Category Archives: Manufacturing

Understanding the Seventh District’s economic slowdown in 2015

As I noted on this blog in February 2015, 2014 was a pretty good year for the Seventh District. Real District gross state product (GSP) grew 1.2%, the unemployment rate fell from 7.3% to 5.8%, and payroll employment grew 1.5%. The strong finish to 2014 led me to feel quite optimistic for how 2015 would turn out. Unfortunately, it has become increasingly clear that economic activity in the Seventh District has steadily slowed as 2015 has progressed. While the District is certainly not in recession, it is now likely growing at a below-trend pace. In this blog post, I provide evidence of the slowdown and explore how the fortunes of District states’ signature industries have both contributed to and helped mitigate the slowdown.

While we wait for the GSP data for 2015 to be released (due out in June), arguably the best overall indicator we have for 2015 District economic activity is our Midwest Economy Index [1] (I should note here that we will be releasing a new survey-based activity index later this month). Figure 1 shows values for the MEI from 2014 to the present. The index was well above zero throughout 2014, indicating that growth was consistently above trend. Just as 2015 began, the index began to decline, and it entered negative territory in June. The most recent reading of the MEI (for November 2015) indicates that District growth is somewhat below trend.

1-MEI

Some important indicators included in the calculation of the MEI are payroll employment, the regional Purchasing Manager Indexes (PMIs) [2], and per capita personal income. Not surprisingly, they also largely suggest that economic activity in the District slowed in 2015. Figure 2 shows that while District payroll employment grew by an average of 23,000 jobs per month in 2014, the pace of growth slowed to only about 12,000 new jobs per month in 2015. Figure 3 shows the simple average of the five PMIs available for the Seventh District. This average also indicates that economic activity declined notably starting in 2015. As a counterpoint, figure 4 shows that the pace of growth in real personal income per capita has not slowed much in 2015: The annualized growth rate for 2014 was 3.08% and the available data for 2015 (through Q3) indicate that the annualized growth rate has only slowed to 2.94%.

2&3-Emp&PMIs

4-RIPC

While the preponderance of evidence suggests that Seventh District economic activity slowed in 2015, it turns out that the experiences of individual states within the District have been quite different. Figure 5 shows the sum of the contributions to the MEI for the eastern states of the District (Indiana and Michigan) and the sum for the western states of the District (Illinois, Iowa, and Wisconsin). Growth in 2014 was above the District’s long run trend in both sub-regions, but the western states outperformed the eastern states. The pace of activity in the eastern states picked up steadily through the first half of 2015 and has since slowed to near the District’s trend. This experience contrasts quite notably with that of the western states. Activity in these states began to slow at the end of 2014 and continued to slow until the middle of 2015, at which point conditions improved some.

5-WEMEIs

One approach to understanding the different experiences of eastern and western District states is to do an economic base analysis for each state. Such an analysis identifies the industries whose employment is especially concentrated in a state (and therefore likely quite important for the state’s economy) by calculating a location quotient (LQ). A location quotient is the ratio of the share of employment in an industry in a state to the share of employment in an industry in the U.S. as a whole:

Formula

As an example, if the machinery industry’s share of employment in Michigan is 1.3% and the machinery industry’s share of employment in the U.S. is 1%, then the location quotient is 1.3, and we say that the machinery industry is 30% more concentrated in Michigan than in the U.S. as a whole.

For this blog post, I calculate location quotients for each state for each of the 3-digit NAICS industries that are available from the Bureau of Labor Statistics’ (BLS) payroll employment survey.[3] I then consider the industries in each state with a location quotient greater than 1.5. This approach successfully identifies the signature industries one typically thinks of for each state in the District. For example, the analysis picks up Michigan’s auto industry, Indiana’s steel industry, and Illinois’s, Iowa’s, and Wisconsin’s machinery industry.

Table 1 shows the high-location quotient industries for Indiana and Michigan, along with the percentage of overall employment the industry represents and the year-over-year employment growth rate of the industry from November 2014 to November 2015. With the exception of the primary metals industry (where employment fell by 0.93%), employment grew for all of Indiana’s high-LQ industries and was solid for most of them. The story is even clearer in Michigan, where the auto industry dominates. Employment in the transportation equipment industry grew 4.59% over the past year.

To summarize the overall growth of District states’ flagship industries, I calculate the average growth rate for the industries, weighted by their relative size. Employment in Indiana’s flagship industries grew 1.35% over the past year, while employment in Michigan’s flagship industries grew 3.38%. Thus, even though the pace of growth in economic activity slowed in Indiana and Michigan in the second half of 2015, it was still a good year for both states.

6-Table 1

The story is more mixed for the states in the western part of the District (table 2). Machinery (and the fabricated metal producers who support them) has not faired well in the past year: Illinois, Iowa, and Wisconsin all saw notable declines in machinery and fabricated metal employment (with the exception of Wisconsin’s machinery employment, which was flat). However, Iowa and Wisconsin were helped by strong growth in other flagship industries (food products in both Iowa and Wisconsin and finance in Iowa). Illinois has few other flagship industries to help it, though it’s worth noting that Chicago has fared much better than downstate Illinois because of its concentration in business services and finance. Average employment growth for Illinois’s high-LQ industries was dismal (-2.04%), while growth was solid for Iowa’s (1.58%), and slow for Wisconsin’s (0.73%). Thus, although some flagship industries have done well in the western states in the District, the struggles of the machinery industry appear to have put quite a damper on their economic performance.

7-Table 2

So we see that the overall slowdown in the District in 2015 was not a shared experience across District states. The eastern states (Michigan and Indiana) did notably better than the western states (Illinois, Iowa, and Wisconsin) and these differences are relatively consistent with the performance of states’ flagship industries. What does the future hold for these flagship industries? At the moment, it’s hard to find much evidence that there will be a significant reversal of fortunes in 2016. The auto industry is likely to continue to benefit from steady growth in the U.S. economy and low gasoline prices, while the machinery industry is likely to continue to suffer from weaker global growth and depressed commodities prices (which hurt demand for both mining and agriculture machinery).

That said, while flagship industries certainly play an important role in a state’s economy because of all the related industries that support them, there are still many industries that are not closely related to them. For example, Iowa’s contribution to the MEI has been negative for most of 2015 (not shown), likely because of the struggles in the farming industry (see the Chicago Fed’s latest AgLetter for more details). The converging trends in the MEI (figure 5) suggest that these other factors are also making their presence known.

[1] The MEI is a weighted average of 129 Seventh District state and regional indicators measuring growth in nonfarm business activity from four broad sectors of the Midwest economy: manufacturing, construction and mining, services, and consumer spending.

[2] The PMIs included in the index are for Chicago, Iowa, Detroit, and Milwaukee.

[3] Data are not available for all 3-digit NAICS industries because there is not sufficient employment in some industries in some states for the BLS to be able to cover them accurately.

Making Value for America: A study by the National Academy of Engineering

Production technology and the nature of work are changing rapidly, giving rise to job declines in the manufacturing sector. In this context, can the U.S. design policies that support manufacturing while providing greater opportunity for U.S. workers? This was the question asked of a study panel at the National Academy of Engineering, which produced “Making Value for America: Embracing the Future of Manufacturing, Technology and Work.”

On May 4, Nick Donofrio, who chaired the study committee, joined a panel of experts at the Federal Reserve Bank of Chicago to present the findings and implications from the report. Donofrio was the Executive Vice President for Technology at IBM and a member of the National Academy. Joining him were panelists Dan Swinney (Manufacturing Renaissance and study committee member), Chad Syverson (University of Chicago Booth School of Business and study commission member), Haven Allen (World Business Chicago) and Craig Freedman (Freedman Seating).

Setting the stage for the program was Bill Testa, Vice President and Director of Regional Programs at the Chicago Fed. Testa focused on the key role of manufacturing in the Midwest economy. Within the Midwest region, the manufacturing job base remains 53% more concentrated than in the U.S. as a whole. However, dramatic declines in manufacturing jobs have led many policymakers to pursue other economic development targets. Since 1969, when manufacturing accounted for roughly 40% of the regional job base, manufacturing employment has fallen to 13.5%. Testa noted that from 2000 through the recession of 2009, manufacturing jobs in the Seventh District states of Illinois, Indiana, Michigan, Wisconsin, and Iowa dropped by 35% or 1.16 million; and only 224,000 or 21% of those jobs have returned during the recovery to date.

