Category Archives: Manufacturing

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)

Manufacturing: Been down so long, it looks like up?

Those having keen interests in the U.S. manufacturing sector are somewhat encouraged by its performance over the past three years. The sector has bounced back sharply since the end of the severe 2008–09 recession. Job growth in manufacturing is running up 2 percent on a year-over-year basis, and the sector has recovered three-quarters of the output lost during the 2008-09 recession. Encouragement about manufacturing prospects derives not only from the recent bounce, but also from the possibility that the change in direction may represent a turnaround in manufacturing’s fortunes that will be sustained over the longer term. The previous peak in manufacturing jobs took place as far back as the 1990s, so this new direction, particularly if it holds up over a long horizon, would be a welcome change.

To put recent events into proper perspective, it is useful to examine the manufacturing sector’s long-term experience in the United States. Since the mid-twentieth century until the 2000s, the level of jobs in the manufacturing sector has stayed fairly constant, even while real output and productivity have risen briskly. The chart below shows the sector’s climbing real output, with the nation experiencing a five-fold growth in real manufacturing output since the early 1950s through today. Output growth here reflects both the increase in the quantity of goods produced and the improvements in the goods’ quality, such as durability and performance. Over most of this period in the United States, real output growth in manufacturing matched or exceeded the real growth in overall goods and services production[1]. In contrast with this hearty performance of real output growth in manufacturing, the sector’s levels of employment have remained steady over the latter half of the twentieth century—in the range of 17–19 million workers—and then moved much lower until very recently.

Source: Bureau of Labor Statistics/Haver Analytics

Effectively, these gains in output with generally steady employment levels mean that productivity growth in the manufacturing sector has been quite robust. The application of more “know-how” and capital equipment has boosted manufacturing output, but with little need for more accompanying labor. Such productivity improvements, along with cheaper imports, have contributed to falling real prices for many manufactured goods sold in the United States. On the flip side of the same coin, falling prices of manufactured goods have boosted standards of living for U.S. households during the post-World War II era. The ability of American workers to produce more with greater efficiency—as well as to buy more—has translated into real wage gains.

But while such gains have benefited broad swaths of the U.S. population, it is also true that many manufacturing-oriented towns and cities have experienced decline and that manufacturing workers and firms have suffered dislocation. Such changes have led analysts to probe more deeply into the sources of both manufacturing progress and upheaval. Why haven’t rising standards of living done more to sustain manufacturing jobs?

For the most part, there are fundamental aspects to the ways we live that have prevented a large enough rise in our purchases of manufactured goods to outweigh falling labor content (and jobs) in the domestic manufacturing sector. For one, the rising incomes of U.S. households have not lifted the demand for manufactured goods sufficiently. Even with the introduction of new manufactured goods, such as televisions, medical equipment, home computers, and microwave ovens, households have tended to shift consumption toward services, such as medical care, education, and personal services. So too falling real prices for manufactured goods have not sufficiently induced consumer demand for standard manufactured goods, such as home furnishings and automobiles.

To be sure, exports of goods abroad have helped to lift employment in the manufacturing sector. The United States remains a global leader in innovation, as well as research and development (R&D), in many capital goods sectors, especially machinery and equipment. Rapid growth and development of nations throughout the world have raised the demand for U.S.-made capital equipment and certain high-tech products, such as farm equipment, pharmaceutical products, medical equipment, aerospace equipment, and earth-moving machinery. Manufactured goods continue to represent the largest share of U.S. exports abroad, and exports as a share of U.S. gross domestic product (GDP) have risen from 5.8 percent in 2001 to 9.3 percent in 2011.

However, at the same time, imports of manufactured products have also been rising. In fact imports of manufactured products have risen more rapidly than our exports of manufactured products abroad. Some imports become components of U.S.-produced goods that are exported abroad. But for the most part, rising imports displace manufactured goods that might otherwise be produced domestically.

Source: WISER/Census Bureau/Haver Analytics

Source: WISER/Census Bureau/Haver Analytics

Given these mixed trends, some analysts have argued that the long-standing trend of nearly flat manufacturing job levels and rising production levels was interrupted by a decline in the number of manufacturing jobs beginning in the late 1990s, possibly accompanied by a slower pace of real output growth. From that time until recently, the United States experienced a rising trade deficit in manufactured goods. This was not the first time that the U.S. economy had experienced rising competition with other countries for sales both abroad and within its home markets. In particular, the rise of industrialization in Japan and other “Asian Rim” countries had a significant impact in the 1970s and 1980s on U.S. markets for major product segments in home electronics, steel, and automotive. Such developments were facilitated by globalization factors, including tariff reduction agreements and falling costs for transportation and communications.

The era from the late 1990s through the recent recession and recovery may represent a different order of magnitude in this regard. According to economist Robert Fry of Dupont, the large size of China and its low costs of production—coupled with the production capabilities of other “Asian tiger” nations—brought forward sharp competition for U.S. producers both in markets abroad and within the U.S. marketplace. One recent study conducted by David Autor, David Dorn, and Gordon Hanson lends weight to rising import competition as a significant cause for domestic manufacturing job loss over the past two decades. It does so by examining the varied experiences of many U.S. subregions and their relative exposure to rising imports from low-wage countries. In their most conservative estimates, the authors attribute one-quarter of the decline in U.S. manufacturing employment over the period 1990–2007 to changes in Chinese imports.

Since 1998, U.S. manufacturing employment fell precipitously from the levels that had prevailed through the 1960s, 1970s, 1980s, and the early part of the 1990s. Manufacturing employment fell from its peak in 1998 by over 3 million jobs by 2007 (by one fifth) and then by another 2 million jobs by 2010.

Regional trends in manufacturing also shifted during this time. Whereas job losses had been previously concentrated in the traditional industrial belt extending from western Pennsylvania and New York through the Great Lakes states, manufacturing job losses showed no favorites this time around. As seen below, states of the Southeast had been gaining manufacturing jobs versus the Great Lakes states from the late 1960s through the late 1990s. In contrast, jobs in both regions have fallen in tandem since that time.

Source: Bureau of Economic Analysis/Haver Analytics

As mentioned before, a recent rebound in manufacturing activity and jobs has followed on the heels of the severe 2008–09 recession. To some observers, the recent bounce is a harbinger of a change in direction for the manufacturing sector in terms of employment. Since last year’s tsunami and aftermath in Japan, some multinational corporations are rethinking their supply chains overseas in favor of North American production sites. Similarly, falling energy prices for domestic natural gas are enticing some chemical/plastics production operations back to U.S. shores. And as fundamental operational costs are rising in China and the rest of Asia, it may be the case that, at the very least, the strong wave of production relocation toward developing countries is beginning to slow. However, given the sustained decline that the U.S. manufacturing sector has experienced since the 1990s and during the recent recession, along with many cross currents underway general business activity and structure, analysts will not know for at least several years into the future whether manufacturing activity has truly bottomed out.

