Durable goods deflation is wonderful

I've been featuring this chart off and on for years, and it's worth repeating once again. The chart shows the evolution of the Personal Consumption Deflators for Services, Non-durable Goods, and Durable Goods. It starts in 1995 because of three reasons: 1) that was approximately the year that China began to be an export powerhouse, 2) it was a year after China's major devaluation against the dollar, and the first year that the yuan began to stabilize against the dollar, and 3) it was the first year ever that the US durable goods deflator experienced a decline of more than a few months.

I don't think it's a coincidence that the emergence of China as a major exporter of durable goods (e.g., TVs, computers, cameras) coincided with the beginning of a sustained decline in the prices of durable goods. If there's been an identifiable source of deflation in the US economy, it's not been the Fed, but the vast increase in the productivity of the Chinese economy, and the vast increase in the volume of imported Chinese goods to the US economy. Thanks to the industrialization of China, the world has been able to produce manufactured goods much more cheaply than ever before.

This has been a boon to just about everyone in the US economy, and the first chart is also proof of that. Consider that the price of "services" is largely driven by wages, and service sector workers are about 86% of total payrolls. What the chart shows is that the earnings of the great majority of US workers have increased 2.7 times more than the price of durable goods. In other words, an hour's worth of work for the typical American today buys 2.7 times more in the way of durable goods than it did in 1995. When it comes to durable goods, the average American's purchasing power has nearly tripled over the past 22 years, thanks largely to China.

As these last charts show, China did NOT become an export powerhouse by unfairly devaluing its currency. On the contrary, the yuan has appreciated in real terms vis a vis the currencies of its trading partners by about 75% since 1995, as the second chart shows. Furthermore, China's reserves have been relatively stable for the past several months, and this suggests that the yuan is likely to remain relatively stable—there's no hanky-panky going on (significant increases or decreases in forex reserves are symptomatic of an mis-valued currency). It's encouraging that Trump has dropped his threat to "punish" China for boosting our purchasing power so dramatically. We could use more countries like China, and so could the world. When it comes to trade, everyone is a winner.