Testa commented that some of this trend can be traced to technology and productivity. What took 1,000 workers to make in 1950 can be done by 200 today. Moreover, increasingly workers in manufacturing jobs are upskilling and are required to have the ability to work with advanced technology—and to do so at pay scales set by global competition. Despite the many challenges, Testa argued that the Midwest still holds some advantages for manufacturers, such as a strong supply chain and the infrastructure to move goods efficiently. Recreating the region’s network of rail, road, air hubs, and ports would be difficult elsewhere. Second, manufacturing directly comprises 20% of the region’s overall output, but more importantly is responsible for almost two-thirds of the research and development in the region. Additionally, the region’s universities are well positioned to create innovation in engineering and technical fields that can lead to new products and processes.

Donofrio presented the findings from Making Value for America. Donofrio emphasized that this was not a typical manufacturing study. He suggested that in some ways manufacturing is a 20th century word and that what matters today is not simply making things but adding value through production. Understanding where value is added is critical; and in many cases, value comes from services related to the final product. Specifically, he defined adding value as the process of using ingenuity to convert resources into a service or process that contributes additional value to a person or a society. In particular, the study was interested in how the nature of work is changing. Donofrio quoted former MIT president Charles Vest who said, “Far too much of our nation is waiting for new ways of work to arrive. We hear lots of rhetoric about how the nature of work will change, as it relates to some unknown distant future. The fact is that it is happening now, and we need a broader recognition of this fact and policies and education that reflects it.”

Donofrio noted that U.S. employment in manufacturing will never regain its historical levels, but growth will be facilitated by policy that focuses on adding value and innovation. Recommendations from the study focused on three areas—education, collaboration, and being inclusive. A goal is to develop a robust innovation ecosystem that includes business; federal, state, and local governments; economic development organizations; educational institutions; and research organizations. A partial list of recommendations appears in Table 1; the complete list is available at http://www.nap.edu/catalog/19483/making-value-for-america-embracing-the-future-of-manufacturing-technology.

manufacture_table_mattoon

Chad Syverson kicked off the panel discussion by talking about the university’s role in supporting education at the pre K to 12th grade level. He noted that the University of Chicago has been active in urban education, ranging from the creation of charter schools to the creation of the Urban Education Lab. All of these efforts use rigorous social science evaluation to develop best practices for education.

Additionally, the university works directly to support entrepreneurship through the Polsky Center, which serves as a resource for supporting business formation. Syverson noted that the U.S. has had a 30-year downward trend in new business formation and that the dynamics behind this are not well understood. However, it is though business formation that significant innovation occurs, so the trend is disturbing, he said. Complementary services are provided by the Booth School of Business working with the Chicago Innovation Exchange, the 1871 tech incubator, and directly with businesses to disseminate best practices. Syverson noted that large amounts of value are left on the table when firms fail to keep up with best practices and that significant gains for the U.S. economy can be provided by better educating firms.

Haven Allen described the multitude of programs that can be found in Chicago that create manufacturing networks. These include national efforts such as the Digital Manufacturing and Design Innovation Institute (DMDII) and its related Illinois Manufacturing Labs. A clear goal is to connect local firms to this national network of innovative firms. This requires broad partnerships that include businesses, local community groups, and education. Allen stressed that training is key and that recent apprenticeship programs offered by organizations such as the Jane Addams Resource Center, the University of Illinois-Chicago, and Daley College provide models for supporting work force development. Finally, Allen emphasized that successful partnerships will focus on improvements in people, process, and product.

Craig Freedman offered the perspective of a manufacturer. Freedman suggested that the pace of change means that businesses and their workers need to get smarter at all levels. Business needs to link with education in order to make sure that relevant skills are learned at all grade levels. For example, Freedman cited the Manufacturing Connect program at Austin Polytech as a model that deserves replication. The school is located in the Austin community on the west side of Chicago. The program teaches high school students metal-working skills and provides them with certified credentials upon graduation. Local businesses partner with the school and provide apprenticeships and job shadowing opportunities.

Freedman also praised local training organizations such as the Jane Addams Resource Center, Daley College, and the 1000 Jobs Campaign as helping support critical work force development. Finally, Freedman suggested that more work needs to be done to promote the image of manufacturing as a good career path. Current perceptions of manufacturing are based on outdated notions of the industry that need correcting if young people will be attracted to these jobs.

Concluding the discussion was Dan Swinney. He noted that social inclusion should be a goal of the new emphasis of manufacturing rebirth in cities. He also cited the efforts of the Manufacturing Renaissance and the Manufacturing Connect program in the Austin Community in Chicago. Swinney stressed the importance of bringing these types of programs to areas that have suffered disinvestment. The challenges communities like Austin face are clear in the data. While unemployment in Chicago has fallen to 6.4%, in Austin it hovers near 30%. Similarly, manufacturing job loss in Austin is near 90%. However, to address the challenges faced by communities like Austin, Swinney argued, programs like Manufacturing Connect must be scaled up, since they currently only reach a small subset of students.

The Importance of Manufacturing to the Seventh District and Michigan

By Paul Traub

There has been a lot written about manufacturing returning to the United States from abroad, and there are data to suggest that this is happening. Rising wages abroad, falling energy prices in the U.S., and declining willingness of domestic manufacturers to suffer the delays and poorer quality of overseas supply chains are conspiring to shift some production back to the U.S., a trend called onshoring. At a Federal Reserve Bank of Chicago conference last April, Justin Rose of the Boston Consulting Group (BCG) attested that the U.S. still makes over 70% of the manufactured goods it consumes, while its prospects remain bright as global trends are conspiring to encourage onshoring. However, while U.S. manufacturing output remains hefty and onshoring is undoubtedly taking place, there is some debate as to whether manufacturing jobs are returning to the U.S. in a meaningful way. A recent Forbes article, “Reports Of America’s Manufacturing Renaissance Are Just a Cruel Political Hoax” makes the case that even though “some reshoring has taken place,” there hasn’t been enough to offset the continued offshoring of manufacturing jobs along with the job declines that derive from labor-saving advances in technology. This debate is of great importance to the Seventh District and Michigan.

As Chart 1 shows, the United States lost about 33.2% of its manufacturing jobs between 2000 and 2010 compared with a 1.5% decline in total nonfarm payroll jobs. Given the extent of manufacturing job decline during the recession, it wasn’t surprising to see growth in manufacturing jobs exceed total nonfarm payroll growth through 2012 even though that pace of growth slowed somewhat in 2013. In addition, while nonfarm employment is now close to its prerecession peak, manufacturing employment is still down by more than 30% from its 2000 level and 11.0% below its 2007 level.

Comparing U.S. employment with that of the Seventh District and Michigan (Chart 2), we see a slightly different picture. While total nonfarm employment for the District has improved, it is still 4.9% below its 2000 level and Michigan is still down 12.8%. Manufacturing employment is well below 2000 levels in both the District and Michigan, –28.9% and –38.2%, respectively. However, there has been some progress in the District since the recession, especially in manufacturing jobs. While the District has seen total nonfarm jobs grow by 4.2% since 2010, manufacturing jobs have improved by more than twice that rate, increasing by 8.7%. Michigan has seen total nonfarm employment grow by 5.5% for the same period, with manufacturing jobs increasing an astonishing 17.0%.

Obviously, this is important to the Seventh District and Michigan economies, given the relative heft of the manufacturing sector in the region. Charts 3 and 4 use nominal data to create manufacturing’s share of total output for the United States, the Seventh District, and Michigan. The charts show that while manufacturing has been declining steadily since 1997, the District and Michigan remain more dependent on manufacturing than the nation as a whole. The charts also illustrate that manufacturing has made somewhat of a rebound since the end of the recession. In fact, the manufacturing shares of both the U.S. and the district are very close to where they were just prior to the recession.

Much of the District’s growth in manufacturing output is related to growth in light vehicle sales, which reached their lowest levels in almost three decades during the 2008 recession. Still, the growth is quite impressive. Chart 5, which uses data from the Bureau of Economic Analysis (BEA), shows how the District accounts for almost half of the nation’s motor vehicle and parts manufacturing and this share has remained fairly constant over the last 15 years. Michigan accounts for more than half of the District’s and about 25% of the nation’s motor vehicle and parts output.

Chart 6 shows that U.S. light vehicle production fell about 6.0 million units from the peak in 2000 to just 5.6 million units in 2009. Between 2009 and 2013, light vehicle production rebounded by 5.2 million units or 94%. This would do a lot to explain the District’s manufacturing growth over the past four years.

Motor vehicle and parts employment has been declining for a number of years, due to outsourcing and increased use of automation in vehicle assembly plants. As Chart 7 shows, a simple calculation of dividing the total U.S. motor vehicle and parts employment by the number of light vehicles produced in the U.S. reveals that in 2013, there were only about 74% of the number of employees it took to produce the same number of vehicles in 2006. Since the economy started to recover in 2009, the motor vehicle and parts sector has seen an increase of about 140,000 employees, while increasing total vehicle production by 5.2 million units.