Meanwhile, in the near term, overall economic growth has entered a soft patch around the world over the past several months. And as usual, when overall growth slows, the trend tends to be magnified for manufacturing activity. And so, the informational signals on whether U.S. manufacturing has turned around in a major way have become more difficult to read.

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[1]Some analysts have challenged the veracity of recent output gains from the manufacturing sector. Output gains may be overstated as final goods are produced here with an increasing amount of foreign content, especially purchased inputs and intermediate parts and components. Susan Houseman notes that such inputs are undercounted (so that final U.S. output as recorded is then overcounted). In a 2009 paper, Houseman and co-authors found that “from 1997 to 2007 average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage points, and real value added growth by 0.2 to 0.5 percentage points.”(Return to text)

Understanding manufacturing labor and wage trends

Bill Testa and Britton Lombardi

The number of net jobs held by workers in the manufacturing sector have declined markedly in recent decades—and especially so during the recent recession. Yet, manufacturers bemoan shortages of skilled workers, even while they tout emerging employment opportunities. What is the possible disconnect that is at play in the manufacturing sector? For one, worker shortages may not apply to all categories of workers, but rather to those with high or specialized skills. Across the entire U.S. economy, employers have had sharper needs for workers with greater levels of skills and educational attainment in recent years. And so, manufacturers may find it difficult to meet their own needs in this regard. If this is the case, one place to look for evidence would be in the wages of workers who are now in manufacturing. How have wages and compensation in the manufacturing sector changed over the years?

One of the longest-running data series on manufacturing wages is available from the U.S. Bureau of Labor Statistics (BLS). The BLS provides data on the hourly wage of nonsupervisory and production workers in manufacturing. In the chart below, we show these data with some modification. In particular, we convert the data into dollars of constant spending power using the personal consumption expenditure deflator. The average wage below is expressed in today’s dollars, running from the end of 2011 back through 1947.

In interpreting the wage trend, we must exercise some caution for two reasons. First, the hourly wage data cover a variety of workers, including those involved in fabricating, processing, storing, handling, shipping, maintenance, janitorial services, and recordkeeping. And so, the “mix” of workers across occupations may have been changing over time so that wage comparisons across time periods may be somewhat distorted. Second, the data only report on wage and salary compensation and not on worker benefits, such as deferred retirement benefits and health care insurance. Since the 1980s, health care insurance costs have been generally rising as a share of compensation for the overall U.S. work force—and within the manufacturing industry as well.[1] And so, wage trends alone may understate the changes in overall compensation.

With these cautions in mind, it appears that real wages in manufacturing grew steadily from 1947 through the late 1970s. After a dip in wages near the very end of the 1970s, wages have since remained largely constant.

Much of the policy discussion about job opportunities and compensation in manufacturing is qualified by notions that work in the sector increasingly requires higher-skilled laborers, and that demands for such workers are frequently exceeding the supply of qualified candidates. The BLS data above are not adequate for analyzing the manufacturing labor force by fine classification and skill level; however, the U.S. Census Bureau’s Census of Manufactures data featured below has long differentiated the wage bills of production workers from those of nonproduction workers in the manufacturing sector. The nonproduction category comprises nonline supervisors, along with white collar positions, such as executives, engineers, designers, sales staff, and research and development (R&D) personnel.

This is not to say that all nonproduction workers are more skilled than all production workers, but the general tenor of the classification suggests so, on average. In particular, the annual earnings levels are higher for nonproduction workers (as we might expect them to be). In 1947, the average wage of nonproduction workers was 60% higher than that of production workers; as of 2007, the average wage of nonproduction workers was 70% above that of production workers.

On further inspection of these data back through 1947, we notice a similar pattern of earnings for both production and nonproduction workers in manufacturing. Much like the BLS data on hourly wages, the Census Bureau data on annual earnings of production workers climbed until the late 1970s before flattening out or rising mildly.

Source: Authors’ calculations based on data from U.S. Census Bureau, Census of Manufactures.

However, in contrast to production worker wages, nonproduction worker wages have registered some modest post-1977 growth. This somewhat more robust wage growth of nonproduction workers (relative to their production counterparts) hints at a nearly universal trend among such workers (and occupations) over the past three and a half decades. In other words, the compensation and rewards for gaining higher skills and education have been sharpening in the U.S. economy—and not just in manufacturing. Changes in the industry structure of the U.S. economy have encouraged the growth of work requiring greater skills and education. The advent of new technologies in the workplace—such as the Internet, computing equipment and software, and advanced machinery—have put a premium on higher levels of skills and education. At the same time, global competition in some industries has also dampened low-skilled wages and profits.

Across the entire U.S. work force, the average levels of skills and formal education of successive generations of workers have also been rising markedly for many decades. Under most circumstances, such an increased availability of skilled workers might be expected to put downward pressure on their compensation and wages. Evidently, such effects have been more than offset by rising demands in the U.S. for workers with higher levels of skills and educational attainment.

In a recent Chicago Fed Letter we document the fact that average worker skills, as measured by years of school completed, have been on the rise in the U.S. since the 1990s. Using educational attainment (i.e., years of school completed) as a proxy for skills of workers, we find this to be the case in both the manufacturing and nonmanufacturing sectors. In fact, educational gains among workers in manufacturing have outpaced those among workers in nonmanufacturing between the year 1990 and an average of the years 2000–07. For example, while shares of workers who have attained “some college” or at least a four-year degree remains higher (on average) in the nonmanufacturing sector, the gaps in these shares between manufacturing workers and their nonmanufacturing counterparts have closed considerably over this time period.

Have manufacturing wage benefits gone up as more workers “upskill”? In the chart below, which draws on the 2011 Chicago Fed Letter, we see the percent change in wage gains in both sectors—manufacturing and nonmanufacturing. Within each individual sector, patterns of relative wage gains by education are similar. In both the manufacturing and nonmanufacturing sectors alike, wages of those workers having higher educational attainment have increased sharply, while the wages of workers with only a high school diploma and below have languished.

