September 2, 2010
Rebalancing and exports
Exports of goods and services have garnered much attention in recent months. For one reason, export growth has been leading the economic recovery in the United States. As several Asian and Latin American economies have begun to recover recently and strongly, they have begun to buy U.S. goods and services. The figure below shows annualized quarterly rates of export growth from the United States. The global recession of 2008–09 resulted in plunging U.S. exports to the rest of the world. However, the economic recovery during 2009–10 has been accompanied by robust export growth and world trade. Though currency swings may have contributed to U.S. export volatility, global swings in overall economic growth were the dominant force behind this volatility. The second figure below illustrates that world economic growth rates plunged by more than half in 2009. The turnaround in global growth was equally sharp, spurring the recovery of U.S. exports abroad. A similar trend can be seen (below) in goods exports from the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin.
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Looking out over the longer term, many analysts foresee a fundamental reorientation of the U.S. economy toward production and exports—led by a shift in demand by developing nations for U.S. products and services. Over the past few decades, in the United States there has been strong growth in the consumption of goods and services, including imports from overseas, along with low household savings rates. Meanwhile, saving rates in nations such as China and other developing nations have been very high, while their consumption (and imports from the United States) have been relatively low. Given these fundamental misalignments, tomorrow’s realignments may include a U.S. economy that shifts its production capabilities toward serving overseas markets.
Assuming that these developments do materialize, how is the Seventh Federal Reserve District economy positioned to contribute to export growth? As it turns out, states of the Seventh District—Illinois, Indiana, Iowa, Michigan, and Wisconsin—are highly oriented toward goods production destined for overseas markets. In particular, the Seventh District economy is steeped in both manufactured goods and agricultural products that are sold abroad.
Before I illustrate the Seventh District’s export orientation, let me say a prior word about the available data. The U.S. Department of Commerce takes great effort in tracing manufactured exports back to their state of origin. In this way, an exported machine that is produced in Wisconsin, but shipped abroad from Seattle, will not be (mistakenly) attributed to the state of Washington. However, these procedures of tracing the origin of production can be somewhat misleading for raw agricultural exports from the Midwest. Agricultural products tend to be over-allocated to the port of shipment or last storage, rather than to their state of agricultural production. For this reason, the U.S. Department of Agriculture re-estimates the origin of agricultural commodities, assigning U.S. exports abroad back to the home state according to each state’s share of the commodity’s production. For example (and with simplification), total exports of corn from Iowa are estimated from Iowa’s share of U.S. corn production. Such adjustments can be very important for inland states, such as those of the Seventh District.
After making such state-of-origin adjustments for agricultural commodities, the Seventh District’s export orientation becomes more apparent[1]. Agricultural exports make up 9.1 percent of the nation’s exports; and they make up 14.4 percent of the District’s exports.
As a share of annual production, or gross state product, the figure below reveals that the Seventh District is marginally more export-oriented overall than the nation. For both the nation and the Seventh District, manufactured goods account for the lion’s share of exports, and this holds true for individual states. Still, Iowa is the exception such that agricultural exports rival manufactured goods exports for that state.
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Agricultural exports represent a larger share of output for each Seventh District state, save Michigan, relative to their share for the nation. For fiscal year 2008, the five states of the District accounted for 21 percent of the nation’s agricultural exports[2]. All five states were significant contributors. Overall, Iowa and Illinois ranked second and third in the nation—Iowa by virtue of leading the nation in soybean, feed grain, and livestock/meat exports. Illinois’s exports in these same categories also ranked very high, as did Indiana in soybeans and feed grains (table below).
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Agricultural exports from the District have expanded rapidly over the past decade. Continued economic growth in developing nations has led to richer diets in such countries, sharpening the demand for U.S. agricultural products (see table below). Because of the global recession, exports of agricultural products slowed in 2009, but they are now rising once again in 2010 as global economic recovery unfolds.
