May 2, 2013
Robert Solow, an accomplished economist, once said that “you can see the computer age everywhere but in the productivity statistics.” 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. 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).
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. 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.
Robert Solow, 1987, “We’d better watch out,” New York Times Book Review, July 12, p. 6. (Return to text)
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)
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)
Automotive exports from the U.S. have also been rising markedly, see Thomas Klier. (Return to text)
February 25, 2013
Conference to Explore the Economic Impacts of Enhanced Domestic Energy Production from Shale Gas and Oil Extraction
New technologies and techniques to extract natural gas and gas liquids, as well as petroleum, from shale rock have greatly altered expectations for North America’s capacity to produce energy products. As a result of innovations such as hydraulic fracturing, some government, industry, and academic observers have predicted that the United States will soon become energy self-sufficient and possibly become a net exporter of natural gas and petroleum.
Leaders from both specific markets and regions are looking at the opportunities and challenges associated with the so-called energy production revolution ushered in by the new means to access natural gas and other fuels. Indeed, many from potential energy-producing regions are assessing the trade-offs between economic growth associated with expanded gas and oil production and the risks to the environment that this production may pose. For those from other regions, an energy boom based on shale gas and oil extraction may present opportunities in many different arenas. For instance, some regions will especially benefit from lower consumer prices for home heating and cooling. Similarly, switching to natural gas from diesel in the long-haul trucking industry to take advantage of low natural gas prices may help bring about lower delivery costs for a wide spectrum of household and business goods. Additionally, several parties in regions historically reliant on manufacturing, such as the Midwest, are hoping that low energy prices will bring about new development and jobs in energy-consuming manufacturing sectors, such as chemicals and plastics. Furthermore, greater energy production and chemical manufacturing may lead to more supply chain linkages, which can be developed by regional and local economies.
Our April 8–9, 2013, the Chicago Fed’s Detroit Branch will host an event to discuss the impact of enhanced domestic recovery of natural gas and other fuels on industries and regional economies. The conference will focus on the shifting markets, development opportunities, and economic outcomes resulting from greater shale gas and oil extraction in the United States. We will be meeting at our Detroit Branch from the afternoon of April 8 through early afternoon the next day.
For further details on the conference, including its agenda, and information on accommodations, please click on this conference link.
November 14, 2012
Will America’s Boom in Energy Production Give Manufacturing a Boost?
Falling prices for natural gas have encouraged those who believe that manufacturing activity will rebound in the years ahead. While abundant supplies and dampened prices for natural gas are certainly positive developments for U.S. manufacturing, the impacts may be modest in sum. Energy materials and fuel costs are important to many types of manufacturing processes and industries, but such factors are not always commanding considerations in manufacturing production and siting decisions. Additionally, while the outlook for domestic energy production looks robust, the outlook for large price declines may be limited because of the competing uses for natural gas, both at home and abroad.
The domestic recovery of fossil fuels—especially that of natural gas—has been on the rise in recent years. Since the middle of the previous decade, technological breakthroughs in natural gas recovery have boosted natural gas production and supplies. These enhanced recovery techniques include horizontal drilling through shale rock in search of gas deposits, accompanied by pressurized fracturing of shale rock, which releases gas (and energy liquids) for recovery. Accordingly, natural gas production from shale deposits has expanded rapidly, increasing its share of overall U.S. gas production to 23% in 2010 from less than 7% in 2007. One long-term forecast concludes that this trend will continue—more specifically, under the assumption that current laws and regulations will stay the same over the projection, shale gas production is predicted to rise “from 5.0 trillion cubic feet per year in 2010 (23 percent of total U.S. dry gas production) to 13.6 trillion cubic feet per year in 2035 (49 percent of total U.S. dry gas production).” As a result of this additional fossil fuel recovery, it is projected that overall domestic gas production will expand by 30% on an annual basis by the year 2035.
So far, expanded production of natural gas has translated into falling prices. Earlier this year, prices for natural gas on the spot market (i.e., the cash market, in which this commodity is traded for immediate delivery) plummeted following a period of extensive exploration and recovery activity. From the late fall of 2009 to the spring of 2012, the spot price for natural gas per million British thermal units) fell from $6 to $2 (see the chart below). Since that time, drilling and recovery activity have been curtailed in response to plummeting prices, so that prices have recovered to some extent. The firming of prices has also been bolstered by the greater use of natural gas (instead of coal) in generating electric power.
Whether or not enhanced natural gas production will translate into lower domestic prices for industrial users over the long haul will depend on several factors. For one, as just mentioned, natural gas can be substituted for competing fuels in other sectors. Currently, for example, natural gas is being substituted for coal in the electric generating industry. Competing demands such as these may tend to buoy the price of natural gas, even as overall supplies are increasing.
The transportation sector is the largest fuel-consuming sector in the United States (outside of the electric power generating sector), and it is almost wholly dependent on gasoline derived from petroleum. In the event that a larger percentage of cars and trucks were modified so that they could use natural gas, the competing demand for this fuel might also sustain upward pressure on its price. Currently, natural-gas-powered vehicles consume a small fraction of the transportation sector’s overall fuel use. The service fleets of vehicles that are maintained by commercial businesses and governments account for most of the natural gas consumption within the transportation sector. However, the technology to adapt vehicles for natural gas consumption is well developed. The major impediment to broader modification of vehicles so that they are powered by natural gas is the additional infrastructure required to transport natural gas from wells and pipelines to commercial filling stations across the country.
The ultimate impact of rising domestic production of natural gas on our manufacturing may also be affected by international demand for natural gas. A set of complex dynamics will affect whether the nation imports or exports (on net) natural gas. To date, the United States has been a net importer of natural gas from neighboring countries. However, in the event that domestic production continues to grow rapidly, market conditions may one day encourage U.S. producers to export the product. If so, the price of U.S.-produced natural gas would then become more in line with global energy market prices. To the extent this were to happen, the use of natural gas as a domestic input to manufacturing would be discouraged by the higher prices that could be commanded in international markets.
Even if we assume that natural gas prices remain depressed here, we may still ask if the fuel is an important part of the cost structure for manufacturing. If natural gas turns out not to be a major factor in this cost structure, then the choices in the siting of manufacturing plants that favor the United States would be somewhat limited.
Undoubtedly, industrial processes (including those of the manufacturing sector) consume large quantities of natural gas and other fuels. For 2011, industrial uses accounted for one-third of overall U.S. natural gas consumption; and the industrial sector counted natural gas as its single largest fuel source, just ahead of petroleum (see below).
However, as a share of industrial production costs, energy inputs are a somewhat modest component at the present time. The chart below illustrates the energy content of overall U.S. manufacturing as measured against output (i.e., “value added”). The manufacturing sector’s overall consumption of all energy-type products—including electricity, energy product feedstock, and natural gas—amounts to close to 8% of value added in 2010. (Natural gas alone makes up a smaller share, nearly 3%.) In contrast, labor costs makes up almost 26% of value added in 2010.
Though energy costs do not make up, on average, a large share of the overall value added of the U.S. manufacturing sector as a whole, this is not the case for certain manufacturing subsectors. The first table below ranks U.S. manufacturing subsectors from highest to lowest according to non-electricity fuel intensity from all sources. The highest ranking industry subsector, nitrogenous fertilizer, is a huge user of energy material, most of it being natural gas (see second table below). The nitrogenous fertilizer industry spends 125% of value added on non-electricity fuel products and 117% of value added alone on natural gas—principally as a feedstock into the production of fertilizer. However, many of these energy intensive subsectors are small and do not make up large shares of overall U.S. manufacturing production at the present time. All told, for example, the top 15 most fuel-intensive industries account for less than 10% of total U.S. value added in manufacturing. The top 15 natural-gas-consuming industries account for less than 4% of total U.S. manufacturing production.
Despite this modest share of energy-intensive industries in overall U.S. manufacturing, low energy costs (and the greater availability of energy) in certain states do tend to attract the most energy-intensive industries. The table below ranks those states having the most energy-intensive mix of industries as measured by the consumption of fuel product per dollar of manufacturing (second column). Energy-producing states tend to dominate the list because energy products are abundant there and because fuel prices are lower closer to the point of production (on account of the lower transportation costs). In contrast, although much more overall manufacturing activity is located in the Seventh Federal Reserve District relative to the nation (last column), the District’s industry mix tends to be less intensive in average fuel use.
Click to enlarge.
Source: Author's calculations based on data from the U.S. Energy Information Administration
Note: Physical energy includes raw energy materials consumed in the electric generating process. Expenditure includes purchases of electricity.
The table below specifies the employment concentration of the nation’s 25 most natural-gas-intensive industries. Many of these industries have tended to locate in the Seventh District, and they may choose do so to a greater extent in the future should natural gas become cheap and abundant here.
The boom in natural gas production in the U.S. will undoubtedly encourage some manufacturing activity. However, under several scenarios, the benefits of abundant natural gas are likely to be spread broadly across the U.S. and Midwest economies rather than being concentrated in the manufacturing sector alone. In particular, natural gas usage will likely make inroads into many sectors, such as electric power generation and transportation. In this way, the (lower) price effects, should they come about, will also be distributed across many sectors. If so, these competing demands will tend to limit the potential price decline of natural gas and the associated upside in manufacturing activity. Similarly, the possibilities for exporting natural gas will tend to buoy its price for domestic purposes, including those for the industrial sector (dampening its increased level of activity).
Note: Thanks to Norman Wang for excellent research assistance, and to Han Choi for editorial work.