It is also evident that when we compare wage gains at the same level of educational attainment, average wage gains have been stronger outside of manufacturing. Indeed, “upskilling” in manufacturing has taken place, resulting in higher-paying jobs; but for those workers who have similar levels of educational attainment, wage gains in manufacturing have not kept pace with those in nonmanufacturing.

Click to enlarge

Such evidence is far from the last word on wage compensation in the manufacturing sector, but it appears that manufacturing employers have been struggling to compete with nonmanufacturing employers for workers with greater levels of skills and educational attainment. In both sectors, wages have grown more rapidly for those with higher educational attainment. Relative to the nonmanufacturing sector, the manufacturing sector continues to pay a premium to its workers at nearly all levels of educational attainment. However, the manufacturing wage premium has possibly eroded since 1990, as wage gains in manufacturing have not kept pace with nonmanufacturing wages, on average.

Note: Thanks to Norman Wang for assistance.

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[1]As reported by the Employee Compensation Index of the BLS, wage and salaries across all civilian workers in manufacturing industries have increased 5.5% 1981, while total compensation, including benefits, has increased 17.8%.(Return to text)

Great Lakes’ manufacturing job loss in perspective

by Bill Testa and Norman Wang

Residents of the Great Lakes states have been long familiar with the ups and downs of manufacturing jobs and with the shocks to local economic conditions when factories close and whole industries all but evaporate. There are many policy issues attendant to these events revolving around responses such as work force training, industry assistance, and community efforts to diversify these communities’ industry bases. Rather than addressing such issues, we’d simply like to offer a perspective on the extent and nature of manufacturing job loss from the most recent decade to date. The data on job counts in manufacturing show that these losses have been unparalled in many respects.

The data in the chart below display total jobs in the manufacturing sector since 1969 (as constructed by the Bureau of Economic Analysis of the U.S. Department of Commerce).[1] The geography of these jobs (counted in millions) is defined by the BEA as the “Great Lakes Region,” which includes the states of Ohio, Indiana, Michigan, Wisconsin, and Illinois. These five states have long been considered to be the core of the “industrial belt” that more broadly ranges westward from Western New York and Pennsylvania into eastern Iowa and Missouri. And so, the experience of these five states should describe the experience of the nation’s industrial belt.

A look at the chart beginning in 1969 shows that, during the recessions of the 1970s, there were sharp declines and recoveries in manufacturing jobs. But later on, from 1979 to 1983, the bottom fell out, as more than one in five manufacturing jobs were eliminated from peak to trough. Contributing factors were many:

 The nation experienced two (back-to-back) recessions during the early 1980s.

 Interest rates were climbing and the value of the dollar versus foreign currencies rose sharply, which instigated declining domestic investment in capital goods and exports abroad.

 In domestic markets, competition from abroad in industries such as primary steel production and construction equipment was keen.

 The farm economy, an important customer of the Midwest machinery industry, experienced deep declines in income and associated capital investment.

 Defense expenditures were rising, but to little effect in the Midwest region.

The national economic recovery beginning during 1983 was sharp, which lifted Midwest manufacturing jobs somewhat, especially in the automotive sector. However, although the 1990s were also robust in the region, levels of manufacturing jobs remained largely flat, never again approaching their pre-1980 levels.

Source: Bureau of Economic Analysis/Haver Analytics

As the chart also shows, the Great Lakes has experienced its second profound decline in manufacturing jobs over the past 10–15 years. During that time, through two recessions and two recoveries, Great Lakes manufacturing employment has fallen continually. From a 1998 peak of 4.2 million jobs, manufacturing levels fell to 2.7 million in 2010, a decline of approximately 1.5 million. By both absolute and relative standards, the extent of this job loss exceeded that of 1979–83 when 1.2 million manufacturing jobs were lost peak to trough. Rather than the one in five jobs lost of the earlier period, the 1998–2010 experience amounted to a one in three loss of manufacturing jobs.

Source: Bureau of Economic Analysis/Haver Analytics

How does the Great Lakes’ experience compare with that of the rest of the U.S.? The chart above compares job levels between the two, accurately scaled according to their relative manufacturing size in the beginning of the period. Over the entire period from 1969 to 2010, manufacturing jobs declined markedly across the United States. Overall, the Great Lakes decline was only moderately steeper. However, the Great Lakes region’s employment base had been and continues to be more concentrated in manufacturing. Accordingly, manufacturing job losses have a more significant impact on this region’s work force and communities, on average, than they do elsewhere.

To illustrate this point, the table that follows indicates the percentage decline in manufacturing jobs from the previous peak years during the late 1990s (column 1). At the peak, the second column indicates just how prominent the manufacturing sector was as a share of total jobs in particular states, in the region, and in the U.S. The final column “weights” manufacturing job losses by the respective size of the manufacturing sector, thereby illustrating the extent to which manufacturing decline impacted the overall employment base in the state or region.

The chart illustrates this impact. For example, nationally, we see that manufacturing job declines from the peak year (1998) through year 2010 wiped out the equivalent of 3.8% of the total job base of 1998. However, for the Great Lakes Region, the impact was much more severe, at 5.9%—and 7.7% for the hardest hit state, Michigan.

(Click to enlarge)

Source: Bureau of Economic Analysis/Haver Analytics

Comparing these more recent declines with those of 1979–83, we see that the pace of manufacturing job declines in the Great Lakes Region was much steeper than that of the nation during 1979–83. At that time, some other regions were experiencing job gains in both defense-related and aerospace industries and in microelectronics and computing equipment.

In the more recent period since 1998, manufacturing declines have been roughly proportionate in both the Great Lakes Region and in the remainder of the U.S., though still somewhat steeper in the region. During the recovery years in the middle of the last decade, manufacturing jobs continued to decline in our region even while flattening out in the remainder of the U.S.

The Great Lakes’ continuous decline in manufacturing owes much to the performance of its transportation equipment industries—especially automotive, trucks, and trailers. As the next chart illustrates, employment in the transportation equipment industry has fallen by over one-half from its peak in 1999.[2] The net loss of these 400,000 jobs comprises over one-quarter of the region’s manufacturing job losses over the period. Moreover, many more job losses are indirectly attributable to production declines in the transportation equipment sector due to the industry’s intensive sourcing of business services, parts, fasteners, materials, and equipment from within the region.

Both production and employment in the transportation equipment sector bottomed out in 2009, but job gains since then have been very small in relation to the previous net losses. From the trough of the 2008–09 recession, transportation equipment has regained 28,600 jobs in the region, roughly 6.8% of prior net job losses as counted from the peak of the 1990s. Across all manufacturing sectors, the region has regained 135,200 jobs, roughly 8.5% of its previous job losses.