The Midwest and Seventh District manufacturing sectors are also major exporters. As set out in my previous blog entry, the District produces capital goods, heavy machinery, and transportation equipment needed by developing countries as they build their own economies. (See also the detailed tables at end of this article.) However, the data’s assignment of U.S. manufactured exports to individual states and localities should be viewed as suggestive only, rather than as definitive (with a high degree of accuracy). That is because exported goods are often composed of various components, which may be produced almost anywhere—their value often originates from many places. For example, a heavy truck exported from Wisconsin will contain manufactured parts and materials from other plants or production sites located in other states in the Midwest or in different regions of the country; such components for the truck may even originate from outside the United States. Moreover, the truck’s value is also composed of services such as research and development, design, and headquarters/administrative services—any of which may take place across a wide geography. For these reasons, the export orientation of the broad Seventh District (Midwest) economy, relative to that of any particular state, is the more important point to be taken from these data. Geoff Hewings and his co-authors have demonstrated that Midwest states (and their plants and businesses) trade intensively with one another in producing final output, such as global exports. Accordingly, we can be fairly sure that many of the manufactured exports from states in the region are made up of “value added” originating somewhere in the broader multistate region, if not the specific state to which its entire value is assigned.
The same point holds true for recent estimates that attribute exports to metropolitan areas. A current Brookings Institution study reports that ”metropolitan areas produce 84 percent of the nation’s exports, making them the points of leverage for scaling up trade with the wider world. The 100 largest metropolitan areas alone account for over 64 percent of the nation’s exports, including 75 percent of its service exports.” For Seventh District metropolitan areas, the table below extracts data from that report. According to these measures, four of the District’s metropolitan areas rank within the top 25 nationally: Chicago, Detroit, Indianapolis, and Milwaukee.
The ultimate destination of exports by metropolitan area is also reported (by the International Trade Administration). For example, in 2008, Canada remained Chicago’s and Indianapolis’s top export destination, but the number two and three destinations differed. For Indianapolis, France and Germany claimed the number two and three spots; for the Chicago area, Mexico and India claimed the next two spots.
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As the nation moves beyond the profound economic disruptions of the past few years, it seems likely that the emergent economy will differ in important ways. Throughout the past decade, the Seventh District’s economic production has been shifting toward goods destined for overseas markets. Currently, the District’s export orientation in manufactured goods is at least on par with that of the nation—and even more so with respect to agricultural production. An accelerated shift in the United States toward producing goods for overseas markets would likely have a large impact on much of the Seventh District’s economic base. In addition to its agricultural prowess, the District’s manufacturers produce important capital goods that are in high demand as world trade and developing economies expand.
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[1] We also adjust manufactured exports using the U.S. Department of Agriculture’s agricultural estimates. Many food products, such as milled grain and oils, are otherwise counted as manufactured. (Return to text)
[2] Chicago Fed Research Department staff estimates.
Posted by Testa at 1:06 PM | Comments (0)August 19, 2010
Is U.S. Manufacturing Disappearing?
When discussing the health of the manufacturing sector, one major issue is whether we should assess the number of people employed in the sector or focus on the amount of output created in manufacturing. Interestingly, each leads to the opposite conclusion about the strength of manufacturing in the United States.[1]
Manufacturing employment as a share of total employment in the United States has been declining over the past 60 years. In 1950, nearly 31% of nonfarm workers were employed in manufacturing. Since then, the share has been dropping three or four percentage points per decade, falling to 28.4% in 1960, 25.1% in 1970, 20.7% in 1980, 16.2% in 1990, 13.1% in 2000, and 9.1% in 2009. Even with this downward trend in manufacturing’s share of jobs, employment in manufacturing has on average been fairly stable over the past 60 years, averaging a decline of –0.1% per year. In contrast, the growth of nonfarm employment averaged 1.9% per year, and this led to the reduction in manufacturing’s share of jobs.[2]
By 2006, the U.S. economy employed about as many workers in manufacturing as in 1950, just over 14 million. And so, looking at manufacturing employment alone leads one to believe that the sector is in decline or at best stagnant.