 Note that most natural gas is not sold on the spot market; rather, it tends to be sold under longer-term contracts. Accordingly, these prices do not generally reflect the average prices paid for natural gas consumed. (Return to text)
 The U.S. Department of Energy’s baseline forecast expects that because of the expansion of natural gas production, the United States will eventually become a net exporter of natural gas by early in the next decade. Longer-term projections by the U.S. Energy Information Administration (EIA) predict that real prices will remain largely flat over the next ten years. (Return to text)
 However, high transportation and production costs of domestic natural gas for export would mean that its price would remain somewhat lower for domestic use. And again, there are large infrastructure investments to be made to achieve capacity to export natural gas.+(Return to text)
 This qualification may be an important assumption. Presumably, if energy costs fell very dramatically, the industry mix of manufacturing in the United States would shift, perhaps decidedly, toward those types of products and processes that heavily consume energy. (Return to text)
 Note also that the energy efficiency of U.S. manufacturing (blue line) has been increasing over time. Here, we take a broad view of energy intensity—i.e., including all fuels rather than natural gas alone—because fuel substitution may be widely feasible in many production processes. (Return to text)
September 7, 2012
Wage growth in the Seventh District’s manufacturing occupations
by Bill Testa and Paul Traub
A strong surge in manufacturing output has been one of the hallmarks of the U.S. economic recovery since the 2008–09 recession. Along with this resurgence in production, manufacturers have also expanded their hiring following years of net job declines. Even before the recession, manufacturing employers and their trade associations voiced disappointment and concern about the “poor” availability of higher-skilled workers, who were needed to replace retirees. And as the recent manufacturing recovery has unfolded, employers have once again voiced these same complaints. Additionally, as some industry observers have noted, during the recession and recovery, manufacturers have advanced their production technologies more rapidly to survive and to stay profitable. Accordingly, workers of ever-higher skills are needed to operate, monitor, maintain, and program advanced equipment, such as computer numerically controlled machines and robotic tools.
In this blog entry, we examine these trends in terms of wage and job growth within the states of the Seventh Federal Reserve District, as well as across the nation. In doing so, we draw on data reported for hourly wages across individual occupations in the manufacturing sector. Further, these occupations have been classified and grouped according to the levels of skills and background preparation needed to carry out the attendant work—i.e., both formal schooling/training and on-the-job experience. Because of the recent claims that the demand for higher-skilled manufacturing labor has heightened, we compare experiences of the recent recession and recovery periods with those that took place earlier in the 2000s.
We find that:
- Within both the period 2000-07 as well as 2007-11, wage growth has been more rapid for jobs in those occupational groups that are classified as requiring higher skills and preparation.
- For the 2007–11 period as compared to the 2000–07 period, wage growth has seemingly slowed for all skill-level groupings in the manufacturing sector.
Data on hourly wages and the number of people employed are gathered annually by the Bureau of Labor Statistics of the U.S. Department of Labor in its Occupational Employment Statistics (OES) program. As the database name suggests, these data are classified by the primary occupation of each surveyed employee, and the OES program uses over 800 occupational classifications. In addition, these data are available for the nation as a whole and they are also broken down by geography—i.e., by states, metropolitan areas, and rural divisions.
In the following analysis, we use OES data for those occupations that can be predominantly found in manufacturing industries. To identify such occupations, we rely on O*NET (Occupational Information Network)—which is the nation’s primary source of occupational information intended to help prospective employees in their search for work. We examine data for occupations with a range of 49%–100% representation in the manufacturing sector at the national level, according to O*NET (this range may vary somewhat more by region). For example, at the national level, an estimated 96% of tool and die makers are employed by manufacturing companies, and 49% of automotive engineers are employed by manufacturing firms. In many of these occupations, employees outside of manufacturing companies may produce services (i.e., automotive design/engineering), which are ultimately purchased by manufacturing companies and which are embedded in manufactured products.
Since we are interested in skills and wage trends by occupation, we also focus on the “skill zone” groupings of the various occupations as classified by O*NET. Occupations are grouped in O*NET into one of five “Job Zone” categories, which are defined on the basis of “levels of education, experience, and training necessary to perform the occupation” (the higher the Job Zone number, the higher level of education, experience, and training required). In the analysis to follow, the manufacturing occupations are grouped into one of the first four job zones. None of the Job Zone Five occupations (with “extensive preparation needed”) meet the criterion of having at least 49% of currently employed workers in the manufacturing sector.
Findings and Discussion
In the table below for the Seventh District and the nation, average hourly wages for manufacturing occupations are reported for two time periods: 2000–07 and 2007–11. These periods are chosen for their business cycle similarity. That is, both the year 2000 and the year 2007 precede the onset of a recession, and both the year 2007 and the year 2011 are in the recovery/expansion phases following a recession. Importantly, however, 2007 represents a year that is five years following the business cycle trough (i.e., the 2001 recession), while 2011 represents a year that is only two years out from the trough (i.e., the 2008–09 recession). For this reason, we may expect some (unknown) dissimilarity among wage and hiring trends by skill level to the extent that employers’ demand for workers vary over the business cycle (e.g., by the time elapsed from the end of a recession).
According to O*NET, Job Zone One (which we refer to as skill zone 1) includes occupations such as hand grinding and polishing workers, slaughterers/meat packers, and production helpers. At the other skill extreme, Job Zone Four (skill zone 4) includes such occupations as materials, mechanical, and industrial engineers, as well as aerospace engineering technicians. Additionally, Job Zone Three (skill zone 3) occupations include computer numerically controlled machine programmers, along with machinists and tool and die makers. Finally, Job Zone Two (skill zone 2) encompasses occupations such as welders and many varieties of machine operators and setters.
As seen below, occupations in skill zone 2 make up a large majority of the manufacturing jobs found in the Seventh District. Along with jobs in skill zone 1, these jobs have been declining as a share of total manufacturing jobs in the Seventh District since year 2000. In contrast, higher-skilled occupations in skill zones 3 and 4 have come to comprise a larger share of manufacturing jobs.
With these caveats about the proportions of jobs in the different skills zones in mind, we present below a table that reports average hourly wages by occupation, with occupations grouped into the four skill zones. From the table, it is clear that the annual pace of wage growth has slowed from the earlier period to the later one. This is not surprising given the sharp declines in payroll employment that have taken place since 2007 in the manufacturing sector. In the U.S., for example, from the fourth quarter of 2007 through the fourth quarter of 2009, employment declined by 16.4% (2.25 million jobs). Since the fourth quarter of 2009 until the second quarter of 2012, manufacturing jobs have grown by 457,000, thereby gaining back 20.3% of the decline.
Looking across the skill categories for any given year, one can see that wages generally rise more sharply, the higher the skill zone. Wages in the lowest manufacturing skill zone are less than one-third of those found in the highest manufacturing skill zone. Even more striking is the widening of wages between skill levels that has taken place in both the Seventh District and the nation over the past decade. Much as in the overall economy, those manufacturing occupations requiring greater skills have experienced faster wage gains.
Making a more granular comparison of the later period with the earlier one, we note that occupations in skill zone 3 have seemingly experienced a relative pickup in wage growth. During the 2000–07 period, average wages in these occupations grew at a similar pace to those in skill zones one and two. In contrast, by the latter period, in both the Seventh District and nation, skill zone 3 wages were outpacing those of (lower) skill zones 1 and 2, and were rivaling wage growth in (higher) skill zone 4. To some extent, then, this evidence is consistent with recent claims of manufacturing employers that workers with higher skills are in short supply and high demand. For example, the hourly wage of “electro-mechanical technicians” rose by over 5.0% annually from 2007 to 2011 in the Seventh District, while the hourly wages of “medical equipment operators” rose by 7.6 percent annually. Both of these occupations lie in the skill zone 3 category. Over the same period, skill zone 2 “computer controlled machine tool operators” reported a 1.3 percent annual wage growth over the period; “welders, cutters, solderers, and brazers” (in skill zone 2) reported 1.7 percent annual gains.
General comparisons of employment growth also speak to a relatively stronger demand for manufacturing workers in higher skill zone categories. The charts below display the shares of workers in each skill zone over time for both the Seventh District and the nation. Trends for skill zones 1, 3 and 4 (blue, green, and purple) are to be read off of the left-hand vertical axis; trends for skill zones 2 (red) is to be read off of the right-hand vertical axis. The trends seen are consistent between the Seventh District and the nation. That is, the share of manufacturing workers in the lower skill zones (1 and 2) have been on the decline, with skill zone 2 jobs falling sharply since 2007. In contrast, jobs in skill zones 3 and 4 have been rising as a share of overall employment in manufacturing. In particular, the share of skill zone 4 occupations—many of which are as engineers and engineering technicians—have been rising continually since 2000. The share of skill zone 3 workers has been rising in both the Seventh District and in the nation, especially over the past three to four years.
While these trends tend to echo the manufacturing sentiments being heard today, a cautionary note would be that these data reflect an early point in the nascent economic expansion following the Great Recession. We are only two years into the recovery/expansion of the business cycle (using 2011 as the most recent data available). The chart below expresses these same employment data as year-over-year changes for the U.S. Here, data for all four skill zones can be read off of a single vertical axis. During the expansion following the 2001 recession, growth in higher-skilled manufacturing jobs recovered earlier than that in lower-skilled manufacturing jobs, with some catch-up growth taking place by 2004 and 2005 (three to four years following the recession). Similar trends in manufacturing job growth may yet emerge during the post-2011 years of the economic recovery.
The manufacturing work force has been “upskilling”—i.e., this sector, like so many other industries over the long term, has seen improvements in average skill levels; the manufacturing sector’s composition of jobs has been shifting toward those occupations requiring more skills and preparation. According to the data on wages and employed workers as categorized by their occupational skill zone, this is no less true during the recent recession and recovery so far than during the earlier years of the 2000s.
