[p2p-research] US Manufacturing Is Not Dead

[Ryan]

Excellent evidence for the rise of robotic production...

Sent to you by Ryan via Google Reader: US Manufacturing Is Not Dead via
FiveThirtyEight: Politics Done Right by noreply at blogger.com
(Hale "Bonddad" Stewart) on 2/28/10
Today’s economic article at 538 is from me (Hale Stewart) and my
co-blogger at the Bonddad Blog Silver Oz. Over the last few weeks we
have been discussing manufacturing in the US – or, more specifically,
the argument that the US doesn’t make things anymore largely as a
result of free trade agreements. Unfortunately, the US still makes
plenty of goods. In addition, free trade is not the boogie-man job
killer many purport it to be. As always, please click on all the
pictures to get a larger picture.



There is a common theme across the internet: US manufacturing is dead
and it's never coming back. Well, there's a big problem with that
analysis: it's not true. In fact, as the chart above indicates, it's
actually false. Note that since 1960, the index of industrial
production has risen from a little below 30 to its current level of
about 100. And note the increase is continual -- meaning the number
didn't just hover around 30 for most of that time only to spike up in
one big move. The index has continually risen over that entire period.
This situation is also obvious on a logarithmic chart:


Instead, what people are commenting on is the drop in manufacturing
employment. Consider these two charts.



Durable Goods Employment remained fairly steady at 10 million to 11.5
million employees between the mid-1960s to the early 2000s. Then total
employment dropped like a stone, losing three million people over the
last 10 years. These are levels last seen in 1950.


Non-durable goods manufacturing is even worse. From the mid-1960s to
the early 200s, total employment in this area hovered around a 6.8
million. However, starting in 2000, the number fell off a cliff, losing
almost 2 million people. This is the lowest the number has been in over
60 years.

However, over the last 15 years we've seen an increase in manufacturing
productivity. Consider the following:


Manufacturing Output per hour has increased continually since records
have been kept, as has




Multi-factor productivity.

What does all this information tell us?

US Manufacturing is alive and well. The real issue is manufacturing
employment, which is dropping like a stone. And the reason for the drop
is an increase in productivity.

In addition, SilverOz adds the following:

Many people have a knee-jerk reaction to the decline in manufacturing
jobs and immediately blame outsourcing/imports for this decline. The
following graph demonstrates that the linkage between increased imports
and a decline in manufacturing jobs is virtually nonexistent.



What we clearly see is that imports increased quite dramatically over
the last 30 years, while good producing jobs remained fairly level
(dipping during recession and then recovering) until this last
recession, which took a huge toll on manufacturing employment even
though imports actually declined. This again plays much better to the
argument that productivity increases are the greatest contributor to
our decline in manufacturing employment than the outsourcing/imports
argument.

And the following is from co-blogger SilverOz:

A recent debate elsewhere interested me enough to do some research on
the effects trade has on goods producing employment in the US. Now, I
want to state upfront that this is a look at the aggregate and that
there are obviously anecdotal cases of individual companies/plants
moving to overseas locations for competitive reasons, however, I want
to separate the publicized and emotional loss of individual plants from
the broad case that free trade is a job killer.

As we all know, the trade deficit has ballooned in recent decades as is
evidenced by the following graph (all graphs are thumbnails due to the
quantity in this piece):

We can clearly see that really beginning for good at the end of the
1991 recession the trade balance went down dramatically, with the only
sustained recoveries occurring during recessions. So, let's look at how
goods producing employees have been affected by this trade deficit by
decade.

The trade deficit really got its start during the early 80's recessions
when high interest rates by the Fed created a strong dollar really hurt
exports causing their nominal dollar value to flat line from 1981
through 1986 before they took off again in 1987. The following graph
shows goods employment vs. the trade deficit for the 80s:



This graph shows no link between the increasing trade deficit and goods
employment in the 80s with goods employment rebounding even while the
deficit grew following the end of the 81 recession.