Source: Bureau of Labor Statistics/Haver Analytics

In sum, the Great Lakes Region’s net job losses in manufacturing since the late 1990s have been severe. Relative to the structural changes that took place in the early 1980s, the more recent experience has been worse along every dimension save one—that is, recent manufacturing job declines have been drawn out over a ten-year period rather than the four-year descent of 1979–83. Manufacturing jobs have been growing over the course of the cyclical recovery that began in mid-2009, but these gains are very modest in the context of the entire period since 1969.

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[1]The BEA estimates include full and part-time workers, both those on payrolls and those who are self-employed. Contract workers would be excluded from the manufacturing industry, as they are accounted for in other sources of jobs data.(Return to text)

[2] These data are payroll employment data, provided by the Bureau of Labor Statistics, U.S. Department of Labor.(Return to text)

Great Lakes’ manufacturing job loss in perspective

by Bill Testa and Norman Wang

Residents of the Great Lakes states have been long familiar with the ups and downs of manufacturing jobs and with the shocks to local economic conditions when factories close and whole industries all but evaporate. There are many policy issues attendant to these events revolving around responses such as work force training, industry assistance, and community efforts to diversify these communities’ industry bases. Rather than addressing such issues, we’d simply like to offer a perspective on the extent and nature of manufacturing job loss from the most recent decade to date. The data on job counts in manufacturing show that these losses have been unparalled in many respects.

The data in the chart below display total jobs in the manufacturing sector since 1969 (as constructed by the Bureau of Economic Analysis of the U.S. Department of Commerce).[1] The geography of these jobs (counted in millions) is defined by the BEA as the “Great Lakes Region,” which includes the states of Ohio, Indiana, Michigan, Wisconsin, and Illinois. These five states have long been considered to be the core of the “industrial belt” that more broadly ranges westward from Western New York and Pennsylvania into eastern Iowa and Missouri. And so, the experience of these five states should describe the experience of the nation’s industrial belt.

A look at the chart beginning in 1969 shows that, during the recessions of the 1970s, there were sharp declines and recoveries in manufacturing jobs. But later on, from 1979 to 1983, the bottom fell out, as more than one in five manufacturing jobs were eliminated from peak to trough. Contributing factors were many:

 The nation experienced two (back-to-back) recessions during the early 1980s.

 Interest rates were climbing and the value of the dollar versus foreign currencies rose sharply, which instigated declining domestic investment in capital goods and exports abroad.

 In domestic markets, competition from abroad in industries such as primary steel production and construction equipment was keen.

 The farm economy, an important customer of the Midwest machinery industry, experienced deep declines in income and associated capital investment.

 Defense expenditures were rising, but to little effect in the Midwest region.

The national economic recovery beginning during 1983 was sharp, which lifted Midwest manufacturing jobs somewhat, especially in the automotive sector. However, although the 1990s were also robust in the region, levels of manufacturing jobs remained largely flat, never again approaching their pre-1980 levels.

Source: Bureau of Economic Analysis/Haver Analytics

As the chart also shows, the Great Lakes has experienced its second profound decline in manufacturing jobs over the past 10–15 years. During that time, through two recessions and two recoveries, Great Lakes manufacturing employment has fallen continually. From a 1998 peak of 4.2 million jobs, manufacturing levels fell to 2.7 million in 2010, a decline of approximately 1.5 million. By both absolute and relative standards, the extent of this job loss exceeded that of 1979–83 when 1.2 million manufacturing jobs were lost peak to trough. Rather than the one in five jobs lost of the earlier period, the 1998–2010 experience amounted to a one in three loss of manufacturing jobs.

Source: Bureau of Economic Analysis/Haver Analytics

How does the Great Lakes’ experience compare with that of the rest of the U.S.? The chart above compares job levels between the two, accurately scaled according to their relative manufacturing size in the beginning of the period. Over the entire period from 1969 to 2010, manufacturing jobs declined markedly across the United States. Overall, the Great Lakes decline was only moderately steeper. However, the Great Lakes region’s employment base had been and continues to be more concentrated in manufacturing. Accordingly, manufacturing job losses have a more significant impact on this region’s work force and communities, on average, than they do elsewhere.

To illustrate this point, the table that follows indicates the percentage decline in manufacturing jobs from the previous peak years during the late 1990s (column 1). At the peak, the second column indicates just how prominent the manufacturing sector was as a share of total jobs in particular states, in the region, and in the U.S. The final column “weights” manufacturing job losses by the respective size of the manufacturing sector, thereby illustrating the extent to which manufacturing decline impacted the overall employment base in the state or region.

The chart illustrates this impact. For example, nationally, we see that manufacturing job declines from the peak year (1998) through year 2010 wiped out the equivalent of 3.8% of the total job base of 1998. However, for the Great Lakes Region, the impact was much more severe, at 5.9%—and 7.7% for the hardest hit state, Michigan.

(Click to enlarge)

Source: Bureau of Economic Analysis/Haver Analytics

Comparing these more recent declines with those of 1979–83, we see that the pace of manufacturing job declines in the Great Lakes Region was much steeper than that of the nation during 1979–83. At that time, some other regions were experiencing job gains in both defense-related and aerospace industries and in microelectronics and computing equipment.

In the more recent period since 1998, manufacturing declines have been roughly proportionate in both the Great Lakes Region and in the remainder of the U.S., though still somewhat steeper in the region. During the recovery years in the middle of the last decade, manufacturing jobs continued to decline in our region even while flattening out in the remainder of the U.S.

The Great Lakes’ continuous decline in manufacturing owes much to the performance of its transportation equipment industries—especially automotive, trucks, and trailers. As the next chart illustrates, employment in the transportation equipment industry has fallen by over one-half from its peak in 1999.[2] The net loss of these 400,000 jobs comprises over one-quarter of the region’s manufacturing job losses over the period. Moreover, many more job losses are indirectly attributable to production declines in the transportation equipment sector due to the industry’s intensive sourcing of business services, parts, fasteners, materials, and equipment from within the region.

Both production and employment in the transportation equipment sector bottomed out in 2009, but job gains since then have been very small in relation to the previous net losses. From the trough of the 2008–09 recession, transportation equipment has regained 28,600 jobs in the region, roughly 6.8% of prior net job losses as counted from the peak of the 1990s. Across all manufacturing sectors, the region has regained 135,200 jobs, roughly 8.5% of its previous job losses.