See www.bls.oes, which states: “The Occupational Employment Statistics (OES) program produces employment and wage estimates for over 800 occupations. These are estimates of the number of people employed in certain occupations, and estimates of the wages paid to them. Self-employed persons are not included in the estimates. These estimates are available for the nation as a whole, for individual States, and for metropolitan and nonmetropolitan areas; national occupational estimates for specific industries are also available.” (Return to text)
In making wage comparisons by occupation over time, the inherent information must be discounted to some extent, especially over short time period comparisons at the local and regional level of geography. That is because the data collection methodology of the OES uses a rotating three-year panel of establishments (i.e., each establishment drops out after three years of continuous reporting). Any single year’s reported data for a region represents a three-year moving average of sampled observations. For the currently reported period, past observations are brought forward in time by using national level average estimates of change by occupation. In the process, some local information is then lost while gains are made in both data up-to-dateness and larger sample size for the current year’s reported data. (Return to text)
See www.onetonline.org. O*NET was developed under the sponsorship of the U.S. Department of Labor/Employment and Training Administration (USDOL/ETA) through a grant to the North Carolina Department of Commerce. (Return to text)
See here. (Return to text)
The latest year for which data are reported is 2011. Wages level comparisons across individual years, as well as comparisons across time periods, may not be wholly comparable because occupational composition is subject to change. Occupational classifications are sometimes dropped or added from year to year. (Return to text)
There is much variation in wage experience within the same work skill zone. For example, over the same period skill zone 3 “tool and die makers” reported small annual wage declines. (Return to text)
August 8, 2012
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.
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. 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.
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.
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.
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.
July 13, 2012
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. 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.
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.
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.
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.
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)
February 22, 2012
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. 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.
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.
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.
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)
February 13, 2012
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). 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.
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.
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.
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. 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.
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.
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)
December 6, 2011
Understanding the Seventh District and U.S. Economies with Purchasing Managers’ Surveys
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. 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.
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.
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%.
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. 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.
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.
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.
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)
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)
March 14, 2011
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.
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.
 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)
August 19, 2010
Is U.S. Manufacturing Disappearing?
When discussing the health of the manufacturing sector, one major issue is whether we should assess the number of people employed in the sector or focus on the amount of output created in manufacturing. Interestingly, each leads to the opposite conclusion about the strength of manufacturing in the United States.
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.
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, 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. 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. 
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.
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.
 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)
 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)
 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)
April 9, 2009
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, 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.
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.
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.
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.
February 18, 2009
Manufacturing Headwinds Strengthen
The manufacturing sector exerts an outsized impact on the Midwest economy—especially during cyclical downturns. Regional jobs and income are approximately 30 percent more concentrated in manufacturing in the Seventh District than in the nation as a whole. The District’s economy is even more concentrated in durable goods production--both capital goods, such as machinery, and consumer durables such as autos and appliances. Both capital and consumer durables are highly sensitive to cyclical swings. In times of economic contraction, businesses slow their purchases of capital equipment as they struggle with production overcapacity in relation to their current sales. Meanwhile, households slow their purchases of durable goods as they increase their precautionary savings to meet possible loss of jobs and income.
Earlier in the current recession, manufacturing activity had been having a somewhat subdued regional impact. The chart below compares the year-over-year growth of industrial production in the District and the nation during the last two recessions (recessions are indicated by the shaded vertical bars). By way of contrast, in the months leading up to the 2001 recession, production and manufacturing employment began to fall in advance of the recession. During the period leading up to that recession, very strong national and global investment in IT equipment and plant capacity took place. Specifically, the so called “Y2K” effect, coupled with buoyant world growth in response to emerging Internet innovation, spurred investment across many durable goods sectors. During the current recession, manufacturing activity held up relatively well through the first two quarters of 2008 before dropping sharply later in the year.
A closer look at this decline by broad sector would show that 2008’s production strength resided in the capital goods and machinery sectors. In both the Chicago Fed Midwest Manufacturing Index and the national index of production, machinery production remained almost flat. In contrast, slides in automotive production coincided with the general downturn in business activity. In fact, District automotive production fell sharply during the first half of 2008 in response to the gasoline price spike, which depressed sales of the larger vehicles in which the District’s producers tend to specialize.
Meanwhile, ongoing growth in the global economy bolstered capital goods and machinery purchases. Developing nations such as China and India have become important customers for U.S. capital goods, and their continued growth contributed to U.S. export growth. At the same time, high prices for farm, energy, and other commodities also spurred foreign demand for U.S. manufactured mining, construction, and farm equipment. As commodity prices fell off of their mid-summer peaks, so did both domestic and foreign demand for such equipment. So too, as the financial crisis worsened in the fall, and spread to other parts of the world, U.S. exports abroad began to ease. This can be seen below in the two charts of manufactured exports. Year over year through the fourth quarter of December of 2008 (3 month smoothed), exports fell by 4.2% in the nation and by 3.6% in the District.
Note: Emily Engel contributed to this blog entry.
January 8, 2009
Growth and Great Lakes Cities
For half a century or more, the industrial belt of the Great Lakes and Midwest has lagged counterpart regions in much of the South and West. Large midwestern metropolitan areas arguably offer the best prospects for relief from this historical pattern. The reasons are rooted in a fundamental restructuring of the global economy that favors cities. In underdeveloped countries, rapid urbanization and the emergence of large cities have gone hand in hand with economic growth and progress. And in developed countries on all continents, two factors have lifted growth opportunities for large cities. Foremost, technological gains in transmission of information have intensified the productivity of cities because of their role as meeting places. Face-to-face communication complements digital information flows. As business people can more easily transmit and receive information via electronic devices, their time has been freed so that they can engage more intensely and broadly in in-person dialog and social interaction. In other words, carrying one’s office in the palm of one’s hand allows one to leave the physical office to better explore opportunities and ideas. Cities tend to maximize these encounters in person. Enhanced and cheaper air travel lends a helping hand.
A second factor, the opening of global trade and capital markets, has increased the possible scale and opportunities for large cities. Cities tend to function best in managing and administering far-flung markets. More open and intensive global trade has tended to broaden the reach and scale by which successful cities can perform such functions in finance, advertising, research and development, law, and company management. For this reason, some analysts believe that they can identify the emergence of “global cities” that have succeeded in such opportunities.
To date, large cities of the Great Lakes have not fully benefitted from these “new economy” trends. Migration to regions with warmer climates has slowed these cities’ work force and population growth—a trend also reflected throughout the remainder of the region. But more fundamentally, many if not most of the region’s large urban economies were built not on the service industries that benefit from the ongoing global changes, but rather on the manufacture of goods and associated freight transportation. These cities’ transition to services and knowledge-based economies has proven difficult because manufacturing-oriented places must overcome and replace larger portions of their economic base. Manufacturing-oriented income in the region has withered because of global competition, falling real prices for manufactured goods, and technical advances that have allowed goods to be produced with less labor. To these obstacles, technical changes in the production processes themselves may be added: Such changes have made the more-densely populated parts of large cities especially difficult places in which to manufacture, compared with those far suburban and rural places, where land is cheap and the transportation of materials is more convenient. The growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Edward Glaeser.
Have the relative growth rates of midwestern metro areas coincided with the degree of their original manufacturing orientation? The charts below display employment concentration in manufacturing for the eleven largest metropolitan areas in the industrial belt on the vertical axis. The horizontal axis displays each metropolitan area’s total job growth on the first chart and real per capita income growth on the second chart. The inverse correlation of economic well-being with initial manufacturing concentration is quite evident. A simple correlation between job growth from 1969 through 2006 and the manufacturing orientation in 1969 is a strongly negative 0.8. Similarly, the correlation between manufacturing and per capita income growth is -0.7.
What might be some other reasons behind varying performance of these metropolitan areas? For one, even within the manufacturing sector, industry mix (and related performance) varies markedly. For example, the Twin Cities’ manufacturing base included emerging medical instruments and computer equipment during this time period, while Detroit hosted sagging domestic auto production.
Other observers wonder about the role that the metro core or central city has played in its relative growth and development. Due to marked suburbanization within metropolitan areas, and fixed central city boundaries, some cities such as Cleveland and St. Louis became relatively small islands of population; today, the city population accounts respectively for only 20.9% and 12.5% of these two metropolitan areas. As such, cities such as these were left largely alone to provide public services to low-income populations—and to do so with a rapidly diminishing tax base. Accordingly, some researchers speculate whether growth and development suffered as a result of this trend—not only in the city but in the entire metropolitan area. In contrast, central city Columbus and Indianapolis began with a broader geography and richer tax base with which to provide public services and development-oriented infrastructure.
While Midwest cities have many challenges to overcome, there are also assets on which to build. As widely shown and increasingly recognized, the most important overall determinant of regional growth performance has been the educational attainment of its population and work force. This is not surprising given the structural changes that have taken place in the emerging economy—changes which place a greater emphasis on information exchange and the development of creative ideas. For Midwest metro areas, and as discussed by Timothy Dunne in a recent Economic Commentary, educational attainment may be more important than for other regions. To succeed in overcoming the shocks that rocked their industrial bases, educational attainment in Midwest metro areas may have been most helpful in adaptation and re-invention. Tim Dunne displays charts similar to those above which indicate a weaker correlation between educational attainment and growth in warm weather metro areas as compared to cold weather climes. In considering educational attainment of the populations, the table below displays the ranks of Great Lakes metropolitan areas among 118 metropolitan areas in 1970 and 2006. The two local leaders in 1970 college attainment, Columbus, Ohio, and the Twin Cities also experienced the fastest employment growth. While Pittsburgh ranked low in college attainment in 1970, its gains in this metric since then have been the most rapid. Perhaps not accidentally, Pittsburgh’s growth in per capita income also outpaced other cities in the region.
As for policy, while the region’s goods-producing industry mix has left behind a legacy of a slow-growing industrial base, the region also boasts top-notch colleges and universities. With regard to elementary and secondary education, the region maintains a healthy income base with which to support its schools. Similar to most other parts of the country, the region’s educational challenges are to have its students to perform much better, especially in central cities and lower-income communities.
Note: Vanessa Haleco-Meyer contributed to this weblog.
July 2, 2008
Michigan—Brakes and Shocks
Few outside the state of Michigan are fully aware of its economic woes. Nationally, the U.S. economic slowdown, housing market decline, and rising gasoline prices have captured the headlines. Even within the Midwest, spring and early summer flooding have dominated our news. Somewhat lost in the shuffle, Michigan payroll jobs are down more than 10% from their peak in June, 2000, representing over 486,000 jobs. Recent developments are no more encouraging. The state's (preliminary) unemployment rate rose by 1.6 percentage points in May, to a seasonally adjusted 8.5% percent—topping the U.S. rate of 5.5% by 3 full percentage points. Preliminary statistics estimate that payroll jobs in Michigan fell by 68,000 over the month (seasonally adjusted). Minus Michigan, reported U.S. employment would have grown by 19,000.