Based on projections from Ward’s Automotive, light vehicle production is expected to increase another 800,000 units by 2015. If these projections are achieved, this will certainly help the District’s overall economic output, but its impact on total employment will be more modest than that seen from 2009 to 2013. Still, we can expect the overall economic impact from the growth in production to be positive for the Seventh District and Michigan.

Reshoring discussion

Robert Solow, an accomplished economist, once said that “you can see the computer age everywhere but in the productivity statistics.”[1] Similarly, the reshoring of manufacturing activities to the U.S. has been highly touted over the past two years, even though the evidence for it has been scarce. As skeptical analysts and journalists alike have indicated, if reshoring were taking place on a large scale, we would expect to see improvements in the U.S. balance of trade in manufactured goods with the rest of the world.[2] Imports of manufactured goods would be waning and/or exports would be rising rapidly. On the contrary, the U.S. balance of payments in manufactured goods shows that little progress has been made in this regard since the years preceding the Great Recession (below).[3]

Still, despite the lack of aggregate macroeconomic evidence to date, there appear to be legitimate prospects for the reshoring of manufacturing activities because of ongoing shifts in the underlying competitive conditions that favor manufacturing production on U.S. soil.

At our recent conference held in Detroit, encouraging and somewhat mixed prospects for re-shoring were presented for a wide spectrum of domestic manufacturing, as well as for two specific industries—chemicals and automotive.

Presenting the broad case for the reshoring of manufacturing activities, Justin Rose of The Boston Consulting Group (BCG), partly drew from a recent report called “Made in America, again.” According to Rose’s presentation, the U.S. share of world manufacturing has remained steady over the past 40 years, and the U.S. still makes over 70% of the manufactured goods it consumes—two facts that may be surprising for some to learn. China has emerged as a chief manufacturing competitor to the U.S. because of its low wages. Yet, on a productivity-adjusted basis, U.S. manufacturing wages have become more competitive with China’s since 2005, said Rose. And in terms of productivity-adjusted wages in manufacturing, the U.S. has a distinct advantage over many developed countries, including Germany, France, Italy, the UK, and Japan, because of its relatively less regulated labor market.

Rose noted that BCG has identified seven manufacturing subsectors that are close to a “tipping point” for reshoring. Further reductions in labor and logistics costs for the U.S. (or further increases in these costs for its competitors) may bring back to American shores a significant amount of manufacturing activity in the following industries: computing and electronics, machinery, electrical equipment/appliances, transportation equipment, plastics and rubber, chemicals, and primary metals. If a significant portion of these seven industries’ manufacturing activity were to return to the U.S., the result would be a gain of approximately $200 million in annual manufacturing output, said Rose.

Of these specific industries identified by BCG, the chemical industry may be the most likely to bring back the bulk of its production to the U.S., according to Martha Gilchrist Moore, senior director of policy analysis and economics for the American Chemistry Council. At our recent Detroit conference, Moore pointed out that the chemical industry will benefit greatly from the enhanced production of natural gas and natural gas liquids that are now taking place in the U.S. The chemical industry is the largest natural-gas-consuming industry in the U.S., and the U.S. shale gas boom is possibly the most important energy development in the past 50 years. Shale gas production has been climbing rapidly since 2005, and now accounts for 30% of U.S. gas production. Along with the gains in “dry gas” production have come supplies of natural gas liquids. These liquids are used as important feedstocks to chemical production. All of these developments are changing the economics of global petrochemical production in favor of the U.S. such that domestic chemical production is expected to increase 7.8% annually through 2020. Having tallied the recent shale-gas-related announcements from the chemical industry, Moore reported that $72–$82 billion of chemical industry investment stemming from shale gas is expected over the next ten years, which will enhance the domestic production of key chemicals such as ethylene, propylene, and butadiene. Most of these investments are expected to take place along the U.S. Gulf Coast, but some important projects are slated for the Midwest.

The automotive industry is another manufacturing subsector that is on the move, as reported by Chicago Fed senior economist Thomas Klier at the conference and in a recent Chicago Fed Letter. However, the motor vehicle industry is on the move to Mexico rather than the U.S. (i.e., it’s reshoring its activities to another part of North America). Klier showed that Mexico has raised its share of North American light vehicle production from 6% in 1990 to 19% in 2012. The growth of light vehicle exports explains virtually all of the increase in Mexico’s light vehicle production over the last 25 years or so.[4] Moreover, foreign domiciled vehicle producers are an integral part of Mexico’s motor vehicle industry. Last year the three largest producers there were – in order – Nissan, Volkswagen, and GM.

According to Klier, Mexico has become an attractive location in which to manufacture automobiles not only because of its low labor costs, but also because of improvements in its training and infrastructure, and salutary changes in its trade policy over the past two decades. The major changes in Mexico’s trade policy began in 1994, when Mexico, along with the U.S. and Canada, implemented the North American Free Trade Agreement (NAFTA)—which opened Mexico’s market to its neighbors to the north while (temporarily) discouraging auto imports from outside of the NAFTA area. More trade barriers came down for Mexico since 1994; as of 2012, Mexico had signed free trade agreements with 44 countries.

At first blush, it would not seem that rising auto production in Mexico contributes at all to the reshoring of manufacturing activities to the U.S. Rather, it would appear that gains in auto production in Mexico simply divert production away from the U.S. (and its other NAFTA partner, Canada). However, over 37 percent of Mexico’s auto exports are destined outside of North American to Asia, Latin America, Europe and Africa. And since some of the embedded value within Mexico-produced vehicles comes from parts and design that originate in the from U.S., those enhanced exports of finished vehicles from Mexico does augment manufacturing activity to the north. Because NAFTA has helped integrate auto manufacturing activities across Mexico, Canada, and the U.S., gains in production in one of the three NAFTA nations can mean gains in production for the others.

Will evidence of large-scale reshoring ever emerge? The answers to the issues raised by re-shoring will not be settled for quite some time. Shifting patterns of global trade and technological change make for a murky geographic landscape. But at the very least, some of the shifts underway will be toward U.S. domiciles rather than away from them.

______________________________________________________________________________________

[1]Robert Solow, 1987, “We’d better watch out,” New York Times Book Review, July 12, p. 6. (Return to text)

[2]See, for example, Timothy Aeppel, 2013, “Signs of factory revival hard to spot,” Wall Street Journal, April 1, available by subscription here. (Return to text)

[3]These figures represent total manufacturing as stated in nominal dollars. Further analysis from 2003 to date using data that cover specific industry sectors in 2005 chained dollars are similar, though with some sectoral differences. Two sectors have experience shrinking trade deficits: Industrial Supplies (including petro products), and Food, Feeds and Beverages. Three other sectors report widening trade deficits: Capital Goods Excluding Automotive, Automotive, and Consumer Goods Excluding Automotive. (Return to text)

[4]Automotive exports from the U.S. have also been rising markedly, see Thomas Klier. (Return to text)

Conference to Explore the Economic Impacts of Enhanced Domestic Energy Production from Shale Gas and Oil Extraction

New technologies and techniques to extract natural gas and gas liquids, as well as petroleum, from shale rock have greatly altered expectations for North America’s capacity to produce energy products. As a result of innovations such as hydraulic fracturing, some government, industry, and academic observers have predicted that the United States will soon become energy self-sufficient and possibly become a net exporter of natural gas and petroleum.

Leaders from both specific markets and regions are looking at the opportunities and challenges associated with the so-called energy production revolution ushered in by the new means to access natural gas and other fuels. Indeed, many from potential energy-producing regions are assessing the trade-offs between economic growth associated with expanded gas and oil production and the risks to the environment that this production may pose. For those from other regions, an energy boom based on shale gas and oil extraction may present opportunities in many different arenas. For instance, some regions will especially benefit from lower consumer prices for home heating and cooling. Similarly, switching to natural gas from diesel in the long-haul trucking industry to take advantage of low natural gas prices may help bring about lower delivery costs for a wide spectrum of household and business goods. Additionally, several parties in regions historically reliant on manufacturing, such as the Midwest, are hoping that low energy prices will bring about new development and jobs in energy-consuming manufacturing sectors, such as chemicals and plastics. Furthermore, greater energy production and chemical manufacturing may lead to more supply chain linkages, which can be developed by regional and local economies.

Our April 8–9, 2013, the Chicago Fed’s Detroit Branch will host an event to discuss the impact of enhanced domestic recovery of natural gas and other fuels on industries and regional economies. The conference will focus on the shifting markets, development opportunities, and economic outcomes resulting from greater shale gas and oil extraction in the United States. We will be meeting at our Detroit Branch from the afternoon of April 8 through early afternoon the next day.

For further details on the conference, including its agenda, and information on accommodations, please click on this conference link.

