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May 29, 2013

Hog Butchers and Mad Men?

Some local policy leaders remain optimistic about the growth prospects for manufacturing in the Chicago area. For example, a recent development strategy from the Mayor’s office and World Business Chicago proclaims that “Chicago can preserve its competitiveness in manufacturing, a key component of the region’s economy, by capitalizing on the shift into high-tech products and processes underway in the manufacturing sector nationwide.”[1] Such optimism follows a recent rebound in manufacturing employment in the Chicago area, which has added 11,000 jobs since 2009. And against a broader backdrop, the five-state Midwest region surrounding Chicago, ranging from Ohio west to Wisconsin and Illinois, has added 260,000 manufacturing jobs over the same period.

Looking beyond recent growth trends for signs of resurgence, falling energy prices are expected to assist particular manufacturing sectors such as chemicals and plastics. More generally, a possible re-shoring of manufacturing activity is expected to unfold due to rising production costs in low-cost Asian countries, along with mounting concerns from some manufacturers about intermittent disruptions to extensive Asian-American supply chains.

But the fact that manufacturing remains a key part of the regional economy lies at the core of strategies to bolster the sector. The Chicago metropolitan statistical area (MSA) remains a bulwark of manufacturing in the U.S. economy. While the manufacturing share of Chicago’s economy is close to the national average, Chicago’s size vaults its manufacturing rank to third among U.S. metropolitan areas in manufacturing output. And as measured by employment, Chicago ranks first in the following subsectors: Electrical Equipment, Fabricated Metal Products, Food, and Plastics & Rubber. The table below indicates those subsectors in which employment is more concentrated (or less) in Chicago than in the U.S. overall.

Still, we can see from the chart below that workers directly employed in manufacturing in Chicago have fallen dramatically as a share of the work force. In 1969, 30 percent of workers were employed in manufacturing in the Chicago area, well above the national level of 23 percent. By 2012, however, Chicago’s manufacturing job prominence had fallen to near-parity with the nation—to around 7 or 8 percent.

The absolute number of manufacturing workers in the Chicago MSA has also fallen—by 432,000 since 1947, which represents more than half of the 1947 employment size.

Much of the employment loss is due to productivity gains in the manufacturing sector rather than to falling output. For example, as estimated by the U.S. Department of Commerce (BEA), real (inflation-adjusted) manufacturing output in the Chicago region rose by 10 percent from 2001 to 2011, even while employment fell by 30 percent (180 thousand).[2]

The location of Chicago’s manufacturing employment has shifted significantly toward the suburbs. From a city peak of 668,000 in 1947, manufacturing employment had fallen to just 65,000 by 2012, representing just 6 percent of the city’s total payroll employment across all sectors.

While suburban manufacturing jobs have also been falling (since the mid-1990s), in 2012 there were more than four suburban manufacturing jobs for every one that remained in the city.

Given such dramatic and ongoing declines in the manufacturing work force, it may be puzzling to find that economic development plans and strategies continue to focus on the sector’s growth prospects. In addition to the optimism surrounding reshoring prospects for the manufacturing sector itself, the broader cluster of economic activity that is linked to manufacturing may also promote economic growth. Manufacturing establishments purchase many services from local companies, including management consulting, R&D, advertising, accounting, and transportation and logistics. Manufacturing establishments have tended to increase their use of these services over time, as well as tending to purchase the services from outside companies rather than producing them in-house.

The Chicago area economy specializes in such service industries, which are in turn sold to manufacturing clients in town, as well as in the surrounding Great Lakes region and further afield. The city of Chicago’s manufacturing interests, then, are evident in that Chicago’s central area, “The Loop,” remains a thriving job center of these related service sectors. Meanwhile, the outlying city neighborhoods continue to directly depend on manufacturing for jobs. According to the U.S. Census Bureau, of the manufacturing jobs that remain in the city, 62 percent of the workers also live in the city. Of the manufacturing jobs that are located in Chicago’s suburbs, only 25 percent are held by workers who live in the city. However, since there are many more manufacturing jobs in the suburbs, this means that there are twice as many manufacturing job commuters travelling from city to suburb as there are from suburbs to city.

The Chicago area, and even the central city itself, then, are motivated in several ways to preserve and build on the local and regional manufacturing base, even in the face of stark and ongoing declines in the number of paychecks that are directly generated from production activities. A policy focus on so-called advanced manufacturing is one such direction—one that may require the training of a work force with advanced skills. As documented in the recent report by World Business Chicago, a number of local efforts (link http://www.worldbusinesschicago.com/files/downloads/Plan-for-Economic-Growth-and-Jobs.pdf) are underway to build a local work force with needed skills.[3] Another strategic policy focus for Chicago is transportation—many manufacturing operations continue to require intensive transport of materials and intermediate goods, and efforts to maintain and enhance surface transportation infrastructure will also benefit the economy. Finally, all manufacturing—advanced or not—will likely need to stay abreast of ever-rising standards in process and product technology in order to compete in the global marketplace.

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[1] See World Business Chicago, Plan for Economic Growth and Jobs, pg. 36. See also the 2013 report from Cook County, Partnering for Prosperity: An Economic Growth Action Agenda for Cook County, which puts forward a strategy of “Increase the productivity of Cook County’s manufacturing clusters,” p. 12. (Return to text)

[2] The BEA reports GRP on a broad geography; the Chicago MSA is defined to include Cook County, DeKalb County, DuPage County, Grundy County, Kane County, Kendall County, McHenry County, and Will County, Illinois. (Return to text)

[3] Op cit, pp. 36-37. (Return to text)


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Posted by Testa at 10:03 AM | Comments (0)

May 2, 2013

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.

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[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)


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Posted by Testa at 11:50 AM | Comments (0)