Michigan’s economy currently suffers from unfortunate industry composition, with an added dose of structural shocks to several of its prominent lines of business. In particular, the automotive, tourism, and office furniture sectors are highly sensitive to national swings in economic activity. As the U.S. economy slows, such industries tend to decline even more. Moreover, in the case of automotive and tourism, structural changes are tending to further dampen economic production and hiring in Michigan.
Michigan’s economy remains far and away the nation’s most concentrated in motor vehicle manufacturing. Its overall employment concentration lies 8.5 times the national average in combined automotive parts and assembly, with many attendant jobs in manufacturing, distribution, and professional service companies that are customers or vendors to automotive producers.
While U.S. automotive sales remained robust until recently, the former Big Three automakers (now more appropriately called the Detroit Three) and their suppliers have been steadily losing market share to imports and to foreign nameplate producers located elsewhere in the U.S. As of May 2008, market share of the Detroit Three automakers had fallen from 67.8% in 2000 to 47.2%. Prominent parts supply companies, including Delphi, Dana, Tower, and Collins & Aikman, have folded, merged, or are currently trying to emerge from bankruptcy.
With the recent economic slowdown, automotive sales are resuming their cyclical pattern of retrenchment. To some degree, the historical behavior of sales declines was allayed in the aftermath of September 11, 2001, when automakers offered generous sales and financing incentives to prospective buyers. However, today’s slowing economy appears to be leading consumers to avoid the purchase of new autos. As discussed recently at our annual Automotive Outlook Symposium, rising gasoline prices are curbing driving behavior while draining household income.
The recent run-up in gasoline prices has magnified loss of market share and erosion of profitability of the Detroit Three automakers and their suppliers. Over the past year, the Detroit 3 share of domestic sales has fallen by 7.1 percentage points. To some degree, this repeats the pattern of the 1970s when U.S. consumers turned to (imported) foreign-domiciled automakers who offered vehicles with greater fuel efficiency. Domestic automakers are more reliant on trucks than on cars, and they tend to lag foreign manufacturers on fuel efficiency.
Not only the automotive sector has been impacted by rising energy prices. Michigan’s tourism, recreation, and hospitality industry has taken on added importance in the wake of the state’s waning automotive industry presence. Many parts of western and northern Michigan feature attractive scenic and semi-rural locales for retirement, recreational living, and seasonal tourism. In addition to its many inland lakes, the state is endowed with 3,126 miles of Great Lakes shoreline, which is attractive for boating, fishing, and other recreational activities like hiking, cycling, and golf. In particular, the state registers nearly as many boats as Florida or California. Such activities in Michigan are especially related to vacation and seasonal homes. As of the last Census, 5.6 percent of homes in Michigan were of this variety versus a national average of 3.1 percent.
The map below shows recreational counties as designated by demographers Calvin Beale and Kenneth Johnson. The northern tier counties of Michigan and Wisconsin have long been recreational destinations, especially for Michiganders and residents of the greater Midwest region.
Recreational spending is highly discretionary on the part of consumers. As household income falls, recreational spending can be easily curtailed by households in an effort to maintain spending on necessities.
Recent declines in Michigan recreational spending are reflected in data collected by the State of Michigan on sales tax collections imposed on overnight lodging. These accord with declining lodging occupancy rates collected by the industry. Both are down so far in 2008 on a year over year basis. A broader index of Michigan’s tourism activity is displaying a modest uptick for the first quarter of 2008 versus one year ago. However, with rising gasoline prices, the index (and activity) is expected to trend lower in coming months.
Two additional factors may be restraining recreation sector growth in Michigan. Michigan’s recreational counties are characterized by ownership of second homes. The run-up in housing prices and the subsequent rash of foreclosures and price declines have been especially severe in recreational/seasonal home locales. Seasonal home residents who have experienced asset price losses on their second homes may be especially aggressive in re-building their household balance sheets by restraining current spending in the second-home locales.
The second, more obvious, factor affecting recreation this year is rising gasoline prices which raise both travel costs to vacation locales and, in Michigan's case, the cost of boating. However, some domestic vacation locales may benefit from a backwash effect as households choose nearby attractions rather than long distance adventures. Nonetheless, in most instances, the overall effect tends to be a dampening. For these reasons, tourism industry analysts in Michigan are forecasting declines in tourism activity for 2008.
In addition to automotive and recreation sectors, Michigan has a strong presence in the furniture sector. Indeed, Western Michigan hosts the nation’s largest concentration of makers of office furniture. This industry took shape in the late nineteenth century during rapid industrial growth, which was accompanied by rapid growth in office employment. Taking advantage of the region’s abundant hardwoods and skilled immigrant craftsmen, most furniture companies in the area had developed as manufacturers of high-end traditional style home furnishings. However, the labor-intensive wood furniture industry declined in Grand Rapids and other northern centers by the mid-1900s due to competition from Southern producers. In response, the Grand Rapids industry shifted its focus from household to office furniture, led by companies that would become industry giants: Steelcase, Haworth, and Herman Miller.
The U.S. Census reports that the state is the nation’s leading producer of office furniture and fixtures, with 17,000 direct employees in 2005. Broadly defined, the state’s industry share accounts for 24% of the nation’s shipments. (Michigan’s share is larger according to the way that the industry trade association defines the industry).
Michigan’s office furniture companies have been affected by competition from China and other low-cost locales. Despite competitive pressures, the companies have successfully responded in two ways. To some extent, producers have moved or offshored production of select product lines to low-cost locales while maintaining high value added and custom design services domestically. More importantly, these companies are characterized by great innovation in product and processes. They have succeeded and grown by offering custom and advanced products and services.
However, office furniture sales and production have been highly cyclical. The industry experienced sagging sales in the late 1980s and early 1990s when U.S. businesses downsized middle management positions and as the U.S. economy sagged. So too, the “technology bust” years that began the current decade saw a falloff in demand for office systems and furniture, especially in the IT sector.
So far in the current environment, industry production has been holding up well. However, if industry observers are correct, office furniture may be “one more shoe about to drop” in Michigan. An opinion poll of office furniture executives has been flashing negative for the near term outlook, and the industry association has recently lowered its forecast of 2008 production.
If such expectations develop, this would further dampen economic activity and the labor market in Michigan. Cyclicality of certain businesses can be planned for and absorbed by states such as Michigan and its neighbors. However, cyclical episodes in the economy can be exceptionally severe when shocks such as rising energy prices are in play and when longer term structural changes are taking place, as they are in Michigan’s automotive sector.
Thanks to Graham McKee and Vanessa Haleco-Meyer for assistance.
June 17, 2008
Manufacturing's role in the Midwest future?
Across the Midwest, perhaps no economic development issue looms as large as the diminishing role of manufacturing. The Midwest’s once rapid population growth and lofty standard of living largely evolved from the industrialization that took place over the past 150 years. Yet, in recent years, job levels in manufacturing have declined. And as a share of overall payroll employment in the region, manufacturing has fallen from 29% in 1969 to 12% in 2007.
Additional debate has broken out because of dramatic declines in specific industries, such as the automotive industry, which is concentrated in Michigan and scattered throughout many parts of the region. In the face of such stark declines, the question arises as to whether the region must look beyond manufacturing and toward new industries. As the U.S. economy evolves toward advanced services, should the Midwest be following suit at an accelerated pace? And if so, how should the region go about it? For example, should the region’s policy focus on improving the quality of life features to attract highly skilled workers for business services and related industries? Or should the region cultivate new technology and entrepreneurial behavior in an effort to grow new industries?
Arguably, policymakers in the region should pursue all such avenues toward redevelopment and reinvention that are within the bounds of reason and with careful cost–benefit consideration. But there are also reasons to believe that traditional manufacturing can continue to play an important role in the Midwest economy. Significant opportunities remain for manufacturing enterprises that are both extant and emerging here.
In disparaging manufacturing's prospects, an analogy to production agriculture can sometimes be misleading. In terms of long term productivity gains, some observers are only partly correct in drawing close parallels between the U.S. production agriculture sector and manufacturing. Rapid productivity growth in each sector has pushed down prices of products and lessened attendant labor demands. The world over, rising national income per capita has gone hand in hand with declining shares of a nation’s employment in agriculture, followed by declines in manufacturing. Eventually, such trends lead to a wealthy economy steeped in services. In the typical experience for a developed nation, the share of national employment in production agriculture drops because of startling labor saving productivity on the farm, coupled with unresponsive household demand for raw food products as incomes climb. In the U.S., for example, as our standard of living has progressed, agricultural labor as a share of the work force has declined from 41% around year 1900 to only 2% today.
Some of these same processes are also at work in the manufacturing sector. And so, some analysts reason that manufacturing jobs will similarly disappear; that is, eventually, only a slim manufacturing presence will remain across the nation as whole, leaving us an economically diminished Midwest region.
However, in contrast to agriculture, manufacturing continues to give rise to a significant share of income among the most developed countries in the world. This occurs in spite of the trends toward generating more services production in developed countries and offshoring manufacturing to low-cost countries. Manufacturing’s continuing importance to developed countries’ economies can be seen clearly in an exhibit within the Federal Reserve Bank of Dallas’ 2007 annual report. The report’s exhibit 8 observes nations both by the percentage of their workforce engaged in manufacturing and agriculture and by their average per capita income. Manufacturing resembles agriculture to only a modest extent with respect to these measures. As a nation’s income rises, the share of the workforce engaged in manufacturing does tend to decline; the same applies to agriculture. However, whereas the share of employment in agriculture drops off precipitously as countries grow wealthier, the share of employment in manufacturing declines only modestly and gradually. For even the wealthiest nations, such as the U.S., manufacturing remains a large and vibrant sector.