However, a very different conclusion emerges if you focus on the amount of goods being produced by the manufacturing sector. While employment has changed very little over the past 60 years,[3] output in manufacturing has increased at an annual rate of 3.4%. Manufacturing output in 2007 (the recent peak in manufacturing output) was over 600% higher than in 1950.
Productivity Is the Key
So how was manufacturing output able to surge over the past 60 years with little change in the sector’s employment? The answer can be found by looking at productivity. The increase in both the number and quality of machinery over time, along with technological improvements in production processes and inventory management, have given rise to greater manufacturing sector output at lower unit cost. Productivity growth in the manufacturing sector has averaged 2.9% over the past 60 years. In essence, this means that manufacturing sector output has risen each and every year by around 2.9%. What took 1,000 workers to produce in 1950 could be produced with 184 workers in 2009.
Between 1950 and 1979, productivity growth in the manufacturing sector was matched by the productivity growth of the nonfarm economy—both averaged a rate of 2.5% each year. Since then, with the adaptation of CNC machinery (i.e. Computer Numerical Control) manufacturing during the late 1970s (and other subsequent innovations), productivity growth in the manufacturing sector accelerated to average 3.3% per year between 1980 and 2009, while in the nonfarm economy productivity growth eased to an average of 2.0% per year.
Manufacturing output itself grew on average by 4.2% per year between 1950 and 1979 and then slowed between 1980 and 2009 to an average of 2.2% per year. So, over the past 30 years, relatively slower manufacturing output growth and faster productivity growth led to a declining manufacturing labor force.
Efficiency Leads to Lower Prices
Another observation about manufacturing’s long-term behavior in the U.S. economy is that, between 1950 and 2007 (prior to the severe recession), manufacturing output was just over 600% higher while over the same period growth in real GDP of the U.S. was only a slightly lesser 560%. Yet, the manufacturing share of GDP declined markedly over this period as measured in current dollar value of output. In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace.[4] This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP.
Strong Productivity Gains Expected to Continue
Since much of the gains in U.S. manufacturing have been due to strong productivity, a natural question to raise is whether these gains will continue. Often, advancement in technology leads to productivity gains. Accordingly, U.S. spending on research and development can be used as a proxy for the effort being devoted to developing new technology. On this front, the U.S. appears to be in relatively good shape as we continue to invest heavily in research and development. Research and development averaged 2.5% of our GDP between 1953 and 2008. Between 1999 and 2008, it averaged 2.7%, with 2008 at 2.8%.
The private sector has played an ever-increasing role in research and development spending, suggesting that these resources are well-directed in raising productivity. Fifty years ago the majority of research and development was being funded by the government, much of it in support of public sector programs. More recently, the private sector has become the major funder—the privately funded share of research and development averaged 36% during the 1960s; 47% in the 1970s; 54% in the 1980s; 66% in the 1990s; and 72% between 2000 and 2008. [5]
Every two years, Chicago hosts one of the premier manufacturing shows in the world, the International Manufacturing Technology Show IMTS. It is amazing to see the cutting-edge technologies that are becoming available to manufacturers. I typically ask exhibitors of common manufacturing equipment to explain to me the differences between their new equipment and what was displayed two years earlier. The response is almost universal: The new pieces of equipment are more accurate, faster, more versatile, and less expensive than their predecessors.
I often have the opportunity to tour manufacturing production facilities, and I am impressed by the continuous improvements in technology that companies employ. I always ask these producers the following question: Can they envision being able to be even more productive? Nearly all of them tell me without hesitation that they absolutely can become even more efficient, and many then launch into a description of the near-term plans that will make them so.
Conclusion
The changes in manufacturing output, productivity, and labor have not been occurring just over the past few years but over decades. Using recent history is a guide, we can look forward to an industry that will continue to produce more, contributing to a stronger U.S. economy, with manufacturing employment representing a smaller share of the overall U.S. labor market.