Will America’s Boom in Energy Production Give Manufacturing a Boost?

Falling prices for natural gas have encouraged those who believe that manufacturing activity will rebound in the years ahead. While abundant supplies and dampened prices for natural gas are certainly positive developments for U.S.[1] manufacturing, the impacts may be modest in sum. Energy materials and fuel costs are important to many types of manufacturing processes and industries, but such factors are not always commanding considerations in manufacturing production and siting decisions. Additionally, while the outlook for domestic energy production looks robust, the outlook for large price declines may be limited because of the competing uses for natural gas, both at home and abroad.

The domestic recovery of fossil fuels—especially that of natural gas—has been on the rise in recent years. Since the middle of the previous decade, technological breakthroughs in natural gas recovery have boosted natural gas production and supplies. These enhanced recovery techniques include horizontal drilling through shale rock in search of gas deposits, accompanied by pressurized fracturing of shale rock, which releases gas (and energy liquids) for recovery. Accordingly, natural gas production from shale deposits has expanded rapidly, increasing its share of overall U.S. gas production to 23% in 2010 from less than 7% in 2007. One long-term forecast concludes that this trend will continue—more specifically, under the assumption that current laws and regulations will stay the same over the projection, shale gas production is predicted to rise “from 5.0 trillion cubic feet per year in 2010 (23 percent of total U.S. dry gas production) to 13.6 trillion cubic feet per year in 2035 (49 percent of total U.S. dry gas production).” As a result of this additional fossil fuel recovery, it is projected that overall domestic gas production will expand by 30% on an annual basis by the year 2035.

So far, expanded production of natural gas has translated into falling prices. Earlier this year, prices for natural gas on the spot market (i.e., the cash market, in which this commodity is traded for immediate delivery) plummeted following a period of extensive exploration and recovery activity.[2] From the late fall of 2009 to the spring of 2012, the spot price for natural gas per million British thermal units) fell from $6 to $2 (see the chart below). Since that time, drilling and recovery activity have been curtailed in response to plummeting prices, so that prices have recovered to some extent. The firming of prices has also been bolstered by the greater use of natural gas (instead of coal) in generating electric power.

Source: Wall Street Journal/Haver Analytics

Whether or not enhanced natural gas production will translate into lower domestic prices for industrial users over the long haul will depend on several factors. For one, as just mentioned, natural gas can be substituted for competing fuels in other sectors. Currently, for example, natural gas is being substituted for coal in the electric generating industry. Competing demands such as these may tend to buoy the price of natural gas, even as overall supplies are increasing.

The transportation sector is the largest fuel-consuming sector in the United States (outside of the electric power generating sector), and it is almost wholly dependent on gasoline derived from petroleum. In the event that a larger percentage of cars and trucks were modified so that they could use natural gas, the competing demand for this fuel might also sustain upward pressure on its price. Currently, natural-gas-powered vehicles consume a small fraction of the transportation sector’s overall fuel use. The service fleets of vehicles that are maintained by commercial businesses and governments account for most of the natural gas consumption within the transportation sector. However, the technology to adapt vehicles for natural gas consumption is well developed.[3] The major impediment to broader modification of vehicles so that they are powered by natural gas is the additional infrastructure required to transport natural gas from wells and pipelines to commercial filling stations across the country.

The ultimate impact of rising domestic production of natural gas on our manufacturing may also be affected by international demand for natural gas. A set of complex dynamics will affect whether the nation imports or exports (on net) natural gas. To date, the United States has been a net importer of natural gas from neighboring countries. However, in the event that domestic production continues to grow rapidly, market conditions may one day encourage U.S. producers to export the product. If so, the price of U.S.-produced natural gas would then become more in line with global energy market prices.[4] To the extent this were to happen, the use of natural gas as a domestic input to manufacturing would be discouraged by the higher prices that could be commanded in international markets.[5]

Even if we assume that natural gas prices remain depressed here, we may still ask if the fuel is an important part of the cost structure for manufacturing. If natural gas turns out not to be a major factor in this cost structure, then the choices in the siting of manufacturing plants that favor the United States would be somewhat limited.

Undoubtedly, industrial processes (including those of the manufacturing sector) consume large quantities of natural gas and other fuels. For 2011, industrial uses accounted for one-third of overall U.S. natural gas consumption; and the industrial sector counted natural gas as its single largest fuel source, just ahead of petroleum (see below).

Source: Author’s calculations based on data from the U.S. Energy Information Administration

However, as a share of industrial production costs, energy inputs are a somewhat modest component at the present time.[6] The chart below illustrates the energy content of overall U.S. manufacturing as measured against output (i.e., “value added”). The manufacturing sector’s overall consumption of all energy-type products—including electricity, energy product feedstock, and natural gas—amounts to close to 8% of value added in 2010. (Natural gas alone makes up a smaller share, nearly 3%.) In contrast, labor costs makes up almost 26% of value added in 2010.[7]

Sources: Census Bureau/Haver Analytics and U.S. Energy Information Administration

Though energy costs do not make up, on average, a large share of the overall value added of the U.S. manufacturing sector as a whole, this is not the case for certain manufacturing subsectors. The first table below ranks U.S. manufacturing subsectors from highest to lowest according to non-electricity fuel intensity from all sources. The highest ranking industry subsector, nitrogenous fertilizer, is a huge user of energy material, most of it being natural gas (see second table below). The nitrogenous fertilizer industry spends 125% of value added on non-electricity fuel products and 117% of value added alone on natural gas—principally as a feedstock into the production of fertilizer. However, many of these energy intensive subsectors are small and do not make up large shares of overall U.S. manufacturing production at the present time. All told, for example, the top 15 most fuel-intensive industries account for less than 10% of total U.S. value added in manufacturing. The top 15 natural-gas-consuming industries account for less than 4% of total U.S. manufacturing production.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Note: Both consumption and expenditure exclude purchases of electricity.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Despite this modest share of energy-intensive industries in overall U.S. manufacturing, low energy costs (and the greater availability of energy) in certain states do tend to attract the most energy-intensive industries. The table below ranks those states having the most energy-intensive mix of industries as measured by the consumption of fuel product per dollar of manufacturing (second column). Energy-producing states tend to dominate the list because energy products are abundant there and because fuel prices are lower closer to the point of production (on account of the lower transportation costs). In contrast, although much more overall manufacturing activity is located in the Seventh Federal Reserve District relative to the nation (last column), the District’s industry mix tends to be less intensive in average fuel use.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Note: Physical energy includes raw energy materials consumed in the electric generating process. Expenditure includes purchases of electricity.

The table below specifies the employment concentration of the nation’s 25 most natural-gas-intensive industries. Many of these industries have tended to locate in the Seventh District, and they may choose do so to a greater extent in the future should natural gas become cheap and abundant here.[8]

Click to enlarge.

Source: Author’s calculations based on data from the County Business Patterns, U.S. Department of Commerce.

The boom in natural gas production in the U.S. will undoubtedly encourage some manufacturing activity. However, under several scenarios, the benefits of abundant natural gas are likely to be spread broadly across the U.S. and Midwest economies rather than being concentrated in the manufacturing sector alone. In particular, natural gas usage will likely make inroads into many sectors, such as electric power generation and transportation. In this way, the (lower) price effects, should they come about, will also be distributed across many sectors. If so, these competing demands will tend to limit the potential price decline of natural gas and the associated upside in manufacturing activity. Similarly, the possibilities for exporting natural gas will tend to buoy its price for domestic purposes, including those for the industrial sector (dampening its increased level of activity).

Note: Thanks to Norman Wang for excellent research assistance, and to Han Choi for editorial work.

______________________________________________________________________________________

[1] See, for example, “Europe Fears U.S. Energy Gap,” Financial Times. (Return to text)

[2] Note that most natural gas is not sold on the spot market; rather, it tends to be sold under longer-term contracts. Accordingly, these prices do not generally reflect the average prices paid for natural gas consumed. (Return to text)

[3] See Conference on “Energy Use in the U.S. Trucking Sector,” Resources for the Future. (Return to text)

[4] The U.S. Department of Energy’s baseline forecast expects that because of the expansion of natural gas production, the United States will eventually become a net exporter of natural gas by early in the next decade. Longer-term projections by the U.S. Energy Information Administration (EIA) predict that real prices will remain largely flat over the next ten years. (Return to text)

[5] However, high transportation and production costs of domestic natural gas for export would mean that its price would remain somewhat lower for domestic use. And again, there are large infrastructure investments to be made to achieve capacity to export natural gas.+(Return to text)

[6] This qualification may be an important assumption. Presumably, if energy costs fell very dramatically, the industry mix of manufacturing in the United States would shift, perhaps decidedly, toward those types of products and processes that heavily consume energy. (Return to text)

[7] Note also that the energy efficiency of U.S. manufacturing (blue line) has been increasing over time. Here, we take a broad view of energy intensity—i.e., including all fuels rather than natural gas alone—because fuel substitution may be widely feasible in many production processes. (Return to text)

[8] For a current map of the location of both feasible shale rock formations, along with “current plays” in producing natural gas, see here. (Return to text)

Will America’s Boom in Energy Production Give Manufacturing a Boost?