Manufacturing’s continued strength has much to do with the fact that manufacturing companies need to be knowledge-intensive and highly creative to develop new products. Strong productivity tends to reduce the amount of low-skilled labor required for manufactured goods, and intense global competition for such labor drives down the prices of manufactured goods. That said, as a counterweight manufacturing companies continue to come up with new products. These include consumer products, such as improved electronic appliances, pharmaceuticals, and packaged/processed foods, as well as tools for businesses, such as more advanced computing equipment, mining/construction machinery, and telecommunications.
Some inkling of manufacturing’s high level of knowledge intensity can be seen from figures reported annually on research and development (R&D) of manufacturing companies. Manufacturing companies account for $123 billion of the nation’s $278 billion spent on R&D in year 2003—a 45% national share (see blue bars in chart below). This compares to a 13% share of manufacturing sector output in overall gross domestic product, or GDP (red bars below).
Click to enlarge.
Midwestern manufacturing companies have a strong orientation toward knowledge-intensive manufacturing. The region’s manufacturing companies account for 66% of the region’s R&D versus 19% of the region’s total output.
That the manufacturing R&D share of the Midwest economy exceeds that of the nation can be explained by the larger role of manufacturing companies in our region. Moreover, it may surprise some to learn that Midwest manufacturing is no less “high tech” than the national average as well. The sector’s “R&D intensity” also contributes to the dominant role of manufacturing R&D in the region. In both the region and in the nation, R&D spending makes up about nine cents of every dollar of inputs spent by manufacturing companies (per chart below).
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The bulk of the Midwest’s industrial R&D takes place within the region’s hallmark sectors—automotive, food products, electrical equipment, machinery, and chemicals. By our estimates, these sectors make up 42% of the region’s $42 billion of industrial R&D reported for 2003. The chart below characterizes the concentration of R&D by industry sector in the Midwest. Highly concentrated R&D expenditures are denoted by deeper shades. These concentrations are constructed for a state, for example, as an index of R&D taking place in a particular sector relative to the state’s national share of total output. For instance, the state of Michigan scores a deep shade in “Motor vehicles, trailers & parts” because its share of the nation’s R&D in this sector far exceeds the state’s share of overall GDP. Indeed, company activity in motor vehicle R&D in Michigan registered $10.7billion—a national share representing a concentration over 17 times the state’s share of overall economic output in 2003.
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Other Midwest states can also be seen to be domiciles of R&D in particular industries. The final column above displays R&D concentrations (as an index number) for the entire seven-state region. In addition to intensive R&D activity in the region’s hallmark industries, the region also scores highly in pharmaceuticals, computer equipment and its design, and aerospace.
And so, if a high degree of ongoing R&D intensity is any indication, manufacturing will continue to play a strong role in U.S. production. Despite its current challenges in automotive production, the Midwest is no exception in this regard. To be sure, the region’s overall population and work force growth have lagged those of the nation. In some part, this reflects the region’s greater concentration in manufacturing—a sector that has experienced outsized impacts from labor-saving productivity and, to some degree, offshoring of activity. Nonetheless, there remains a sizable future to be built by the region’s manufacturing companies.
One public policy effort to further the strength of the manufacturing sector in the region has been initiated as the Great Lakes Manufacturing Council. This coalition will meet this summer “to discuss the image of the Great Lakes region, innovation in manufacturing, the work force and skills needed for manufacturing today and tomorrow as well as the borders and logistics requirements to effectively move goods and services in today’s global economy.” I hope to see many gather at the meeting to discuss (and act) on these issues further.
Note: Thanks for assistance from Graham McKee.
May 22, 2008
Tracking Seventh District Manufacturing
By Emily Engel, Associate Economist
There is a greater concentration in manufacturing among the five states of the Seventh Federal Reserve District than in the nation. For example, as measured by the share of payroll jobs in manufacturing, Indiana ranked first among the 50 states in 2007; Wisconsin, second; Iowa, fourth; Michigan, seventh; and Illinois, 19th. For this reason, we at the Federal Reserve Bank of Chicago tend to closely watch the manufacturing sector. In fact, our watchfulness often becomes close scrutiny during times like the present when the U.S. economy shows signs of slowing. (Manufacturing activity has tended to be highly sensitive to general business downturns.)
The Chicago Fed Midwest Manufacturing Index (CFMMI) is a public statistical release that the Federal Reserve Bank of Chicago has been producing since 1987. This monthly release tracks manufacturing output for the Seventh District states (Illinois, Indiana, Michigan, Iowa, and Wisconsin) and compares it to the manufacturing component of the Industrial Production Index (IPMFG) produced by the Federal Reserve Board of Governors. The chart below, taken directly from the March release of the CFMMI, shows historical data comparing the CFMMI to the IPMFG. Over the decade, Midwest output growth has lagged the nation. During the current slowdown in national economic activity, both the IPMFG and the CFMMI have slowed and declined at a very mild rate in comparison with past episodes.
Industry concentration in specific industrial sectors influences economic performance among District states. In particular, transportation equipment and machinery are bellwethers of state economic performance in the District.
Since the beginning of this decade, the automotive-intensive states of Indiana and especially Michigan have experienced a softening of their labor markets relative to the national average.
Meanwhile, by the same measure, the machinery-intensive states of Illinois and Iowa have outperformed the nation. The remaining state, Wisconsin, deviates from this pattern, being a machinery-intensive state with an unemployment rate that has deteriorated relative to the national average.
The charts below compare these states’ concentration in both machinery and transportation equipment, respectively. Manufacturing activity in these industries is compiled by the U.S. Census Bureau’s Annual Survey of Manufactures (ASM). Specifically, the Census data measure “value added” by manufacturing establishments within each state. Value added roughly corresponds to the value of shipments of manufactured establishments, net of intermediate inputs to production, such as fuel, materials, parts, and components that are purchased from other establishments. In this sense, value added is manufacturing output.
It takes much time and effort for the U.S. Census Bureau to compile these data, so that detailed information on output by specific industry sector and location are issued with a one or two year lag. The data above, for example, refer to 2005 and 2006.
To keep more current than the Census statistics allow, our CFMMI constructs sector-specific estimates of manufacturing output for the overall Seventh District. These estimates are primarily based on data reported on payroll hours worked in manufacturing establishments across the District, and these data are usually available with only one month’s lag. When complete data on value added are issued by the U.S. Census Bureau, we adjust or benchmark our CFMMI data series to correspond to that data.
There are four major sectors of the CFMMI: auto, steel, machinery, and resource. The CFMMI is made up of 15 North American Industry Classification System (NAICS) codes of hours worked data. The breakdown of the NAICS codes is given under each graph (such as the one below) on the press release every month. The auto sector components are plastics & rubber products (326) and transportation equipment (336). Primary metal (331) and fabricated metal products (332) compose the steel sector. The machinery sector is made up of machinery (333), computer & electronic product (334), and electrical equipment, appliance, & components (335). There are five categories for the resource sector: food manufacturing (311), wood product (321), paper (322), chemical (325), and nonmetallic mineral product (327). The overall CFMMI is composed of the four sector components as well as these industries: printing & related support activities (323), furniture & related product (337), and miscellaneous manufacturing (339).
As seen by the two sector charts below, taken directly from the March CFMMI release, the District’s output growth paths in the machinery and auto sectors have diverged. While the machinery sector of the CFMMI is slowly outpacing the overall CFMMI, the auto sector of the CFMMI continues to fall below the overall CFMMI. Such developments can help us understand differences in economic performance around the Seventh District.
To see more information about the CFMMI, please check the Federal Reserve Bank of Chicago’s website. Additionally, some of the other Federal Reserve Banks also have manufacturing indexes/surveys. Please see below for some of those links:
Federal Reserve Bank of Philadelphia Business Outlook Survey
Federal Reserve Bank of New York Empire State Manufacturing Survey
Federal Reserve Bank of Richmond Manufacturing Conditions Survey
Federal Reserve Bank of Kansas City Survey of Tenth District Manufactures
Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey
March 20, 2007
Manufacturing jobs, increasingly undercounted
As I described in my August 2006 entry, government statistics tend to significantly undercount manufacturing activity. The undercounting occurs because manufacturing companies increasingly outsource service activities that they formerly performed “inhouse,” such as accounting, payroll, design, R&D, and others. These activities are increasingly attributed to service industry sectors in the national statistics rather than to manufacturing. For the Midwest, where manufacturing plays an important part in its economy, the undercounting can seriously mislead us as we try to understand the source of our livelihood.
But, more than services are being outsourced. Susan Houseman of the Upjohn Institute and her co-authors Matthew Dey and Anne Polivka of the Bureau of Labor Statistics find that U.S. manufacturing companies have also increasingly outsourced their “blue-collar” and production roles. They do this in an indirect way; they use temporary and leased workers (usually on-site) who are technically counted as employees of “employment services agencies.” Because these workers remain technically employees of the employment services agencies, the statistical counts of the work force of the companies that use employment services appear light, and declines in employment may be illusory, merely reflecting this outsourcing.
The number and size of employment services workers in the U.S. economy has grown rapidly over the past 16 years, easily outstripping overall payroll employment growth by a factor of six. And behind this growth, worker occupations in the employment services industry have been shifting toward industrial workers at the expense of office and administrative occupations. According to a survey by the American Staffing Association, 58 percent of customers engage temporary or contract workers to fill needs in industrial occupations.
In their research, Houseman and her co-authors draw on public databases to estimate the rapidly growing use of temporary and contract workers by manufacturing companies in the United States. They find that “the number of employment services workers assigned to manufacturing grew by about 1 million, from about 419,000 in 1989 to over 1.4 million in 2000.”
How does this practice affect the size of the U.S. manufacturing work force? Per the Houseman research, the outsized growth of temporary and contract workers by manufacturing companies implies that, rather than falling as reported, manufacturing employment actually grew by 1.4 percent in the U.S. between 1989 and 2000.