The manufacturing sector remains vibrant and innovative. Manufacturing output has been rising at a solid pace over time. Most of this growth, especially over the past 30 years, has been achieved by improving productivity. Of course, for some workers and towns, this increase in productivity has been a double-edged sword, since highly productive operations can achieve their output goals using fewer workers. Nonetheless, higher productivity has fostered a globally competitive U.S. manufacturing sector with the ability to produce more goods with relatively lower price increases, which has benefited U.S. households and the overall economy.
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[1] For a further discussion, see William Strauss, CFL 2003. (Return to text)
[2] There is a break that occurs during this period. Between 1950 and 1979, manufacturing employment increased on average by 1.4% per year (over the same period nonfarm employment was rising on average by 2.4% per year), and between 1980 and 2009 manufacturing employment declined on average by 1.6% per year (over the same time nonfarm employment growth slowed, rising on average by 1.3% per year). (Return to text)
[3] Between 1950 and 1979 productivity growth rates in both durable manufacturing and nondurable manufacturing were nearly identical, averaging 2.6% and 2.7% per year, respectively. However, between 1980 and 2009 productivity growth for durable manufacturing surged, to average 3.9% per year, and productivity growth for nondurable manufacturing declined, to average 2.4% per year. Durable goods manufacturing makes greater use of machinery, and the sector was aided by the advancements in the capabilities of machines over this period.(Return to text)
[4] Low elasticity of demand for many manufactured goods contributes to a falling nominal share of the manufacturing sector in GDP. Over time, elasticity of demand for manufactured products by domestic and overseas markets was not responsive enough to offset falling prices.(Return to text)
[5] As reported by the National Science Foundation. (Return to text)
Posted by Testa at 11:16 AM | Comments (0)August 4, 2010
A continued role for central cities?
Bill Testa and Bill Sander
The rapid flight of jobs and people from central cities, such as New York and Chicago, during the 1970s called into question what role, if any, they could play in metropolitan area economies. Today, many central cities of the Northeast and Midwest continue to be significant centers of commerce and employment in their metropolitan areas[1]. Over the past four to five decades, the manufacturing production sector has invariably shifted its activities from central cities to the suburbs (or moved away from metropolitan regions altogether). While doing so, this sector has shed many jobs. Yet certain important service sectors continue to find central cities to be desirable and hospitable locations in which to conduct their business. These include, for example, higher education, specialized medical services, and some types of government services that require face-to-face service delivery[2]. For such businesses, central cities remain accessible destinations for customers drawn from broad surrounding market areas. Customers are still willing to travel to service providers’ places of business located in cities.
In addition, a central city location can be highly productive for those businesses in which frequent face-to-face communication must take place among their workers or nearby business-to-business customers. The high density of central business districts can be very productive for such industries: Deals are struck, creative ideas are born, or temporary partnerships are formed as a result of frequent (and often unplanned) personal interactions that a central city facilitates. Such businesses often include law, financial services, advertising/marketing, public relations, management consulting, R&D, headquarters, and accounting (see figure below).
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Workers in these “city-centric” businesses are generally those who engage in creative, administrative, and highly skilled work activities[3]. In no small part, the rising share of high-skill jobs in the overall U.S. economy has helped to boost this economic role of central cities. As the rate of technological change has increased (and as global markets have become more open) over the past four decades, the wages and incomes of highly skilled and educated workers have grown considerably. More generally, a study by E. Glaeser and A. Saiz finds that, compared with other regions, “skilled cities” have been growing more rapidly for at least a century because they are more productive and also because they adapt more easily to economic shocks, such as changing industry fortunes.
Drawing on data from the U.S. Census Bureau’s American Community Survey (ACS), the table below presents the proportion of the city workforce with four-year college degrees (or higher) as compared with the rest of the metropolitan area (suburbs). The workers are reported here by their place of work although they may reside anywhere in the metropolitan area, be it city or suburb. Although educational attainment is far from a comprehensive measure of skill, it is a widely used measure since the level of educational attainment correlates strongly with wages and income. Generally, it is seen that the central city workers of the Northeast and Midwest tend to have greater educational attainment than their suburbs[4]; Detroit and Philadelphia are exceptions.[5].