Falling prices for natural gas have encouraged those who believe that manufacturing activity will rebound in the years ahead. While abundant supplies and dampened prices for natural gas are certainly positive developments for U.S.[1] manufacturing, the impacts may be modest in sum. Energy materials and fuel costs are important to many types of manufacturing processes and industries, but such factors are not always commanding considerations in manufacturing production and siting decisions. Additionally, while the outlook for domestic energy production looks robust, the outlook for large price declines may be limited because of the competing uses for natural gas, both at home and abroad.

The domestic recovery of fossil fuels—especially that of natural gas—has been on the rise in recent years. Since the middle of the previous decade, technological breakthroughs in natural gas recovery have boosted natural gas production and supplies. These enhanced recovery techniques include horizontal drilling through shale rock in search of gas deposits, accompanied by pressurized fracturing of shale rock, which releases gas (and energy liquids) for recovery. Accordingly, natural gas production from shale deposits has expanded rapidly, increasing its share of overall U.S. gas production to 23% in 2010 from less than 7% in 2007. One long-term forecast concludes that this trend will continue—more specifically, under the assumption that current laws and regulations will stay the same over the projection, shale gas production is predicted to rise “from 5.0 trillion cubic feet per year in 2010 (23 percent of total U.S. dry gas production) to 13.6 trillion cubic feet per year in 2035 (49 percent of total U.S. dry gas production).” As a result of this additional fossil fuel recovery, it is projected that overall domestic gas production will expand by 30% on an annual basis by the year 2035.

So far, expanded production of natural gas has translated into falling prices. Earlier this year, prices for natural gas on the spot market (i.e., the cash market, in which this commodity is traded for immediate delivery) plummeted following a period of extensive exploration and recovery activity.[2] From the late fall of 2009 to the spring of 2012, the spot price for natural gas per million British thermal units) fell from $6 to $2 (see the chart below). Since that time, drilling and recovery activity have been curtailed in response to plummeting prices, so that prices have recovered to some extent. The firming of prices has also been bolstered by the greater use of natural gas (instead of coal) in generating electric power.

Source: Wall Street Journal/Haver Analytics

Whether or not enhanced natural gas production will translate into lower domestic prices for industrial users over the long haul will depend on several factors. For one, as just mentioned, natural gas can be substituted for competing fuels in other sectors. Currently, for example, natural gas is being substituted for coal in the electric generating industry. Competing demands such as these may tend to buoy the price of natural gas, even as overall supplies are increasing.

The transportation sector is the largest fuel-consuming sector in the United States (outside of the electric power generating sector), and it is almost wholly dependent on gasoline derived from petroleum. In the event that a larger percentage of cars and trucks were modified so that they could use natural gas, the competing demand for this fuel might also sustain upward pressure on its price. Currently, natural-gas-powered vehicles consume a small fraction of the transportation sector’s overall fuel use. The service fleets of vehicles that are maintained by commercial businesses and governments account for most of the natural gas consumption within the transportation sector. However, the technology to adapt vehicles for natural gas consumption is well developed.[3] The major impediment to broader modification of vehicles so that they are powered by natural gas is the additional infrastructure required to transport natural gas from wells and pipelines to commercial filling stations across the country.

The ultimate impact of rising domestic production of natural gas on our manufacturing may also be affected by international demand for natural gas. A set of complex dynamics will affect whether the nation imports or exports (on net) natural gas. To date, the United States has been a net importer of natural gas from neighboring countries. However, in the event that domestic production continues to grow rapidly, market conditions may one day encourage U.S. producers to export the product. If so, the price of U.S.-produced natural gas would then become more in line with global energy market prices.[4] To the extent this were to happen, the use of natural gas as a domestic input to manufacturing would be discouraged by the higher prices that could be commanded in international markets.[5]

Even if we assume that natural gas prices remain depressed here, we may still ask if the fuel is an important part of the cost structure for manufacturing. If natural gas turns out not to be a major factor in this cost structure, then the choices in the siting of manufacturing plants that favor the United States would be somewhat limited.

Undoubtedly, industrial processes (including those of the manufacturing sector) consume large quantities of natural gas and other fuels. For 2011, industrial uses accounted for one-third of overall U.S. natural gas consumption; and the industrial sector counted natural gas as its single largest fuel source, just ahead of petroleum (see below).

Source: Author’s calculations based on data from the U.S. Energy Information Administration

However, as a share of industrial production costs, energy inputs are a somewhat modest component at the present time.[6] The chart below illustrates the energy content of overall U.S. manufacturing as measured against output (i.e., “value added”). The manufacturing sector’s overall consumption of all energy-type products—including electricity, energy product feedstock, and natural gas—amounts to close to 8% of value added in 2010. (Natural gas alone makes up a smaller share, nearly 3%.) In contrast, labor costs makes up almost 26% of value added in 2010.[7]

Sources: Census Bureau/Haver Analytics and U.S. Energy Information Administration

Though energy costs do not make up, on average, a large share of the overall value added of the U.S. manufacturing sector as a whole, this is not the case for certain manufacturing subsectors. The first table below ranks U.S. manufacturing subsectors from highest to lowest according to non-electricity fuel intensity from all sources. The highest ranking industry subsector, nitrogenous fertilizer, is a huge user of energy material, most of it being natural gas (see second table below). The nitrogenous fertilizer industry spends 125% of value added on non-electricity fuel products and 117% of value added alone on natural gas—principally as a feedstock into the production of fertilizer. However, many of these energy intensive subsectors are small and do not make up large shares of overall U.S. manufacturing production at the present time. All told, for example, the top 15 most fuel-intensive industries account for less than 10% of total U.S. value added in manufacturing. The top 15 natural-gas-consuming industries account for less than 4% of total U.S. manufacturing production.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Note: Both consumption and expenditure exclude purchases of electricity.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Despite this modest share of energy-intensive industries in overall U.S. manufacturing, low energy costs (and the greater availability of energy) in certain states do tend to attract the most energy-intensive industries. The table below ranks those states having the most energy-intensive mix of industries as measured by the consumption of fuel product per dollar of manufacturing (second column). Energy-producing states tend to dominate the list because energy products are abundant there and because fuel prices are lower closer to the point of production (on account of the lower transportation costs). In contrast, although much more overall manufacturing activity is located in the Seventh Federal Reserve District relative to the nation (last column), the District’s industry mix tends to be less intensive in average fuel use.

Click to enlarge.

Source: Author’s calculations based on data from the U.S. Energy Information Administration

Note: Physical energy includes raw energy materials consumed in the electric generating process. Expenditure includes purchases of electricity.

The table below specifies the employment concentration of the nation’s 25 most natural-gas-intensive industries. Many of these industries have tended to locate in the Seventh District, and they may choose do so to a greater extent in the future should natural gas become cheap and abundant here.[8]

Click to enlarge.

Source: Author’s calculations based on data from the County Business Patterns, U.S. Department of Commerce.

The boom in natural gas production in the U.S. will undoubtedly encourage some manufacturing activity. However, under several scenarios, the benefits of abundant natural gas are likely to be spread broadly across the U.S. and Midwest economies rather than being concentrated in the manufacturing sector alone. In particular, natural gas usage will likely make inroads into many sectors, such as electric power generation and transportation. In this way, the (lower) price effects, should they come about, will also be distributed across many sectors. If so, these competing demands will tend to limit the potential price decline of natural gas and the associated upside in manufacturing activity. Similarly, the possibilities for exporting natural gas will tend to buoy its price for domestic purposes, including those for the industrial sector (dampening its increased level of activity).

Note: Thanks to Norman Wang for excellent research assistance, and to Han Choi for editorial work.