In researching why manufacturing firms use temporary workers, research by Yukako Ono and Daniel Sullivan finds that growing firms tend to take on temporary workers rather than permanent employees when they expect that their output may fall in the near future. By doing so, firms are spared the high costs of firing workers when they must curtail their production.
Because of such company behaviors, temporary or contract workers tend to be first hired and fired by companies during swings in national economic activity. During the 2001 recession, for example, the Houseman research finds that job declines in the manufacturing sector tended to be sharper than reported. Similarly, post-2001, manufacturers were more likely to hire workers from employment services agencies than to hire permanent workers, thereby understating recovery in manufacturing.
The miscounting also wreaks havoc with official productivity statistics. Since many measures of productivity are constructed as “output per worker,” an increasing tendency to undercount workers employed by manufacturers tends to overstate productivity growth in the manufacturing sector in comparison to many other industry sectors.
What are the regional differences in undercounting of manufacturing? We do not know this yet. However, if Midwest manufacturing companies behave like their national counterparts with respect to outsourcing of staff, Houseman’s findings for the nation imply that employment-services workers add 8.7 percent to direct-hire employment in Midwest manufacturing.
While we do not know that Midwest manufacturers outsource from employment service firms to the same extent as the nation, we do know that the employment services industry is very prominent in the Midwest. As measured by annual revenue, the nation’s top employment services corporation, Manpower, is headquartered in Milwaukee; the number two corporation is Kelly Services near Detroit.
More broadly, the chart below tracks the growth in “employment services” employees for both the U.S. and the East North Central region since 1990. The top chart indicates that the growth in these outsourced jobs has grown equally rapidly in comparison to the nation. Indiana and Michigan, ranking number first and fourth nationally in relative manufacturing concentration in 2005, experienced especially strong growth in employment services.
The second chart indicates that the Midwest’s concentration of employees of the employment services industry has grown in relation to the U.S. Michigan has led the way, with a concentration that is now more than one-third greater than the U.S.
In examining hiring patterns from the employment services sector, Susan Houseman and her co-researchers are on to an important avenue in assisting the nation and the regions to understand the composition of their economies.
March 5, 2007
Manufacturing exports continue to excel
Even as much of the Midwest’s automotive industry remains troubled, the region’s overall manufacturing exports continue to impress. In the Seventh District, manufactured exports make up around 7% of gross state product; this is on par with the nation’s economy (also discussed in a previous blog). While this share is not huge, the manufacturing sector’s rapid growth of exports in recent years translates into an outsized contribution to the region’s growth. Export growth of manufactured products will exceed 11% in 2006, which marks the third consecutive year of similar growth. By our reckoning, strong export growth from manufacturing made up roughly one-sixth of the Seventh District's overall output growth in 2006.
What’s propelling these exports? For the most part, it’s been due to continued strong global economic recovery and expansion. Following two years of weak growth in 2001 and 2002, the global economy began to recover. According to estimates gathered and reported by the IMF, the global economy grew by 5.1% in 2006. This followed three years of similarly strong expansion. As of early 2007, forecasts and expectations for this year are equally robust.
Among our major trading partners, Mainland China has exhibited the strongest growth; it has been reporting growth rates of 8% to10% over the past seven years. Accordingly, Seventh District manufacturing exports to China have been growing rapidly at an average annual pace of 9.3% per year since 1997.
The chart below illustrates that Midwestern exports to China have come to represent an increasing share of the region's overall exports to Asia. In 1997, overall goods exports to China, including agriculuture, mining, and manufacturing, accounted for only 13.7% of the Seventh District’s exports to Asia. By last year, however, China’s share almost reached 20 percent. (See black line).
Manufactured goods exports accounted for most of this expansion. Moreover, expanding manufactured exports were widespread across broad industry sectors including transportation equipment, machinery and metals.
The second chart below ranks manufactured exports to destination nations in 1997 and 2006. While Canada remains far and away the region’s predominant export destination, China now ranks fifth, behind Canada, Mexico, the U.K., and Japan. The Seventh District states exported $4.9 billion of manufactured goods to China-Hong Kong last year.
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The Seventh District’s manufacturing sector continues to be large and export oriented. This means that global economic growth will continue to figure prominently in the region’s growth. However, this assumes that U.S. policies of open world trade and investment will continue to be expanded. Agreements to open our trade across the globe help develop and stimulate the economies of our trading partners. In response, our trading partners turn to the industrial Midwest for many of their purchases.
October 11, 2006
Global Agriculture Conference
On average, rural America has not been faring as well as metropolitan America in terms of population and income growth. Is this trend yet another painful adjustment that can be attributed to globalization?
Globalization policies continue to be closely intertwined with agricultural markets, which have been the historic lifeblood of rural communities in the Midwest. Last month, the Chicago Fed held a conference on “Globally Competitive Agriculture in the Midwest.” The event included the Midwest release of a task force report by the Chicago Council on Global Affairs, Modernizing America’s Food and Farm Policy. Conference discussion concerned how current global trends and policy debates are affecting agriculture and rural communities, and how prospective policies such as the next Federal farm bill and the Doha round of the world trade talks might play out.
During the conference discussion, several presenters expressed the opinion, without challenges from the audience, that globalization was in some way responsible for the lagging economic performance and stark challenges facing the rural Midwest. However, I think that it is somewhat mistaken to confuse globalization with technological advances and associated structural changes now taking place in the production of agriculture.
First, to concede some ground to the opposition, several forces of globalization have hastened structural adjustments taking place in smaller towns and rural communities. In particular, an expansion of the world market for goods and services has sharpened the economic specializations of many countries and their subnational regions. For the U.S., as global markets in goods, services, and capital have been opened up, the domestic economy has shifted away from manufacturing production and less-skilled services such as back office processing, some software production, and call center activity in favor of advanced services such as finance, investment, and management. For such advanced services, the large urban form, rather than the smaller city or rural town, is the more productive and favorable locale. This preference of industries performing such advanced services has contributed to the growth of large metropolitan areas, such as New York, Chicago, Washington, D.C., Atlanta, and San Francisco.
Aside from that, there is little to argue about globalization as a detriment to rural economic growth. And even at that, I would argue that technological advancements, rather than globalization, account for most of the structural changes that are moving us toward an advanced services economy in the U.S. New technologies, particularly their adaptation in wireless communication and in advanced computing, are highly complementary to such service production, with or without globalization. This is evident the world over as wages, salaries, and employment opportunities have risen sharply for those workers who have the education and technical skills to work with advanced communication and technical tools.
While rural areas have not fared as well in advanced services, the net effects of globalization on commodity production and income in rural areas are mixed rather than one-sided. In much of rural America, the local economy is highly dependent on commodity agriculture or on commodity materials such as energy products, minerals, and timber. Here, relentless productivity advances, especially in agriculture, have obviated the need for as much labor as in the past. In turn, lessened labor demand has put pressure on rural growth.
Yet, such labor substitution is hardly related to globalization. It is true that global markets can introduce competition into commodity markets. Yet, on the flip side, falling transport costs and more open markets also increase possibilities for heightened exports and firmer prices for the commodities produced in rural areas. In the Midwest, for example, global exports in soybean and corn have helped to sustain jobs and income. More recently, as developing countries have improved their diets, U.S. exports of beef, pork, chicken, and poultry have grown. Here, the competitive advantage in grain production translates into local livestock production. The processing of grains and livestock (in order to shed weight and volume before exports) is kept close to the location of grain and livestock production, that is, rural communities.
Growing global growth has also boosted prices of carbon-based fuels. As a result, exploration, mining, and production of fuel sources are providing more jobs and lifting income in many rural communities. In corn-producing states, federal subsidies have combined with rising prices of fossil fuels to spur rapid expansion of corn-based ethanol capacity as a viable energy source. As a result, prices for corn have been raised and are expected to remain so. Moreover, ethanol plants are being built near corn production in rural communities, thereby boosting associated manufacturing jobs.
But ethanol production has not been the only source of manufacturing jobs in rural communities. In the Midwest, as shown below, rural and nonmetropolitan counties have been gaining share of manufacturing jobs at the expense of metropolitan counties for several decades. There are several reasons for this shift, but the dominant factor points to technological changes in production. In particular, areas with lower population density are favored for many types of production due to easier transportation access and lower land costs. And if these forces have been accelerated by global competition, rural areas are the beneficiaries. Income from manufacturing is replacing income earned on farms as the dominant economic base across the Midwest.
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Of course, rural communities in the Midwest face many challenges in the years ahead. For one, manufacturing production centers sited in rural communities are highly vulnerable to global competition. So, too, commodity prices have historically been volatile such that commodity-based economies have often been whipsawed by downward price swings. Global markets show no promise of easing the variability of commodity price swings.
For these reasons, rural communities are striving to avail themselves of development opportunities as they present themselves. On October 24–25, 2006, the Chicago Fed will be partnering with Iowa groups on an informational conference in Ames, Iowa, called “Expanding the Rural Economy through Alternative Energy, Sustainable Agriculture, and Entrepreneurship.”
The question of whether globalization has been a net plus or a net negative for rural areas is not an easy one. Yet, more than ever, rural communities will want to stay closely attuned to trends and policies related to global affairs.
October 5, 2006
Each autumn, I have traveled down to the Indianapolis area to deliver a local perspective on the economy to the Indiana Economic Development Forum. This autumn, the Forum addresses the theme of “work force training and education.” As I survey Indiana’s economic performance over the past 15 years, it strikes me that Indiana is on the right track with its strategic focus on boosting work force training and education. So too, where feasible, an emphasis on technology transfer, firm growth, and entrepreneurial activity may be needed to create matching job opportunities for the more highly skilled Hoosiers.
Indiana and its neighboring Midwestern states rank near the top in manufacturing concentration. Even so, as the figure below shows, the deep recessions of the early 1980s sharply shifted the region’s share of manufacturing jobs elsewhere (right axis, green line). As the steel and auto industries waned here, the computer and military equipment industries grew elsewhere.
The figure also reveals the period’s depressing effects on the region’s per capita income as a result of manufacturing job loss and slow recovery (left axis, blue line). Since then, per capita income, as compared to the national average, has not fully recovered in the Great Lakes region, nor in Indiana, for that matter.