Source: Bureau of Labor Statistics/Haver Analytics

In sum, the Great Lakes Region’s net job losses in manufacturing since the late 1990s have been severe. Relative to the structural changes that took place in the early 1980s, the more recent experience has been worse along every dimension save one—that is, recent manufacturing job declines have been drawn out over a ten-year period rather than the four-year descent of 1979–83. Manufacturing jobs have been growing over the course of the cyclical recovery that began in mid-2009, but these gains are very modest in the context of the entire period since 1969.

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[1]The BEA estimates include full and part-time workers, both those on payrolls and those who are self-employed. Contract workers would be excluded from the manufacturing industry, as they are accounted for in other sources of jobs data.(Return to text)

[2] These data are payroll employment data, provided by the Bureau of Labor Statistics, U.S. Department of Labor.(Return to text)

Understanding the Seventh District and U.S. Economies with Purchasing Managers’ Surveys

By Martin Lavelle

Purchasing managers’ surveys—often referred to as purchasing managers’ index (PMI) reports—provide timely information about the economy. In these monthly surveys, manufacturers are asked about their own purchases and their company’s supply chain. More specifically, manufacturing purchasing managers are asked about the directional heading of their businesses’ key indicators, such as new orders, prices, inventory levels, employment, and delivery time. In constructing the PMI, a survey response of “up” is given a value of 1; an answer of “no change” is worth 0.5; and a reply of “down” is worth 0. Once all the surveys have been taken into account, an index value greater than 50 equates to expansion of the manufacturing sector, a value of 50 means there was no change, and anything less than 50 is associated with a contraction in manufacturing. The further a reading is from 50, the more significant the increase or decrease in manufacturing.

Purchasing managers’ surveys cover manufacturing activity from a variety of geographic areas. Among such surveys, the U.S. and Chicago Institute for Supply Management (ISM) Reports on Manufacturing—released at or near the beginning of each month—are viewed as leading indicators of economic activity. It’s natural for PMI reports to be considered leading economic indicators both because the data are timely and because many manufacturing indicators are generally regarded as leading economic indicators. Manufacturing activity often leads the overall economy because of the durable nature of many of the sector’s goods. Inventories can be costly to hold, so that an unexpected buildup of inventories can prompt companies to halt production activity to bring inventories back into line with sales. Consumers, too, may slow their pace of purchases of durable goods like cars and appliances in response to a dimming outlook for income or jobs; when their incomes become impaired, households do not want to be caught with such durable goods, which can be difficult to convert into cash.

PMIs are especially telling in the Seventh Federal Reserve District where manufacturing is more important to economic growth as compared with the U.S. as a whole. For example, 13% of all Midwest nonfarm payroll employment is classified as manufacturing in the year to date. Nationally, manufacturing only accounts for 8.9% of total nonfarm payroll employment. The Midwest derives 11.2% of its personal income earned from manufacturing as opposed to a 7.2% share for the U.S. Arguably, the strongest sector since the start of the U.S. economic recovery in July 2009 has been manufacturing. And because of the stronger manufacturing presence in the Seventh District, we have benefitted from the recovery more than other states and regions. The individual PMI reports throughout the Seventh District support this assertion.

Chart 1 below shows the U.S. and Seventh District PMI reports—which are compiled for Chicago, southeastern Michigan (Metro Detroit), western Michigan (Grand Rapids, Kalamazoo, Holland), Milwaukee area, and Iowa. The chart constructs a 12-month moving average for each PMI report to resolve seasonal adjustment issues. The data go back to 1990, with the earliest PMI data found for Iowa as of 1994[1]. As indicated, the PMI readings generally peaked at the end of 2004 or the start of 2005. From 2005 until the start of the recession in December 2007, manufacturing continued to expand throughout the Seventh District, but at a slower rate; the lone exception was southeastern Michigan, which was impacted by the early stages of auto industry restructuring. Once the recession began, the deceleration in manufacturing activity intensified and became widespread, with PMI readings within the U.S. and the Seventh District falling below 50 during the onset of the financial crisis in the second half of 2008.

According to the National Bureau of Economic Research, the Great Recession ended in June 2009. Looking at Chart 1, the 12-month moving averages of the PMIs bottomed out at or around June 2009. The Chicago economic area noticeably lagged the U.S. and the other Seventh District indexes by a couple of months. Since then, PMI readings have rebounded well above 50, indicating a strengthening manufacturing sector. This is especially so in the Seventh District where PMI readings are at least 4 points higher than the U.S. PMI number.

Chart 1: U.S. and Seventh District PMIs: Total

In isolating the “new orders” component of the PMI surveys below in Chart 2, one tends to see more accentuated swings in manufacturing business cycles. As indicated by survey responses on new orders, the most dramatic dip and ensuing rebound occurring during the most recent recession and its aftermath took place in Iowa, with readings approaching 75 during the recovery phase. All Seventh District PMI new order readings are currently above the U.S. number, indicating that the pace of manufacturing expansion is stronger here relative to the rest of the nation. Additionally, the ongoing rebound in light vehicle sales and business spending on equipment and software bode well for the Seventh District, since there’s a higher concentration of those industries present in the Midwest.

Chart 2: U.S. and Seventh District PMIs: New Orders

Movements in manufacturing activity are often accompanied by swings in the sector’s employment and income. As of October of this year, manufacturing employment is up 2.4% in the Midwest over last year—higher than national employment growth in manufacturing, which was 1.9% October-over-October. A specific employment component of the PMI is reported. PMIs indicate that the pace of employment expansion has been substantial, with PMI readings of around 60 or above. At the sub-regional level, a rapid pace of hiring has been taking place, especially in western Michigan. A striking feature of Chart 3 below is that southeastern Michigan’s manufacturing sector experienced nine years of job losses because of the protracted contraction in the domestic auto industry before beginning to add jobs in 2010.

The rebound in manufacturing employment has contributed to the Seventh District’s unemployment rate falling faster from its peak than the U.S. unemployment rate. The Seventh District unemployment rate is currently 9.3%, down from its peak of 11%, and just above the current U.S. unemployment of 9%.

Chart 3: U.S. and Seventh District PMIs: Employment

When looking at the “supplier deliveries” component of PMI surveys below in Chart 4, a reading above 50 indicates a slowing in the delivery of supplies to (other) manufacturers[2]. Delivery times have recently increased as longer lead times have developed for commodities, especially those coming from areas in Asia affected by last spring’s Japanese earthquake and tsunami, as well as the recent flooding in Thailand. Since the incidence of delays in obtaining materials from suppliers has increased, the supplier delivery number is currently higher than at the beginning of 2011. Longer lead times bring into question the supply chain’s ability to respond to a robust increase in consumer demand that would require a significant increase in capacity utilization.