______________________________________________________________________________________

[1] See, for example, “Europe Fears U.S. Energy Gap,” Financial Times. (Return to text)

[2] Note that most natural gas is not sold on the spot market; rather, it tends to be sold under longer-term contracts. Accordingly, these prices do not generally reflect the average prices paid for natural gas consumed. (Return to text)

[3] See Conference on “Energy Use in the U.S. Trucking Sector,” Resources for the Future. (Return to text)

[4] The U.S. Department of Energy’s baseline forecast expects that because of the expansion of natural gas production, the United States will eventually become a net exporter of natural gas by early in the next decade. Longer-term projections by the U.S. Energy Information Administration (EIA) predict that real prices will remain largely flat over the next ten years. (Return to text)

[5] However, high transportation and production costs of domestic natural gas for export would mean that its price would remain somewhat lower for domestic use. And again, there are large infrastructure investments to be made to achieve capacity to export natural gas.+(Return to text)

[6] This qualification may be an important assumption. Presumably, if energy costs fell very dramatically, the industry mix of manufacturing in the United States would shift, perhaps decidedly, toward those types of products and processes that heavily consume energy. (Return to text)

[7] Note also that the energy efficiency of U.S. manufacturing (blue line) has been increasing over time. Here, we take a broad view of energy intensity—i.e., including all fuels rather than natural gas alone—because fuel substitution may be widely feasible in many production processes. (Return to text)

[8] For a current map of the location of both feasible shale rock formations, along with “current plays” in producing natural gas, see here. (Return to text)

Wage growth in the Seventh District’s manufacturing occupations

by Bill Testa and Paul Traub

A strong surge in manufacturing output has been one of the hallmarks of the U.S. economic recovery since the 2008–09 recession. Along with this resurgence in production, manufacturers have also expanded their hiring following years of net job declines. Even before the recession, manufacturing employers and their trade associations voiced disappointment and concern about the “poor” availability of higher-skilled workers, who were needed to replace retirees. And as the recent manufacturing recovery has unfolded, employers have once again voiced these same complaints.[1] Additionally, as some industry observers have noted, during the recession and recovery, manufacturers have advanced their production technologies more rapidly to survive and to stay profitable. Accordingly, workers of ever-higher skills are needed to operate, monitor, maintain, and program advanced equipment, such as computer numerically controlled machines and robotic tools.

In this blog entry, we examine these trends in terms of wage and job growth within the states of the Seventh Federal Reserve District,[2] as well as across the nation. In doing so, we draw on data reported for hourly wages across individual occupations in the manufacturing sector. Further, these occupations have been classified and grouped according to the levels of skills and background preparation needed to carry out the attendant work—i.e., both formal schooling/training and on-the-job experience. Because of the recent claims that the demand for higher-skilled manufacturing labor has heightened, we compare experiences of the recent recession and recovery periods with those that took place earlier in the 2000s.

We find that:

– Within both the period 2000-07 as well as 2007-11, wage growth has been more rapid for jobs in those occupational groups that are classified as requiring higher skills and preparation.

– For the 2007–11 period as compared to the 2000–07 period, wage growth has seemingly slowed for all skill-level groupings in the manufacturing sector.

Data

Data on hourly wages and the number of people employed are gathered annually by the Bureau of Labor Statistics of the U.S. Department of Labor in its Occupational Employment Statistics (OES) program.[3] As the database name suggests, these data are classified by the primary occupation of each surveyed employee, and the OES program uses over 800 occupational classifications. In addition, these data are available for the nation as a whole and they are also broken down by geography—i.e., by states, metropolitan areas, and rural divisions.[4]

In the following analysis, we use OES data for those occupations that can be predominantly found in manufacturing industries. To identify such occupations, we rely on O*NET (Occupational Information Network)—which is the nation’s primary source of occupational information intended to help prospective employees in their search for work.[5] We examine data for occupations with a range of 49%–100% representation in the manufacturing sector at the national level, according to O*NET (this range may vary somewhat more by region).[6] For example, at the national level, an estimated 96% of tool and die makers are employed by manufacturing companies, and 49% of automotive engineers are employed by manufacturing firms. In many of these occupations, employees outside of manufacturing companies may produce services (i.e., automotive design/engineering), which are ultimately purchased by manufacturing companies and which are embedded in manufactured products.

Since we are interested in skills and wage trends by occupation, we also focus on the “skill zone” groupings of the various occupations as classified by O*NET. Occupations are grouped in O*NET into one of five “Job Zone” categories, which are defined on the basis of “levels of education, experience, and training necessary to perform the occupation” (the higher the Job Zone number, the higher level of education, experience, and training required).[7] In the analysis to follow, the manufacturing occupations are grouped into one of the first four job zones. None of the Job Zone Five occupations (with “extensive preparation needed”) meet the criterion of having at least 49% of currently employed workers in the manufacturing sector.

Findings and Discussion

In the table below for the Seventh District and the nation, average hourly wages for manufacturing occupations are reported for two time periods: 2000–07 and 2007–11.[8] These periods are chosen for their business cycle similarity. That is, both the year 2000 and the year 2007 precede the onset of a recession, and both the year 2007 and the year 2011 are in the recovery/expansion phases following a recession. Importantly, however, 2007 represents a year that is five years following the business cycle trough (i.e., the 2001 recession), while 2011 represents a year that is only two years out from the trough (i.e., the 2008–09 recession). For this reason, we may expect some (unknown) dissimilarity among wage and hiring trends by skill level to the extent that employers’ demand for workers vary over the business cycle (e.g., by the time elapsed from the end of a recession).

According to O*NET, Job Zone One (which we refer to as skill zone 1) includes occupations such as hand grinding and polishing workers, slaughterers/meat packers, and production helpers. At the other skill extreme, Job Zone Four (skill zone 4) includes such occupations as materials, mechanical, and industrial engineers, as well as aerospace engineering technicians. Additionally, Job Zone Three (skill zone 3) occupations include computer numerically controlled machine programmers, along with machinists and tool and die makers. Finally, Job Zone Two (skill zone 2) encompasses occupations such as welders and many varieties of machine operators and setters.

As seen below, occupations in skill zone 2 make up a large majority of the manufacturing jobs found in the Seventh District. Along with jobs in skill zone 1, these jobs have been declining as a share of total manufacturing jobs in the Seventh District since year 2000. In contrast, higher-skilled occupations in skill zones 3 and 4 have come to comprise a larger share of manufacturing jobs.

With these caveats about the proportions of jobs in the different skills zones in mind, we present below a table that reports average hourly wages by occupation, with occupations grouped into the four skill zones. From the table, it is clear that the annual pace of wage growth has slowed from the earlier period to the later one. This is not surprising given the sharp declines in payroll employment that have taken place since 2007 in the manufacturing sector. In the U.S., for example, from the fourth quarter of 2007 through the fourth quarter of 2009, employment declined by 16.4% (2.25 million jobs).[9] Since the fourth quarter of 2009 until the second quarter of 2012, manufacturing jobs have grown by 457,000, thereby gaining back 20.3% of the decline.

Click to enlarge

Looking across the skill categories for any given year, one can see that wages generally rise more sharply, the higher the skill zone. Wages in the lowest manufacturing skill zone are less than one-third of those found in the highest manufacturing skill zone. Even more striking is the widening of wages between skill levels that has taken place in both the Seventh District and the nation over the past decade. Much as in the overall economy, those manufacturing occupations requiring greater skills have experienced faster wage gains.

Making a more granular comparison of the later period with the earlier one, we note that occupations in skill zone 3 have seemingly experienced a relative pickup in wage growth. During the 2000–07 period, average wages in these occupations grew at a similar pace to those in skill zones one and two. In contrast, by the latter period, in both the Seventh District and nation, skill zone 3 wages were outpacing those of (lower) skill zones 1 and 2, and were rivaling wage growth in (higher) skill zone 4. To some extent, then, this evidence is consistent with recent claims of manufacturing employers that workers with higher skills are in short supply and high demand. For example, the hourly wage of “electro-mechanical technicians” rose by over 5.0% annually from 2007 to 2011 in the Seventh District, while the hourly wages of “medical equipment operators” rose by 7.6 percent annually.[10] Both of these occupations lie in the skill zone 3 category. Over the same period, skill zone 2 “computer controlled machine tool operators” reported a 1.3 percent annual wage growth over the period; “welders, cutters, solderers, and brazers” (in skill zone 2) reported 1.7 percent annual gains.

General comparisons of employment growth also speak to a relatively stronger demand for manufacturing workers in higher skill zone categories. The charts below display the shares of workers in each skill zone over time for both the Seventh District and the nation. Trends for skill zones 1, 3 and 4 (blue, green, and purple) are to be read off of the left-hand vertical axis; trends for skill zones 2 (red) is to be read off of the right-hand vertical axis. The trends seen are consistent between the Seventh District and the nation. That is, the share of manufacturing workers in the lower skill zones (1 and 2) have been on the decline, with skill zone 2 jobs falling sharply since 2007. In contrast, jobs in skill zones 3 and 4 have been rising as a share of overall employment in manufacturing. In particular, the share of skill zone 4 occupations—many of which are as engineers and engineering technicians—have been rising continually since 2000. The share of skill zone 3 workers has been rising in both the Seventh District and in the nation, especially over the past three to four years.