However, Indiana’s job growth and share of manufacturing jobs have recently out-performed the surrounding region (bottom chart). Indeed, even though the level of jobs has declined, Indiana has exceeded its 1980s share of the nation’s manufacturing jobs. Consequently, while the relative per capita income in the Great Lakes region has taken a dive over the last few years, Indiana’s income has remained about the same in relation to the national average.
Something is going right in Indiana, or at least it is going a little better than in surrounding Midwestern states. But given the notably stronger performance gains in Indiana’s share of the nation’s manufacturing jobs, shouldn’t its per capita income be rising a bit, rather than being stuck in place?
The answer again likely lies in today’s broad economic trends. Indiana’s manufacturing wages lie below its Midwestern neighbors. This can be seen in the figure below, which illustrates the higher hourly earnings of production workers in Michigan versus Indiana. Perhaps the state’s favorable wage environment for employers, along with other business climate attractions, partly explain its job share gains in manufacturing, even as per capita income gains are not quite so robust.
Another reason for less robust progress in Indiana’s per capita income can be found in service sector versus manufacturing wage trends. While average wage levels in manufacturing tend to exceed average service sector wage rates in the nation, service sector wage growth has been catching up to manufacturing.
How can Indiana improve its living standards? In our market-oriented economy, higher wages and earnings are currently being paid to those with higher skills and education. For this reason, investment in education and work force training are one important part in achieving higher income for Hoosiers.
In addition to higher skills, there must be job opportunities available for those enhanced skills and training. Sometimes, such local job opportunities do emerge as new firms and capital investment migrate into states in search of favorable work force skills and education. However, in other instances, skilled workers move out of state in search of greater opportunity. To forestall this loss of skilled workers, Indiana and other states are pursuing not only work force training and education, but also local technology transfer from technical universities along with the encouragement of entrepreneurial ventures.
September 28, 2006
Michigan automotive and white collar jobs
Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?
Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three's headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.
Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.
Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).
Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.
These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.
Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.
So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.
Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.
And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.
September 6, 2006
What industries are key to Midwest economic performance?
Urban economist Wilbur Thompson once said, “Tell me your industries, and I’ll tell you your future.” A region’s industries do tell us a lot about its economy. In the Midwest, manufacturing industries often drive fluctuations and trends in the region’s overall economic growth because manufacturing is a much larger part of its economy, on average, than the rest of the nation’s. So, too, manufactured goods are traded far and wide—that is, they are exported and imported across national boundaries as well as across regions that make up the U.S. economy. Accordingly, shifts in demand for manufactured goods can have an outsized impact on states and communities in the Midwest. For example, a national shift in buying behavior toward foreign nameplate autos, or toward smaller and more energy efficient autos, may well impact automotive production, investment, and employment in some parts of the Midwest region.
On a short-term basis, fluctuations in aggregate economic activity, such as recessions, diminish demands for durable goods such as capital equipment, thereby making the Midwest economy more sensitive to national “business cycle” fluctuations.
So, too, many Midwest manufacturing industries are impacted by global competitive shifts. Production operations of some home appliance manufacturers have shifted to Mexico, for instance.
But how can we identify which particular industries to observe and follow in the Seventh District? First, we must ascertain how concentrated is an industry in a local economy as compared with the national economy. Analysts often construct a “location quotient” to do so. In one such application, each industry’s employment share of total employment in the region is compared with its national counterpart. The comparison is constructed as a ratio with the local share on top. For example, if a locality’s labor force had 20 percent of its workers in manufacturing as compared with 10 percent nationally, the index (ratio) takes on a value of 2.0, i.e., 20/10. Parity with the nation would take on a value of 1.0.
While such an index is useful by way of comparison, it says little about the actual size of a particular industry in a state or region. For this reason, the chart below identifies manufacturing industries in the Seventh District states by relative concentration and by employment size. The horizontal scale depicts the concentration, and it is centered at the index value of one, or parity with the nation. The vertical scale is centered at the value of the median-sized manufacturing industry in the District (as measured by payroll employment).
By construction then, we may quickly characterize the most prominent industries in the District as they are located in the upper right hand quadrant of the graph. For the District, it is clear that transportation, food processing, and machinery are the most prominent industries, with transportation (representing automotive) winning hands down. The fabricated metal products sector also looms large; however, these industries represent many diverse intermediate products that are eventually used to produce more final goods such as autos or machinery. Primary metals, principally steel foundries as designated by the industry code 331 on the chart, is the most concentrated industry (as measured by employment) in the District. Yet, its employment is relatively small in comparison.
Charts for each individual state will soon be available on our Midwest Regional Website. Iowa is reproduced below. As the chart suggests, employment in food processing stands out as the largest and the most concentrated in the state. In large part, this activity represents Iowa’s further processing of corn and soybeans into meals and oils, as well as its meat packing industry, chiefly pork. Iowa’s large and highly concentrated machinery industry reflects its focus on its manufacturing of farm machinery and equipment.
Analysis of the District’s lesser industries can also be informative. In the overall U.S., the computing and electronic products industries have grown rapidly into a large component of overall U.S. manufacturing. In virtually every Seventh District state, for example, employment in this sector exceeds the median manufacturing sector. But at the same time, the states’ concentration of this sector is universally below the national average. In this instance, the sector’s lower concentration and lesser expansion here have contributed to a slower pace of overall economic growth.
Of course, these glimpses are only a superficial beginning to understanding the structure and behavior the region’s economy. For one, individually identified sectors often have important linkages to others that merit further consideration. Such industries as machinery and autos, for example, purchase great volumes of intermediate materials and parts locally, including those found in rubber and plastics, fabricated metals, and machinery (e.g., tool and die and metal cutting machinery). Also, in varying degrees, sectors may purchase local services as diverse as management consulting and transportation. Specific industry linkages can be found in the input–output tables of the U.S., which are produced by the U.S. Bureau of Economic Analysis (BEA).
However, the U.S. input–output tables may often be misleading for regional analysis. That is because specific inter-sector buying and selling relationships will differ greatly and vary widely from region to region. For one, local firms will purchase intermediate goods and services from many possible places. For the most part, we know little about the varying geography of such relationships. In response, the BEA has adapted and estimated the national relationships for individual regions of the U.S. in its RIMS II modeling system. This system and others like it, which are available commercially, are often used to estimate the broader economic impacts of small changes to a community or local industry.
August 24, 2006
How should we gauge manufacturing's importance?
Manufacturing jobs and income are shrinking as a share of the national economy as well as the Midwest economy. Some representatives of manufacturers raise this fact in alarm, worrying that the shrinkage leaves the nation unable to support its needs and wants. But at the same time, some manufacturing advocates sometimes claim that the sector’s is mis-measured and undercounted. Meanwhile, economists mostly applaud diminishing manufacturing jobs as a harbinger of continued enhancements to productivity and standards of living for the average household, pointing instead to rising real output of manufactured goods available at ever-lower prices. How, then, should we think about and measure the economic importance of manufacturing?
To use an agricultural metaphor, manufacturing is no small potatoes for many Midwest communities. In the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin, personal income directly coming from manufacturing activity, on average, is more than 50 percent more concentrated than in the nation as a whole. Much of this personal income reflects wage and salary income attendant to jobs in the sector, as shown below. What’s more, such income and jobs are augmented by services related to manufacturing, such as transportation and warehousing, as well as white-collar business services that are purchased locally by manufacturing operations. All of this, of course, means jobs and income to Midwest residents, firms, and households.
It is no small concern to manufacturing workers and communities, then, that income and jobs derived from manufacturing have been shrinking as a share of the economy. However, along with other economists, Senior Business Economist Bill Strauss of the Chicago Fed has pointedly illustrated that what is troubling to those who are discomfited is the very same phenomenon that brings about rapidly rising standards of living across a broad spectrum of households. The perpetual innovation and advances in productivity by manufacturers, accompanied by sharp competition among manufacturing firms, have delivered, on average, cheaper, more customized, more durable, and higher quality manufactured goods to households.
Government statisticians at the U.S. Bureau of Economic Analysis (BEA) calculate prices for manufactured goods purchased in the U.S., and they also do so for a standardized unit of a “real good” including autos, frozen foods, appliances, etc. Qualitative advancements in such manufactured goods are folded into counts of “real goods output,” meaning the total amount—both quantity and quality—of what we buy with our household income.
Over time, such measures show that real output growth by manufacturers in the U.S. and Midwest economies has kept pace with output or total gross domestic product (GDP) growth. Accordingly, if we measure real output produced by the manufacturing sector as a share of the overall economy, the manufacturing share would be virtually constant rather than declining. This is in apparent contradiction to the falling share of income and jobs derived from manufacturing activity.
Yet, in this there is really no paradox when we take into account the fact that the prices of manufacturing goods have fallen even while output has risen. That is, households and businesses are buying a greater “real” quantity of goods, but they are spending less on them overall because falling prices have more than offset the growing quantities being purchased. As illustrated and discussed in the 2004 Economic Report of the President, household and business purchases of manufactured goods have swelled in response to bargain prices, but not enough to sustain the manufacturing sector’s share of total revenue (and income).
A much lesser reason for manufacturing’s falling share is that a greater portion of domestic goods are produced abroad. As the Report illustrates, if the U.S. trade deficit had been hypothetically held to zero while U.S. manufacturing productivity were allowed to improve at its historic rate from 1970 to 2000, the U.S. proportion of employment in manufacturing would be only 14 percent in year 2000 rather than its actual 13 percent. Accordingly, rising productivity in domestic manufacturing accounts for the lion’s share of the decline in manufacturing share of employment from 25 percent in 1970. And yes, even that part of the shift from manufacturing to services related to the rise in imports has helped to buoy U.S. living standards because some goods can be produced abroad more cheaply, thereby allowing U.S. workers to instead produce greater services for domestic consumption.
