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August 19, 2010

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)

Posted by Testa at August 19, 2010 11:16 AM

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