Click to enlarge

While these trends tend to echo the manufacturing sentiments being heard today, a cautionary note would be that these data reflect an early point in the nascent economic expansion following the Great Recession. We are only two years into the recovery/expansion of the business cycle (using 2011 as the most recent data available). The chart below expresses these same employment data as year-over-year changes for the U.S. Here, data for all four skill zones can be read off of a single vertical axis. During the expansion following the 2001 recession, growth in higher-skilled manufacturing jobs recovered earlier than that in lower-skilled manufacturing jobs, with some catch-up growth taking place by 2004 and 2005 (three to four years following the recession). Similar trends in manufacturing job growth may yet emerge during the post-2011 years of the economic recovery.

The manufacturing work force has been “upskilling”—i.e., this sector, like so many other industries over the long term, has seen improvements in average skill levels; the manufacturing sector’s composition of jobs has been shifting toward those occupations requiring more skills and preparation. According to the data on wages and employed workers as categorized by their occupational skill zone, this is no less true during the recent recession and recovery so far than during the earlier years of the 2000s.

______________________________________________________________________________________

[1]For example, see “U.S. Manufacturing and the Skills Crisis,” Wall Street Journal Online. (Return to text)

[2]The entirety of Iowa and the majority of Illinois, Indiana, Michigan, and Wisconsin are in the Seventh District. (Return to text)

[3]See www.bls.oes, which states: “The Occupational Employment Statistics (OES) program produces employment and wage estimates for over 800 occupations. These are estimates of the number of people employed in certain occupations, and estimates of the wages paid to them. Self-employed persons are not included in the estimates. These estimates are available for the nation as a whole, for individual States, and for metropolitan and nonmetropolitan areas; national occupational estimates for specific industries are also available.” (Return to text)

[4]In making wage comparisons by occupation over time, the inherent information must be discounted to some extent, especially over short time period comparisons at the local and regional level of geography. That is because the data collection methodology of the OES uses a rotating three-year panel of establishments (i.e., each establishment drops out after three years of continuous reporting). Any single year’s reported data for a region represents a three-year moving average of sampled observations. For the currently reported period, past observations are brought forward in time by using national level average estimates of change by occupation. In the process, some local information is then lost while gains are made in both data up-to-dateness and larger sample size for the current year’s reported data. (Return to text)

[5]See www.onetonline.org. O*NET was developed under the sponsorship of the U.S. Department of Labor/Employment and Training Administration (USDOL/ETA) through a grant to the North Carolina Department of Commerce. (Return to text)

[6]See here. (Return to text)

[7]See here. (Return to text)

[8]The latest year for which data are reported is 2011. Wages level comparisons across individual years, as well as comparisons across time periods, may not be wholly comparable because occupational composition is subject to change. Occupational classifications are sometimes dropped or added from year to year. (Return to text)

[9]These data are seasonally-adjusted payroll jobs as reported by the BLS/Haver Analytics. (Return to text)

[10]There is much variation in wage experience within the same work skill zone. For example, over the same period skill zone 3 “tool and die makers” reported small annual wage declines. (Return to text)

Wage growth in the Seventh District’s manufacturing occupations

by Bill Testa and Paul Traub

A strong surge in manufacturing output has been one of the hallmarks of the U.S. economic recovery since the 2008–09 recession. Along with this resurgence in production, manufacturers have also expanded their hiring following years of net job declines. Even before the recession, manufacturing employers and their trade associations voiced disappointment and concern about the “poor” availability of higher-skilled workers, who were needed to replace retirees. And as the recent manufacturing recovery has unfolded, employers have once again voiced these same complaints.[1] Additionally, as some industry observers have noted, during the recession and recovery, manufacturers have advanced their production technologies more rapidly to survive and to stay profitable. Accordingly, workers of ever-higher skills are needed to operate, monitor, maintain, and program advanced equipment, such as computer numerically controlled machines and robotic tools.

In this blog entry, we examine these trends in terms of wage and job growth within the states of the Seventh Federal Reserve District,[2] as well as across the nation. In doing so, we draw on data reported for hourly wages across individual occupations in the manufacturing sector. Further, these occupations have been classified and grouped according to the levels of skills and background preparation needed to carry out the attendant work—i.e., both formal schooling/training and on-the-job experience. Because of the recent claims that the demand for higher-skilled manufacturing labor has heightened, we compare experiences of the recent recession and recovery periods with those that took place earlier in the 2000s.

We find that:

– Within both the period 2000-07 as well as 2007-11, wage growth has been more rapid for jobs in those occupational groups that are classified as requiring higher skills and preparation.

– For the 2007–11 period as compared to the 2000–07 period, wage growth has seemingly slowed for all skill-level groupings in the manufacturing sector.

Data

Data on hourly wages and the number of people employed are gathered annually by the Bureau of Labor Statistics of the U.S. Department of Labor in its Occupational Employment Statistics (OES) program.[3] As the database name suggests, these data are classified by the primary occupation of each surveyed employee, and the OES program uses over 800 occupational classifications. In addition, these data are available for the nation as a whole and they are also broken down by geography—i.e., by states, metropolitan areas, and rural divisions.[4]

In the following analysis, we use OES data for those occupations that can be predominantly found in manufacturing industries. To identify such occupations, we rely on O*NET (Occupational Information Network)—which is the nation’s primary source of occupational information intended to help prospective employees in their search for work.[5] We examine data for occupations with a range of 49%–100% representation in the manufacturing sector at the national level, according to O*NET (this range may vary somewhat more by region).[6] For example, at the national level, an estimated 96% of tool and die makers are employed by manufacturing companies, and 49% of automotive engineers are employed by manufacturing firms. In many of these occupations, employees outside of manufacturing companies may produce services (i.e., automotive design/engineering), which are ultimately purchased by manufacturing companies and which are embedded in manufactured products.

Since we are interested in skills and wage trends by occupation, we also focus on the “skill zone” groupings of the various occupations as classified by O*NET. Occupations are grouped in O*NET into one of five “Job Zone” categories, which are defined on the basis of “levels of education, experience, and training necessary to perform the occupation” (the higher the Job Zone number, the higher level of education, experience, and training required).[7] In the analysis to follow, the manufacturing occupations are grouped into one of the first four job zones. None of the Job Zone Five occupations (with “extensive preparation needed”) meet the criterion of having at least 49% of currently employed workers in the manufacturing sector.

Findings and Discussion

In the table below for the Seventh District and the nation, average hourly wages for manufacturing occupations are reported for two time periods: 2000–07 and 2007–11.[8] These periods are chosen for their business cycle similarity. That is, both the year 2000 and the year 2007 precede the onset of a recession, and both the year 2007 and the year 2011 are in the recovery/expansion phases following a recession. Importantly, however, 2007 represents a year that is five years following the business cycle trough (i.e., the 2001 recession), while 2011 represents a year that is only two years out from the trough (i.e., the 2008–09 recession). For this reason, we may expect some (unknown) dissimilarity among wage and hiring trends by skill level to the extent that employers’ demand for workers vary over the business cycle (e.g., by the time elapsed from the end of a recession).

According to O*NET, Job Zone One (which we refer to as skill zone 1) includes occupations such as hand grinding and polishing workers, slaughterers/meat packers, and production helpers. At the other skill extreme, Job Zone Four (skill zone 4) includes such occupations as materials, mechanical, and industrial engineers, as well as aerospace engineering technicians. Additionally, Job Zone Three (skill zone 3) occupations include computer numerically controlled machine programmers, along with machinists and tool and die makers. Finally, Job Zone Two (skill zone 2) encompasses occupations such as welders and many varieties of machine operators and setters.

As seen below, occupations in skill zone 2 make up a large majority of the manufacturing jobs found in the Seventh District. Along with jobs in skill zone 1, these jobs have been declining as a share of total manufacturing jobs in the Seventh District since year 2000. In contrast, higher-skilled occupations in skill zones 3 and 4 have come to comprise a larger share of manufacturing jobs.

With these caveats about the proportions of jobs in the different skills zones in mind, we present below a table that reports average hourly wages by occupation, with occupations grouped into the four skill zones. From the table, it is clear that the annual pace of wage growth has slowed from the earlier period to the later one. This is not surprising given the sharp declines in payroll employment that have taken place since 2007 in the manufacturing sector. In the U.S., for example, from the fourth quarter of 2007 through the fourth quarter of 2009, employment declined by 16.4% (2.25 million jobs).[9] Since the fourth quarter of 2009 until the second quarter of 2012, manufacturing jobs have grown by 457,000, thereby gaining back 20.3% of the decline.