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Although central cities tend to draw workers specializing in education-intensive occupations, the city's share of such jobs in the metropolitan area, as compared with the surrounding suburbs, varies greatly. The first two columns of the table below show the shares of a metropolitan area’s college-educated workers employed in the city and in the suburbs. At one end of the spectrum, the city of Detroit accounts for only 12 percent of employed workers who have college degrees in the Detroit metropolitan area. At the other end of the spectrum, New York City hosts 50 percent of employed workers with a college degrees in the metropolitan region. In the industrial belt, central city Chicago leads with 38 percent; Milwaukee and Pittsburgh are not far behind. The central city of Detroit does lie far behind with 12 percent of the metropolitan area’s college educated workers.
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The choice of residential location by those adults who are college-educated also has important consequences for central cities because such households generally contribute heavily in their payment of local taxes. Older cities of the Northeast and Midwest often have a disproportionate amount of low-income households for whom public services such as education must be financed through local taxes. Having more highly educated, high-income households living in the city boosts the local tax base, providing more revenue for local governments to provide these vital public services.
And as shown by various studies, where workers choose to live can affect where they choose to work—and vice versa. Accordingly, by attracting more highly educated (and other high-income) households, a city can draw in employers that are searching for available high-skill workers. Recognizing these incentives, many central city mayors have fashioned public amenities and services, such as parks, public art, and high-quality schools, to attract highly educated, high-income households in recent years.
The final two columns of the table above show the shares of college-educated households in each metropolitan area residing in the central city and in the nearby suburbs. Although gentrified neighborhoods can be found in virtually all cities, some central cities—for example, Detroit and St. Louis—can be seen as having fared poorly overall at attracting residents with high educational attainment. In addition, there are cities that have performed well at attracting jobs requiring a high level of education, but have done less well at drawing highly educated, high-income households such as Boston, Pittsburgh, and Philadelphia. Chicago and Milwaukee are seen to be fairly balanced and successful in attracting both college-educated workers and households.
Central cities in the Northeast and Midwest continue to struggle to find new and sustainable economic roles within metropolitan areas. Almost without exception, the city’s economic base has historically centered on manufacturing production and goods transportation—industries that have since diminished or re-located to the suburbs or elsewhere. Meanwhile, the nation’s economy has been restructuring to favor occupations requiring highly skilled and educated individuals. Fortunately for some central cities, their high population density, among other amenities, provides favorable conditions for these types of jobs. Some cities of the Northeast and Midwest have been successful at not only attracting highly skilled jobs, but also at attracting highly educated, high-income households. In addition to boosting the local tax base, such success may be highly desirable because employers tend to follow the available local work force.
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[1] This is not to say that employment is centralizing. A recent study of 98 metropolitan areas by Elizabeth Kneebone (link) observes that employment decentralized in almost every major industry between 1998 and 2006. E. Glaeser and M. Kahn (link) find that, on average, less than 16 percent of metropolitan area employment locates within three miles of a city center. (Return to text)
[2] Tim Bartik and George Erickcek characterized the economic roles of these industries for central cities’ economies, see reference (link) (Return to text)
[3] One exception has been the centralization of entertainment and recreational activities in some central cities. Such activities—involving tourism, hotels, eating and drinking places, music and theatre venues, and sporting events-- may not employ highly skilled or educated workers to the same degree. (Return to text)
[4]The ACS enumerates city-based workers by their place of work; it also separately estimates workers by place of their residence. (Return to text)
[5] Note that a city’s downtown or “central business district” often differs markedly in its share of college-educated workers, compared with the remainder of the city—this is illustrated by Manhattan versus the rest of New York City in table 1 . In addition, a study (link) by E.L. Birch of 44 selected cities from 1970 to 2000 finds that young and educated households are trending toward living downtown, but that downtowns are also often the domiciles of some of the most and least affluent population groups. (Return to text)
Posted by Testa at 10:19 AM | Comments (0)