Chart 4: U.S. and Seventh District PMIs: Supplier Deliveries

During the economic recovery, inventory levels rebounded strongly throughout the Seventh District, as Chart 5 displays. But the pace of adding to inventories has now slowed, along with the overall pace of economic growth. As the economy accelerated early in 2011 according to the initial gross domestic product (GDP) reports, so did inventories in order to satisfy consumer demand. But as economic growth has slowed to a modest pace at best, with early 2011 growth being revised downward, inventory levels have become leaner, reflecting some of the uncertainty and lack of confidence present among consumers as they assess their household budgetary situations and prospects. Inventories are currently lighter on the retail side this holiday season in anticipation of a modest increase in the pace of sales relative to last year.

Chart 5: U.S. and Seventh District PMIs: Inventories

In looking over the PMI reports from various Seventh District locations, one notes that the current readings indicate a manufacturing sector that continues to expand at a faster pace relative to the U.S. as a whole. As the national economy recovers from the Great Recession, the Seventh District economy is rebounding—in some respects ahead of the national economy—largely because of the region’s high concentration in manufacturing production of durable goods. If the current PMI trends hold, one could realistically expect that economic growth in the Seventh District will rival, if not exceed, the nation’s economic growth in the remainder of 2011 and into 2012.

______________________________________________________________________________________

[1]In addition, the earliest southeastern Michigan report was found in January 1990, but there’s a break in the data during 2004 when responsibility for the report switched over from the National Association of Purchasing Management and Comerica Bank to the Institute for Supply Management. (Return to text)

[2]Prior to May 2011, a supplier deliveries index above 50 percent in the Milwaukee PMI indicated faster deliveries, and below 50 percent indicated slower deliveries. Milwaukee’s supply delivery index number in Chart 4 has been adjusted to reflect the other supplier delivery indexes by subtracting the index number from 100 prior to their change in methodology. (Return to text)

Understanding the Seventh District and U.S. Economies with Purchasing Managers’ Surveys

By Martin Lavelle

Purchasing managers’ surveys—often referred to as purchasing managers’ index (PMI) reports—provide timely information about the economy. In these monthly surveys, manufacturers are asked about their own purchases and their company’s supply chain. More specifically, manufacturing purchasing managers are asked about the directional heading of their businesses’ key indicators, such as new orders, prices, inventory levels, employment, and delivery time. In constructing the PMI, a survey response of “up” is given a value of 1; an answer of “no change” is worth 0.5; and a reply of “down” is worth 0. Once all the surveys have been taken into account, an index value greater than 50 equates to expansion of the manufacturing sector, a value of 50 means there was no change, and anything less than 50 is associated with a contraction in manufacturing. The further a reading is from 50, the more significant the increase or decrease in manufacturing.

Purchasing managers’ surveys cover manufacturing activity from a variety of geographic areas. Among such surveys, the U.S. and Chicago Institute for Supply Management (ISM) Reports on Manufacturing—released at or near the beginning of each month—are viewed as leading indicators of economic activity. It’s natural for PMI reports to be considered leading economic indicators both because the data are timely and because many manufacturing indicators are generally regarded as leading economic indicators. Manufacturing activity often leads the overall economy because of the durable nature of many of the sector’s goods. Inventories can be costly to hold, so that an unexpected buildup of inventories can prompt companies to halt production activity to bring inventories back into line with sales. Consumers, too, may slow their pace of purchases of durable goods like cars and appliances in response to a dimming outlook for income or jobs; when their incomes become impaired, households do not want to be caught with such durable goods, which can be difficult to convert into cash.

PMIs are especially telling in the Seventh Federal Reserve District where manufacturing is more important to economic growth as compared with the U.S. as a whole. For example, 13% of all Midwest nonfarm payroll employment is classified as manufacturing in the year to date. Nationally, manufacturing only accounts for 8.9% of total nonfarm payroll employment. The Midwest derives 11.2% of its personal income earned from manufacturing as opposed to a 7.2% share for the U.S. Arguably, the strongest sector since the start of the U.S. economic recovery in July 2009 has been manufacturing. And because of the stronger manufacturing presence in the Seventh District, we have benefitted from the recovery more than other states and regions. The individual PMI reports throughout the Seventh District support this assertion.

Chart 1 below shows the U.S. and Seventh District PMI reports—which are compiled for Chicago, southeastern Michigan (Metro Detroit), western Michigan (Grand Rapids, Kalamazoo, Holland), Milwaukee area, and Iowa. The chart constructs a 12-month moving average for each PMI report to resolve seasonal adjustment issues. The data go back to 1990, with the earliest PMI data found for Iowa as of 1994[1]. As indicated, the PMI readings generally peaked at the end of 2004 or the start of 2005. From 2005 until the start of the recession in December 2007, manufacturing continued to expand throughout the Seventh District, but at a slower rate; the lone exception was southeastern Michigan, which was impacted by the early stages of auto industry restructuring. Once the recession began, the deceleration in manufacturing activity intensified and became widespread, with PMI readings within the U.S. and the Seventh District falling below 50 during the onset of the financial crisis in the second half of 2008.

According to the National Bureau of Economic Research, the Great Recession ended in June 2009. Looking at Chart 1, the 12-month moving averages of the PMIs bottomed out at or around June 2009. The Chicago economic area noticeably lagged the U.S. and the other Seventh District indexes by a couple of months. Since then, PMI readings have rebounded well above 50, indicating a strengthening manufacturing sector. This is especially so in the Seventh District where PMI readings are at least 4 points higher than the U.S. PMI number.

Chart 1: U.S. and Seventh District PMIs: Total

In isolating the “new orders” component of the PMI surveys below in Chart 2, one tends to see more accentuated swings in manufacturing business cycles. As indicated by survey responses on new orders, the most dramatic dip and ensuing rebound occurring during the most recent recession and its aftermath took place in Iowa, with readings approaching 75 during the recovery phase. All Seventh District PMI new order readings are currently above the U.S. number, indicating that the pace of manufacturing expansion is stronger here relative to the rest of the nation. Additionally, the ongoing rebound in light vehicle sales and business spending on equipment and software bode well for the Seventh District, since there’s a higher concentration of those industries present in the Midwest.