Click to enlarge

Looking across the skill categories for any given year, one can see that wages generally rise more sharply, the higher the skill zone. Wages in the lowest manufacturing skill zone are less than one-third of those found in the highest manufacturing skill zone. Even more striking is the widening of wages between skill levels that has taken place in both the Seventh District and the nation over the past decade. Much as in the overall economy, those manufacturing occupations requiring greater skills have experienced faster wage gains.

Making a more granular comparison of the later period with the earlier one, we note that occupations in skill zone 3 have seemingly experienced a relative pickup in wage growth. During the 2000–07 period, average wages in these occupations grew at a similar pace to those in skill zones one and two. In contrast, by the latter period, in both the Seventh District and nation, skill zone 3 wages were outpacing those of (lower) skill zones 1 and 2, and were rivaling wage growth in (higher) skill zone 4. To some extent, then, this evidence is consistent with recent claims of manufacturing employers that workers with higher skills are in short supply and high demand. For example, the hourly wage of “electro-mechanical technicians” rose by over 5.0% annually from 2007 to 2011 in the Seventh District, while the hourly wages of “medical equipment operators” rose by 7.6 percent annually.[10] Both of these occupations lie in the skill zone 3 category. Over the same period, skill zone 2 “computer controlled machine tool operators” reported a 1.3 percent annual wage growth over the period; “welders, cutters, solderers, and brazers” (in skill zone 2) reported 1.7 percent annual gains.

General comparisons of employment growth also speak to a relatively stronger demand for manufacturing workers in higher skill zone categories. The charts below display the shares of workers in each skill zone over time for both the Seventh District and the nation. Trends for skill zones 1, 3 and 4 (blue, green, and purple) are to be read off of the left-hand vertical axis; trends for skill zones 2 (red) is to be read off of the right-hand vertical axis. The trends seen are consistent between the Seventh District and the nation. That is, the share of manufacturing workers in the lower skill zones (1 and 2) have been on the decline, with skill zone 2 jobs falling sharply since 2007. In contrast, jobs in skill zones 3 and 4 have been rising as a share of overall employment in manufacturing. In particular, the share of skill zone 4 occupations—many of which are as engineers and engineering technicians—have been rising continually since 2000. The share of skill zone 3 workers has been rising in both the Seventh District and in the nation, especially over the past three to four years.

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While these trends tend to echo the manufacturing sentiments being heard today, a cautionary note would be that these data reflect an early point in the nascent economic expansion following the Great Recession. We are only two years into the recovery/expansion of the business cycle (using 2011 as the most recent data available). The chart below expresses these same employment data as year-over-year changes for the U.S. Here, data for all four skill zones can be read off of a single vertical axis. During the expansion following the 2001 recession, growth in higher-skilled manufacturing jobs recovered earlier than that in lower-skilled manufacturing jobs, with some catch-up growth taking place by 2004 and 2005 (three to four years following the recession). Similar trends in manufacturing job growth may yet emerge during the post-2011 years of the economic recovery.

The manufacturing work force has been “upskilling”—i.e., this sector, like so many other industries over the long term, has seen improvements in average skill levels; the manufacturing sector’s composition of jobs has been shifting toward those occupations requiring more skills and preparation. According to the data on wages and employed workers as categorized by their occupational skill zone, this is no less true during the recent recession and recovery so far than during the earlier years of the 2000s.

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[1]For example, see “U.S. Manufacturing and the Skills Crisis,” Wall Street Journal Online. (Return to text)

[2]The entirety of Iowa and the majority of Illinois, Indiana, Michigan, and Wisconsin are in the Seventh District. (Return to text)

[3]See www.bls.oes, which states: “The Occupational Employment Statistics (OES) program produces employment and wage estimates for over 800 occupations. These are estimates of the number of people employed in certain occupations, and estimates of the wages paid to them. Self-employed persons are not included in the estimates. These estimates are available for the nation as a whole, for individual States, and for metropolitan and nonmetropolitan areas; national occupational estimates for specific industries are also available.” (Return to text)

[4]In making wage comparisons by occupation over time, the inherent information must be discounted to some extent, especially over short time period comparisons at the local and regional level of geography. That is because the data collection methodology of the OES uses a rotating three-year panel of establishments (i.e., each establishment drops out after three years of continuous reporting). Any single year’s reported data for a region represents a three-year moving average of sampled observations. For the currently reported period, past observations are brought forward in time by using national level average estimates of change by occupation. In the process, some local information is then lost while gains are made in both data up-to-dateness and larger sample size for the current year’s reported data. (Return to text)

[5]See www.onetonline.org. O*NET was developed under the sponsorship of the U.S. Department of Labor/Employment and Training Administration (USDOL/ETA) through a grant to the North Carolina Department of Commerce. (Return to text)

[6]See here. (Return to text)

[7]See here. (Return to text)

[8]The latest year for which data are reported is 2011. Wages level comparisons across individual years, as well as comparisons across time periods, may not be wholly comparable because occupational composition is subject to change. Occupational classifications are sometimes dropped or added from year to year. (Return to text)

[9]These data are seasonally-adjusted payroll jobs as reported by the BLS/Haver Analytics. (Return to text)

[10]There is much variation in wage experience within the same work skill zone. For example, over the same period skill zone 3 “tool and die makers” reported small annual wage declines. (Return to text)

First-Half Seventh District Manufacturing Performance

By Martin Lavelle

While manufacturing activity has been slowing over the past couple of months, its performance over the first half of 2012 would definitely be scored as a positive for the region. Seventh District manufacturing activity built on its momentum from last year and continued to grow through the first half of 2012. Growth occurred at rates fast enough to virtually eliminate the output deficit that the Seventh District had developed relative to the U.S. during the Great Recession. Chart 1 shows the performance of the Federal Reserve Bank of Chicago’s Midwest Manufacturing Index versus the Federal Reserve System’s Manufacturing Production Index, which is part of its Industrial Production release. The Seventh District’s output deficit narrowed quickly in the early months of 2012, as growth in the Midwest manufacturing sector accelerated.

Chart 1: Chicago Fed Midwest Manufacturing Index vs. U.S. Manufacturing Production Index

Source: Federal Reserve Bank of Chicago

In an earlier blog, I noted that, based on purchasing managers’ index (PMI) reports throughout the Seventh District, manufacturing was expanding at a faster rate in the Midwest than in the U.S., most likely leading to faster economic growth for the region than the U.S. as a whole during last year and into this year. Over the first half of 2012, PMI reports for the Seventh District indicate this trend is continuing. However, recent individual PMI reports suggest the nationwide slowing of manufacturing has spread into some parts of the Seventh District.

Chart 2 shows PMI readings from Seventh District locations since the beginning of 2011.[1] Since January 2012, manufacturing activity in Iowa and Southeast Michigan (metro Detroit) has continued to expand at a fairly steady pace. Meanwhile, Western Michigan, and Milwaukee have seen some slowing in the rate of increase in manufacturing activity—especially in Western Michigan, where office furniture production has slowed somewhat due to a softening expansion in U.S. business fixed investment spending and automotive suppliers have slowed production because of increasing national and global economic uncertainty.

Chart 2: U.S. and Seventh District PMIs: Total

Source: Haver Analytics, ISM

Despite an overall slowing of the pace of growth in some areas, manufacturers continue to add modestly to their payroll employment. Indeed, according to PMI reports, employment gains have accelerated in Chicago and Southeast Michigan. Using data on payroll employment from the Bureau of Labor Statistics, Chart 3 compares manufacturing employment growth rates in the U.S., Seventh District, and Michigan. Manufacturing employment has grown at faster rates in the District thus far in 2012, and especially in Michigan, than in the nation, thanks in large part to a rebound in auto-related production, spurred by rising national demand for light vehicles.

Chart 3: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth

Source: Bureau of Labor Statistics

However, employment gains haven’t been limited to auto-related manufacturing sectors. Chart 4 compares job growth in manufacturing sectors excluding auto-related manufacturing. Other manufacturing sectors in the Seventh District and Michigan have also added jobs at faster rates than the U.S. Agriculture continues to be a boon for the Seventh District economy, translating into job growth in food manufacturing and machinery. Employment levels among Seventh District food manufacturers are 1.8% higher than a year ago, compared with just 0.4% growth nationally. In Iowa, food manufacturing employment has grown 2.2% over the last year. Iowa has also seen robust hiring from machinery manufacturers, specifically agriculture, construction, and mining machinery. Machinery sector employment in Iowa has increased 16% from the previous year.

Chart 4: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth Excluding Autos

Source: Bureau of Labor Statistics

The District has recorded significant employment growth in agriculture, machinery, printing, plastic, rubber, metal, and furniture-related industries. With improving employment and output growth across such a wide range of sectors, the region continues to outperform the nation to a modest degree.

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[1]These PMI readings have been smoothed with a 12-month moving average as they are not seasonally adjusted (so that all locations can be compared). (Return to text)