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Monday, August 15, 2011 12:44 AM

"Made-in-China" Only 2.7% of U.S. Spending; Really? What Does It Mean? Inflationists Take Note

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For all the political bickering and scapegoating of China, 'Made in China' ranks only 2.7% of U.S. spending

Convinced that everything you buy these days has a Made-in-China label?

Then you aren't paying attention. Things made in the U.S.A. still dominate the American marketplace, according to a new study by economists at the San Francisco Federal Reserve.

Goods and services from China accounted for only 2.7% of U.S. personal consumption spending in 2010, according to the report titled "The U.S. Content of 'Made in China.' " About 88.5% of U.S. spending last year was on American-made products and services.

"On average, of every dollar spent on an item labeled 'Made in China,' 55 cents goes for services produced in the United States," the report said.
It would have been nice to have a link to the Fed report. Missing links is one of my pet peeves. News organizations in general only link to themselves. So do many bloggers. I am tired of it.

Let's do our own report instead.


On July 29, 2011 the BEA gave the Gross Domestic Product: Second Quarter 2011 (Advance Estimate) as follows "Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.7 percent, or $136.0 billion, in the second quarter to a level of $15,003.8 billion."

China Trade

On August 11, 2011 the US census bureau reported Goods and Services Deficit Increases in June 2011

The Nation's international trade deficit in goods and services increased to $53.1 billion in June from $50.8 billion (revised) in May, as exports decreased more than imports.

Balance of Trade

China's portion of the trade deficit was $26.7 billion.

Goods by Geographic Area (Not Seasonally Adjusted)

  • The goods deficit with Canada increased from $2.7 billion in May to $2.8 billion in June. Exports decreased $0.3 billion (primarily fuel oil, passenger cars, and fertilizers) to $24.2 billion, while imports decreased $0.1 billion (primarily nonmonetary gold, petroleum products, and fertilizers) to $27.1 billion.

  • The goods deficit with China increased from $25.0 billion in May to $26.7 billion in June. Exports decreased $0.1 billion (primarily raw cotton, passenger cars, and pulpwood and woodpulp) to $7.7 billion, while imports increased $1.6 billion (primarily computers, apparel, and household goods) to $34.4 billion.

  • The goods deficit with Japan increased from $2.6 billion in May to $4.0 billion in June. Exports decreased $0.3 billion (primarily generators, fish and shellfish, and metallurgical grade coal) to $5.4 billion, while imports increased $1.1 billion (primarily passenger cars, computer accessories, and photo equipment) to $9.5 billion.

To do calculate the percentage, we need total imports from China, not the trade deficit. That number is $34.4 billion.

Let's Do The Math

  1. $34.4 billion is the latest monthly import total from China. The yearly total at the same rate is $412.8 billion.
  2. USD GDP annualized is $15,003.8 billion.
  3. 412.8 ÷ 15,003.8 = 0.02751303

I calculate 2.75%. The reported 2.7% is close enough. Revisions or rounding errors can easily account for the difference.

Regardless, that is how the number was derived.

San Francisco Fed Report

Having done the math (still peeved at missing links), I just found the San Francisco Fed report The U.S. Content of “Made in China”.
Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the "Made in China" label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.

In our analysis, we combine data from several sources: Census Bureau 2011 U.S. International Trade Data; the Bureau of Labor Statistics 2010 input-output matrix; and personal consumption expenditures (PCE) by category from the U.S. national accounts of the Commerce Department’s Bureau of Economic Analysis. We use the combined data to answer three questions:

• What fraction of U.S. consumer spending goes for goods labeled “Made in China” and what fraction is spent on goods “Made in the USA”?

• What part of the cost of goods “Made in China” is actually due to the cost of these imports and what part reflects the value added by U.S. transportation, wholesale, and retail activities? That is, what is the U.S. content of “Made in China”?

• What part of U.S. consumer spending can be traced to the cost of goods imported from China, taking into account not only goods sold directly to consumers, but also goods used as inputs in intermediate stages of production in the United States?

Total import content of U.S. PCE

Not all goods and services imported into the United States are directly sold to households. Many are used in the production of goods and services in the United States. Hence, part of the 88.5% of spending on goods and services labeled “Made in the USA” pays for imported intermediate goods and services. To properly account for the share of imports in U.S. consumer spending, it’s necessary to take into account the contribution of these imported intermediate inputs. We use input-output tables to compute the contribution of imports to U.S. production of final goods and services. Combining the imported share of U.S.-produced goods and services with imported goods and services directly sold to consumers yields the total import content of PCE.

Broader implications

The import content of U.S. PCE attributable to imports from China is useful in understanding where revenue generated by sales to U.S. households flows. It is also important because it affects to what extent price increases for Chinese goods are likely to pass through to U.S. consumer prices.

China’s 2011 inflation rate is close to 5%. If Chinese exporters were to pass through all their domestic inflation to the prices of goods they sell in the United States, the PCE price index (PCEPI) would only increase by 1.9% of this 5%, reflecting the Chinese share of U.S. consumer goods and services. That would equal a 0.1 percentage point increase in the PCEPI. The inflationary effects would be highest in the industries in which the share of Chinese imports is highest—clothing and shoes, and electronics. In fact, recent data show accelerating price increases for these goods compared with other goods.

However, it does not seem that so far Chinese exporters are fully passing through their domestic inflation. In May 2011, prices of Chinese imports only increased 2.8% from May 2010. This is partly because a large share of Chinese production costs consists of imports from other countries. Xing and Detert (2010) demonstrate this by examining the production costs of an iPhone. In 2009, it cost about $179 in China to produce an iPhone, which sold in the United States for about $500. Thus, $179 of the U.S. retail cost consisted of Chinese imported content. However, only $6.50 was actually due to assembly costs in China. The other $172.50 reflected costs of parts produced in other countries, including $10.75 for parts made in the United States.

Figure 2

Geography of U.S. PCE, 2010

Geography of U.S. PCE, 2010

Figure 2 shows the share of U.S. PCE based on where goods were produced, taking into account intermediate goods production, and the domestic and foreign content of imports. Of the 2.7% of U.S. consumer purchases going to goods labeled “Made in China,” only 1.2% actually represents China-produced content. If we take into account imported intermediate goods, about 13.9% of U.S. consumer spending is attributable to imports, including 1.9% imported from China.

Since the share of PCE attributable to imports from China is less than 2% and some of this can be traced to production in other countries, it is unlikely that recent increases in labor costs and inflation in China will generate broad-based inflationary pressures in the United States.

No Excuse for Missing Link

Given that the article is readily available, there is no excuse for the LA Times' failure to link to it.

Generally, in cases like this, I ignore the superfluous article and instead go straight to the source. However, I have had enough of link suppression and am calling the LA Times on it.

Bloomberg authors take note. I nearly wrote the same about you a few days ago but was too busy. Fellow bloggers, watch what you are doing. I despise snips like "Reuters Says" with no link. Worse yet are instances where I cannot even find the quote when I search for it.

Inflationists Take Note

Moreover, in this instance, the LA Times author missed the most important implication of the report, which is "Chinese inflation will have little direct effect on U.S. consumer prices."

I concur with the San Francisco Fed conclusion.

Interestingly, the San Francisco Fed report did not show the direct math either. Now you know how to do it.

Mike "Mish" Shedlock
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