Chart 2: U.S. and Seventh District PMIs: New Orders

Movements in manufacturing activity are often accompanied by swings in the sector’s employment and income. As of October of this year, manufacturing employment is up 2.4% in the Midwest over last year—higher than national employment growth in manufacturing, which was 1.9% October-over-October. A specific employment component of the PMI is reported. PMIs indicate that the pace of employment expansion has been substantial, with PMI readings of around 60 or above. At the sub-regional level, a rapid pace of hiring has been taking place, especially in western Michigan. A striking feature of Chart 3 below is that southeastern Michigan’s manufacturing sector experienced nine years of job losses because of the protracted contraction in the domestic auto industry before beginning to add jobs in 2010.

The rebound in manufacturing employment has contributed to the Seventh District’s unemployment rate falling faster from its peak than the U.S. unemployment rate. The Seventh District unemployment rate is currently 9.3%, down from its peak of 11%, and just above the current U.S. unemployment of 9%.

Chart 3: U.S. and Seventh District PMIs: Employment

When looking at the “supplier deliveries” component of PMI surveys below in Chart 4, a reading above 50 indicates a slowing in the delivery of supplies to (other) manufacturers[2]. Delivery times have recently increased as longer lead times have developed for commodities, especially those coming from areas in Asia affected by last spring’s Japanese earthquake and tsunami, as well as the recent flooding in Thailand. Since the incidence of delays in obtaining materials from suppliers has increased, the supplier delivery number is currently higher than at the beginning of 2011. Longer lead times bring into question the supply chain’s ability to respond to a robust increase in consumer demand that would require a significant increase in capacity utilization.

Chart 4: U.S. and Seventh District PMIs: Supplier Deliveries

During the economic recovery, inventory levels rebounded strongly throughout the Seventh District, as Chart 5 displays. But the pace of adding to inventories has now slowed, along with the overall pace of economic growth. As the economy accelerated early in 2011 according to the initial gross domestic product (GDP) reports, so did inventories in order to satisfy consumer demand. But as economic growth has slowed to a modest pace at best, with early 2011 growth being revised downward, inventory levels have become leaner, reflecting some of the uncertainty and lack of confidence present among consumers as they assess their household budgetary situations and prospects. Inventories are currently lighter on the retail side this holiday season in anticipation of a modest increase in the pace of sales relative to last year.

Chart 5: U.S. and Seventh District PMIs: Inventories

In looking over the PMI reports from various Seventh District locations, one notes that the current readings indicate a manufacturing sector that continues to expand at a faster pace relative to the U.S. as a whole. As the national economy recovers from the Great Recession, the Seventh District economy is rebounding—in some respects ahead of the national economy—largely because of the region’s high concentration in manufacturing production of durable goods. If the current PMI trends hold, one could realistically expect that economic growth in the Seventh District will rival, if not exceed, the nation’s economic growth in the remainder of 2011 and into 2012.

______________________________________________________________________________________

[1]In addition, the earliest southeastern Michigan report was found in January 1990, but there’s a break in the data during 2004 when responsibility for the report switched over from the National Association of Purchasing Management and Comerica Bank to the Institute for Supply Management. (Return to text)

[2]Prior to May 2011, a supplier deliveries index above 50 percent in the Milwaukee PMI indicated faster deliveries, and below 50 percent indicated slower deliveries. Milwaukee’s supply delivery index number in Chart 4 has been adjusted to reflect the other supplier delivery indexes by subtracting the index number from 100 prior to their change in methodology. (Return to text)

Manufacturing in the Seventh District: Agriculture, Construction, and Mining Machinery

by Thomas Walstrum and Bill Testa

As discussed regularly in this blog, manufacturing has long played an important role in the Midwest economy. One of our most prominent manufacturing sectors is agriculture, construction, and mining machinery. This industry’s products are the large machines that plow fields and harvest crops, tear up and repave roads, dig mines and rescue miners. To define the sector specifically, we use the Census Bureau NAICS code 3331.

Two companies headquartered in the Midwest are such household names that you may have played with toy replicas of their products as a child–earth moving equipment maker Caterpillar and farm tractor and harvester maker John Deere. These two companies are the Midwest’s largest in the sector by market capitalization and revenue. As measured by company value, the agriculture, construction, and farm machinery industry has experienced a significant recovery since the financial crisis in 2008. Stock prices for all the sector’s companies based in the Midwest are near their 52-week highs and above their 2008 peak. From a low at the beginning of 2009, the S&P agriculture, construction and machinery index has dramatically outpaced the growth of the overall economy. In addition to the two heavy hitters mentioned earlier, the Midwest is home to a number of other companies, both public and privately owned, with a significant presence in this sector.

A couple of the publicly traded companies overlap with other sectors: Oshkosh also manufactures defense and fire & emergency equipment; Manitowoc also manufactures food service equipment.[1]

Like company stock prices, industry employment grew steadily until the financial crisis in 2008 and fell significantly in the aftermath. Employment began recovering in 2010, but is still 32,000 below the 2008 peak. Jobs are spread relatively evenly among the three subsectors. In December 2010, mining accounted for 35% of the sector’s total employment, construction 29%, and agriculture 36%.

According to the U.S. Department of Commerce, there are over 500 manufacturing establishments for the sector in the Illinois, Indiana, Iowa, Michigan and Indiana. The counties that are part of major metropolitan statistical areas or MSAs have notable concentrations of establishments, but the map below shows that manufacturing establishments are well distributed throughout the region. Some rural counties have a relatively large number of establishments, such as Sioux County in northwest Iowa and Houghton County in Michigan’s western Upper Peninsula.

The construction, mining, and agricultural machinery sector is an important part of all manufacturing in the Midwest. In terms of value-added by this sector to total manufacturing activity, in 2009 the sector contributed 1.6% to total U.S. manufacturing and 3.8% to Midwest manufacturing.

Within the sector, a significant proportion of manufacturing takes place in the Midwest. In 2009, almost one-third of all employees in the sector worked in the Midwest and just over 40% of the value added by the sector came from the Midwest. The sector’s footprint is largest in Illinois and Iowa, but Wisconsin makes a significant contribution as well.

In spite of its relatively small population, Iowa is the second largest producer of construction, mining, and agriculture machinery in the Midwest. For this reason, the industry is particularly important to Iowa in per capita terms. In 2009, more than 6 in 1,000 Iowans were employed by the sector–more than four times the regional average of 1.5 and ten times the national average of 0.6.

As reflected in recent trends, future prospects are bright for growth in the agriculture, construction, and mining machinery industry. Emerging economies such as China and India are continuing to experience significant economic growth, thereby lifting demand for machinery. With the growth of emerging economies, exports from the U.S. are becoming increasingly important. Beginning in 2004, exports for the U.S. industry increased by about 20% annually until the financial crisis of 2008. The parallel increase in the balance of trade provides further evidence that exports became an increasingly important part of industry growth between 2004 and 2008. While exports took a significant hit in 2009, they have recovered somewhat in 2010, and the trade balance is still well above levels in the early 2000s.