Next up are the 90s; the decade of grunge, the stock market bubble, and
NAFTA. One would expect to see massive declines in goods employment
following the implementation of NAFTA and a ballooning trade deficit
towards the end of the decade, but as you can see by the following
graph the opposite actually occurred. Following goods jobs reaching
their post-recession trough (the first jobless recovery) in late 1992,
the exploded up 10% from that bottom at the same time that the trade
deficit went from essentially -$18 billion to over -$90 billion.


Now let us move on to our most recent decade; where trade with China
exploded, we endured two recessions (both with jobless recoveries), and
an enormous increase in national debt. AS you can see from the
following graph, the goods employment trough didn't occur until about 2
years after the first recession ended, which also coincided with a huge
increase in the trade deficit, yet once again goods jobs held their own
during the massive trade imbalance.



Then, during the most recent recession, goods jobs dropped like a rock
(down nearly 20% from the pre-recession peak) and yet the trade deficit
actually decreased (and yes, oil was a part of this, but it has also
been a big part of our trade deficit all along.

So then, what does can account for our decline in goods employment over
recent years, especially over the last decade where it really dropped
off a cliff? The most simple answer seems to be that our productivity
has reached a point where it can outstrip production demands, which
leads to a decline in the labor intensity needed for goods production.



Let's examine this a bit further. From the end of the 1990 recession to
the pre-2001 recession peaks productivity was up about 47%, industrial
production was up about 61%, and goods employment was up about 9.3% (I
used the end of 1990 recession value and not the trough in actual goods
employment here). So during the 90s, production outstripped
productivity (although both were up a ton), while job creation came in
at only +9.3%, obviously lagging. However, from their 2001 recession
troughs (again using the end of the recession for jobs), productivity
was up about 25%, industrial production was up about 15%, and jobs
declined by about 4.3%. This graph demonstrates that when productivity
outstrips production goods jobs decline, but that even when production
outstrips productivity job growth can be anemic so long as the
productivity growth is still substantial. The current recession is
showcasing productivity's effects on jobs very well, as while
production has dropped about 13% during this recession, productivity is
actually up over 5%, and industrial production is now at it's 2002
levels, but with roughly 20% fewer workers making those goods.

In conclusion, the data appear to show that the real factor in goods
job creation (or loss) is the relationship between productivity and
production, which unfortunately leaves little room for protectionism
(even sans the trade war implications that would create), as unless
productivity falls precipitously we would see no net job creation from
any such endeavor.

And just so we don't define this as a US problem, I will direct you to
a conference board study that highlights China's loss of manufacturing
jobs to productivity too.


Here are some general conclusions.

1.) The US still manufactures goods. In fact, the US still manufactures
plenty of goods. Take a look at the types of exports in the latest
trade data from the Census. It includes exports of industrial supplies,
capital goods, autos and consumer goods.

2.) While outsourcing does happen -- that is, companies do go overseas
to open new factories at the expense of US employees -- it is not the
primary cause of manufacturing job losses.

3.) Going back to the recent post on employment remember that in this
recession the unemployment rate of specific groups was heavily
influenced by education level. In fact, according to the BLS, higher
education levels (college graduates and above) were remarkably
untouched in the latest recession while lower education levels (high
school graduates, high school with some secondary education) had higher
rates of unemployment. Lower levels of education are typically
associated with manufacturing and construction employment -- the two
areas of jobs that account for the largest percentage of job losses in
this recession.

US manufacturing would be greatly helped by two developments.

First, China needs to float its currency. A country that has 10% GDP
growth but little currency appreciation is obviously manipulating its
currency's value to a high degree. Given China's growth rate, investors
should be flocking to China driving up the yuan's value. That is not
happening. A real free-floating currency would cure a lot of the trade
deficit problems.

Secondly, there have been calls for a US industrial policy -- that is,
for Washington to essentially "pick winners and losers" by promoting
some industries that they feel have a high probability of success.
Asian countries have been doing this for years with remarkable success
and it is a policy which we clearly need to copy. I'm a big promoter of
nano-technology, alternative energy and stem cell research, but those
are just my choices. There are plenty others out there that would also
make sense.
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