment for language. God knows I’m not averse to an abrasive cadence, but I’d gently ask that commenters remember: Google does “see” everything. I don’t mind if comments are caustic, but we kinda need to make sure they don’t present to an algo like something that needs to be flagged, plus remember that people are reading this site at work.
My bad, thanks for the reminders.
It seems to me that there is a fundamental, or deliberate, misunderstanding of why offshoring occurred and how tariffs may or may not work. Tariffs protect domestic production already underway. Basically punishing consumers by supporting higher cost production. Expecting tariffs to rebuild manufacturing that is already offshore is futile. Offshoring occurred because of costs. If the product requires significant labor inputs, then the US will lose every time, that is unless we loosen our immigration rules to allow unskilled labor in the country. Foreign labor forces initially were not only unskilled but under educated. But assembly line production is build for that type of cheap labor. The required function of a particular position is easily taught. As often pointed out in exposes apparently children can do acceptable work. As long as we have minimum wages multiples above foreign countries we will not have domestic production. To me it does seem absurd to ship materials and supplies overseas from the US to have them assembled and then shipped back. But apparently logical from a capitalist viewpoint.
Robotic assembly and production is where we can shine. But that doesn’t provide jobs to the working class.
Offshoring gutted manufacturing, lowered costs (more profit) and helped control inflation. If we now onshore the impact on inflation should reverse and corporations will try hold on to profit growth without a care for the pact of higher inflation. My simple view, I’m not an educated macro economist. Seems we need to pay for past mistakes, no way around it.
Instead of tariffs, would you favor government intervention like subsidies, tax incentives, regulations, or government procurement for selected critical industries? Would you favor short term tariffs for those industries against dumping? Isn’t this what Biden did? Can a government structured lie the USA be successful at operating and sustaining such an industrial policy?
The problem with your suggestion is that “short-term” tariffs rarely remain short term.
That said, one could make the argument, as I did in 2018, that the US should have imposed a “National Security Surcharge” on chips imported from Taiwan. Something large enough to at least partly cover the cost of defending Taiwan. So Apple, AMD, QCOM and NVDA would have to directly and explicitly pay for their decision to save money by outsourcing chip production to Taiwan rather than dumping the cost on US taxpayers.
But then, that’s how modern US capitalism works, isn’t it? Taxpayers cover private sector losses while shareholders reap the profits.
Instead, we got the Chips Act with its Christmas Tree of stipulations which is less offensive to Taiwan.
Every time I hear about tariffs I think back to the Hawley-Smoot tariff act that led to global escalation of counter tariffs and presaged the great depression. Not a great analog.
I get it, history doesn’t repeat but any kind of rhyme with the 1930’s isn’t a good place to be. Tariff’s, populist leaders with tyrannical ambitions, widespread nationalism, and empirical desires. There is a lot rhyming around the world right now.
Agreed. Tariffs aren’t going to increase manufacturing jobs in the USA.
However, according to the World Bank, in 2021 (the last year for which data is available), the weighted average applied tariff rates were lowest for EU, USA and Japan- which are all under 2%. The tariff rates for China are slightly higher. The outlier is India, with tariff rates in the 6% range.
How about just having free trade? Threatening tariffs might just be a negotiation tactic.