Producers of agriculture, construction, and mining machinery also serve a large U.S. market. Domestic sales in 2009 totaled nearly $60 billion; and domestic manufacturers hold a significant proportion of that market—73.6% in 2009.

Companies based in the Midwest have a presence outside North America to varying degrees. For companies that reported such figures in their annual reports, an average of 45% of revenue came from outside North America in 2010. Not all of that foreign revenue is from exports because production often takes place outside the US. For example, using data from Caterpillar’s 2010 midyear report and fourth quarter 2010 earnings release, 45 % of their employment is U.S. based.

Among Midwest states, industry exports are most important to Illinois, representing 42.4% of sales, just below the U.S. average of 43.3%. For the Seventh District states, exports make up 31.0% of sales.

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[1] Aside from company financial data, the descriptive data to follow covers only the particular establishment sites that are primarily engaged in manufacturing products in the sector, whether the establishments are owned by public or private companies. (Return to text)

Is U.S. Manufacturing Disappearing?

By William Strauss

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)

Upskilling in Manufacturing

By Bill Testa and Britton Lombardi

The U.S. work force has been “upskilling” in recent decades, that is, average work force skills have been climbing. Evidence suggests that such upskilling has been taking place broadly across U.S. industries, including manufacturing. However, manufacturers have been especially disappointed by what they see as their inability to hire and retain skilled workers. In response, manufacturers and their associations are quite active in pursuing strategies and programs to fatten their pipelines of skilled workers.

As documented by Dan Sullivan and Dan Aaronson and others, upskilling across the broad U.S. work force is evidenced by rapid growth in educational attainment over the past century, particularly high school and college completion. Rising family incomes over the twentieth century led to unprecedented investments in human capital which were manifested in rising rates of both high school and college attainment. More recently, reasons for continued broad upskilling across U.S. industries and occupations are varied and debated, but the strongest impetus appears to have arisen from rising employer demands for skills. Accelerating technological advancements in recent decades have boosted the demand for workers who can most effectively use these tools in the workplace. In U.S. manufacturing plants, many less skilled production line jobs have been replaced by skilled workers operating computer controlled equipment and working in groups, with individual workers being trained to perform an increasing variety of tasks and operations.

As shown in the figure below using data from the Bureau of the Census[1], manufacturing’s general reputation for employing those with lower educational attainment continues to hold into the current decade. For both the U.S. manufacturing and nonmanufacturing sectors, each of the charts reports the share of work force by educational attainment with (1) less than high school, (2) high school or equivalent, (3) some college, and (4) a four-year degree or beyond. As compared to aggregate nonmanufacturing, the manufacturing sector’s work force features more workers with less than a high school degree, as well as those with a high school degree as their highest educational attainment.

Still, for both manufacturing and nonmanufacturing, the shares of workers with the least educational attainment are falling rapidly (see panel A below). Workers with a high school level education also represent a larger share of the manufacturing sector’s work force than in nonmanufacturing sectors of the economy. Here, the share is rising over the decade (at the expense of the below-high school share). For those with “some college” the shares are mostly flat for both sectors, but nonmanufacturing’s share of such workers lies 3-4 percentage points higher. For those with a college degree and higher, the spread widens to about 6-7 points to the advantage of the nonmanufacturing sector. In this instance, the gap between the sectors narrowed ever so slightly over the decade to 2007.

Click to enlarge.

Regional Differences

Within the manufacturing sector, educational attainment shares vary by region, in part due to regional variation of types of manufacturing. The New England, the Mideast, and the Far West regions have higher shares of manufacturing workers with at least a bachelors’ degree. These regions also tend to have higher concentrations of high technology manufacturing clusters. On the other end of the spectrum, the Southwest has a higher share of workers with less than a high school education. The Great Lakes region falls in the middle of the distribution. Our manufacturing work force comprises larger shares with educational attainment in the high school and some college categories, with a smaller share of less than high school attainment. Our share of manufacturing workers with a college degree or higher is modestly lower than the national average.

Click to enlarge.

The Employee’s Perspective

Despite the upskilling taking place in the U.S. manufacturing sector, prospective workers may not perceive robust job opportunities in the sector. Total employment levels have been falling (see chart below). Especially since the 1980s to date, the trend is downward, with an annual average loss of 193,000 payroll jobs per year since 1982. Nor is the pattern of decline very predictable for those who seek to chart a career and training path on the basis of expected employment opportunities. While the sensitivity of employment to the national business cycle is evident, strong structural swings also take place, such as the three million jobs lost in manufacturing nationwide from 1998 to 2003.

Click to enlarge.

The Employer’s Perspective

Manufacturers may indeed have an availability problem with their labor market. As the overall labor market in manufacturing continues to shrink in the U.S., the market for workers with particular skills, and usable general skills such as literacy and computational ability, is likely getting thinner. At the same time, skills demanded are rising as global competition heightens and as the U.S. manufacturing sector aims to specialize in more skill intensive goods and services. U.S. manufacturers must also compete for skilled workers with nonmanufacturing sectors in the U.S. which are also upskilling. Surveys of manufacturing employers report widespread concern about the supply of skilled workers and its negative impact on production and customer service.

Wage offers by manufacturing companies to attract workers may be limited by global competition, which may be squeezing profit margins for production operations in the U.S. At the same time, costs of work force training are also under pressure. Traditional or legacy training programs—another avenue for manufacturers to acquire workers—may be similarly squeezed by cost pressures arising from falling numbers of students. That is, when manufacturing job numbers were in the ascendancy, local schools, unions, and employers could more easily gather a sufficient number of students to make the scale of operation affordable.

In responding to their dilemma, U.S. manufacturers are learning to “train and educate” smarter. Their approach has been to encourage programs that identify and define those particular skills that they value in the manufacturing workplace. Such skills are further linked along career pathways by which students or trainees may follow and invest. In this way, training programs and educators will find it easier to construct curricula and career pathways for workers and students. By certifying workers in those skills that employers value and recognize, schools can create incentives for students to invest in skills and training. A further benefit of such skills certification is to reduce search costs in the process of matching jobs and workers, as well as making skills more portable in the process. And since employers can more easily identify desired workers, their available supply of skilled workers will be enhanced.

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[1] American Community Survey (Return to text)