Manufacturing representatives sometimes claim that manufacturing is not shrinking as share of current economic activity or at least that the shrinkage is being greatly overstated. Rather, the sector is being undercounted because some functions previously performed by manufacturing companies have now been outsourced to service companies. A consistent accounting of manufacturing activity would show it to be more sizable.
This latter assertion is partly true and but it does little to alter the long-term reality that the proportion of income and jobs derived from the manufacturing sector has fallen dramatically over many years. For one, it is true that U.S. manufacturers are increasingly relying on temporary workers rather than on their own employees. In official tallies, these temp workers are attributed to the services sector rather than to manufacturing. Yet, while their numbers expanded by roughly one-half million in the U.S. during the 1990s, according to a study by Estavao and Lach, they still made up only 5 percent of the manufacturing work force.
The outsourcing of functions by manufacturing companies is perhaps more important in mismeasuring manufacturing activity. Greater specialization of business functions, including accounting, marketing, payroll, information technology (IT), human resource management, research and development (R&D), strategic management, and public relations, has taken place such that most businesses—not only manufacturing— have come to outsource an increasing share of such activities. The snapshot below is drawn from data from U.S. Input-Output tables that are estimated by the BEA. In particular, manufacturing companies are shown below to be purchasing increasing amounts of business services in relation to each dollar of their own output since 1982. Not all of this service growth derives from outsourcing from manufacturing companies. Manufacturers are also using more services to deliver goods than in the past. In other words, the knowledge content of final goods delivered to households and businesse is higher than before. For example, pharmaceutical production may require an increasing amount of both R&D and testing services purchased by pharmaceutical companies, as well as legal, advertising and public relations services.
I have constructed a rough accounting of total purchased services by U.S. manufacturing companies from 1958 onward. The construction subtracts the BEA’s measure of manufacturing from the U.S. Census Bureau’s measure of value added in manufacturing. Since the U.S. Census’s value added includes services purchased by manufacturing companies, the difference provides an estimate of purchased services. For the U.S., I find that in the late 1950s, manufacturing companies purchased approximately 16 cents of services for every one dollar of their own output. This had climbed to 30 cents in recent years.
The figure below illustrates the generous and comprehensive measure of “manufacturing activity” for both the U.S. and for the Great Lakes region from 1977 to 2001. The color additions represent purchased services, which are shown to considerably inflate the share of manufacturing in total economic activity—be it GDP or its state equivalent, gross state product (GSP). However, regardless of the inclusion of purchased services, manufacturing activity is shown to be steadily declining as share of output.
To return to the agricultural metaphor, is it appropriate to think of U.S. manufacturing as we do production agriculture? The parallels are often drawn. Production agriculture employed close to one-half of the U.S. workforce prior to the dawn of the twentieth century. Subsequently, tremendous gains in productivity provided magnificent improvements to the American diet while shrinking the size of the sector to 3 percent of the work force. In broad perspective, the remainder of the work force have now been freed to deliver to us a great array of services and goods, even as we eat better.
Although the parallel to manfacturing is instructive in some ways, not all observers would be satisfied in relegating manufacturing to the backwaters of economic history along with agriculture. For one, some argue that the sector continues to be the chief engine of innovation in overall U.S. productivity and innovation growth. While the manufacturing sector has diminished in size, it continues to be responsible for a greatly outsized share of the nation’s R&D. As of 2001, manufacturing funded 44 percent of the nation’s R&D, or $199 billion. This amounts to an innovative intensity that is roughly four times the size of the sector’s own activity.
Moreover, it is also argued that the much of the payoff or “economic returns” to this innovation accrues outside of the manufacturing sector to a great extent. That is, there are large spillover benefits to R&D performed by manufacturers. In particular, as service firms providing health or personal services or business services learn to use new and innovative capital equipment such as IT equipment, medical equipment, or pharmaceuticals, their own productivity continues to grow or accelerate.
In the end, how should we measure manufacturing’s importance to the U.S. economy? The answer is, of course, “in many ways.” For manufacturing communities and workers, it will be helpful to track the diminishing (sometimes growing) shares of manufacturing jobs and income in the economy. Communities will sometimes need to consider how to best transition to new economic base sectors; workers will sometimes need to transition toward new or enhanced occupational skills or even to different locales.
In continuing to track productivity or “real” output growth of manufacturing, nations and regions will gain a better understanding of the sources of national growth and living standards. In this, there are several important public policy arenas. Which particular public policies with respect to public investment in fundamental scientific research and technical education give rise to productivity innovations? What regulatory environment is most fertile with respect to the protection of intellectual property, promotion of competition among global firms, and the flow of workers and their ideas across international borders? How much should we be investing in public infrastructure of importance to manufacturing such as roadways, ports, and air cargo airports? How much and in what ways do open global markets for investments, services, and manufactured goods lift our standards of living?
If we get such questions right, the size of manufacturing of the manufacturing sector will be just right. That is because, in market economies such as ours, both service and goods-producing firms compete, adjust, evolve, and innovate and, in the process, they provide households with the services that they desire. Whether those services emanate from manufactured goods or whether they are provided directly to households by service workers is not at issue.
August 4, 2006
Manufacturing activity holds an outsized importance in the economy of the Midwest. The Midwest regional economy derives approximately 53 percent more than the national average of personal income from manufacturing. The map below illustrates the relative share of payroll employment in manufacturing across U.S. states.
Five years ago, manufacturing led the U.S. economy into an economic decline. Real output in manufacturing steeply declined even while consumer spending continued to grow, if only weakly. In both the region and the nation, sagging output translated into layoffs and net job losses. From mid-2000 to mid-2003, manufacturing employment dropped 16 percent in the nation and 17 percent in the Seventh Federal Reserve District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.
To assess the existing conditions and future prospects for manufacturing, the Chicago Fed organized a series of three conferences beginning in late 2003. The Manufacturing Assessment Project’s major conclusions were as follows:
- The manufacturing-oriented national decline beginning in mid-year 2000 was led by sagging exports (reflecting slower global economic growth) and by a precipitous drop in investment spending (driven by a traditional slowdown in growth, as well as excessive investment spending during the late 1990s, especially in high technology communications equipment.)
- The decline in Midwest manufacturing employment was in proportion to the national decline. In the past, the Midwest had experienced a steeper decline than the nation due to the region’s high concentration in manufacturing durable goods—including both capital goods machinery and autos.
- Although manufacturing employment declined proportionately in the region versus the nation, its impact was more severe in the Midwest due to the region’s heavier concentration in manufacturing.
What kept Midwest manufacturing from falling more steeply (as it had done in past recessions) during the economic downturn in 2001? High-tech production activity fell off the map nationally. This hurt some other regions more than the Midwest, because the Midwest economy is not heavily concentrated in computing and communication equipment. In addition, consumer spending on autos was buoyed by low interest rates and by automotive company sales incentives. Finally, continuing foreign competition from very low-wage countries (especially China) affected other regions such as the Southeast more severely, where there is a concentration in low-value-added industries, especially textiles and clothing.
The severity of the 2001 recession and its aftermath led some observers to believe that Midwest manufacturing had taken a negative and permanent deviation from its long- term performance. However, most argued that, aside from the unusual manufacturing orientation of this 2001 recession, there was little reason to conclude that manufacturing performance was in any way inconsistent with long-term trends. In particular, over the long term, strong real output growth in the U.S. has been achieved through robust productivity growth, especially in durable goods production. In the process, the employment share of manufacturing has been declining approximately 2 percent per year since the late 1950s.
The share of income directly derived from manufacturing activity has also been falling. Rising productivity and competitive markets have led to falling prices for manufactured goods in the U.S. Falling prices have stimulated greater domestic demand for manufactured goods, but not enough to offset falling prices. A less important but still significant factor is that a greater share of domestic demand for manufactured goods is being served from offshore.
The Midwest has shared in manufacturing productivity gains and output expansion which, in turn, have ultimately given rise to higher standards of living in the U.S. On the downside, the region’s high concentration in manufacturing employment has contributed to its slower-than-national growth of total employment and population.
An important exception to the Midwest’s similarity to the national economy is the ongoing geographic shift in automotive production from the Midwest to the South Central and Southeast regions. This shift derives from a large sales share shift from the former Big 3 automakers and their suppliers to the “new domestic” automakers, especially Toyota and Nissan, who have tended to move southward.
A follow-up automotive conference this year highlighted how the geographical shift and industry upheaval are affecting the broader automotive parts industry. The following are some of the interesting conclusions that emerged from this gathering:
- The automotive parts industry is three to four times larger than assembly operations as measured by employment.
- The auto supplier sector is paralleling the geographical shift toward the South by automotive assembly plants.
- Foreign ownership of auto parts companies is increasing.
- Both assembly plants and parts makers seem to avoid union and hostile or overly costly labor market environments, if they can do so.
- The challenge for the Midwest’s retention of the parts and assembly industry does not appear insurmountable. Shortages of skilled workers in the South are possibly forestalling more rapid investment there. So too, the bulk of the industry remains in the Midwest so that the region’s locational pull continues to be strong. Domestic auto companies are also strategically restructuring to be more competitive.
What has transpired since we began the Manufacturing Assessment Project?
Investment spending has recovered, pulling both regional and U.S. manufacturing output growth along with it. Nationally, high-tech/info-tech production has also recovered.
In the Midwest, machinery and other basic capital goods production have greatly recovered and some sectors continue to expand. Regionally, basic industrial equipment such as electrical, construction, and mining equipment are growing strongly, while automotive production continues to flag. This has created an east-west tilt, favoring economic growth in the western part of the Great Lakes economy in relation to the auto-oriented states of Ohio, Indiana, and Michigan.
As global growth has recovered, U.S. exports have also recovered, pulling along domestic manufacturing output—especially capital goods exports. Export growth in the Seventh District has outpaced the nation.
Domestic light vehicle sales have been largely flat during the current decade at 16-17 million units per year. Sales shares have continued to shift away from the former Big 3 and their suppliers, so that many states and communities that now host related production facilities remain in crisis.
Today’s robust manufacturing output growth is largely being achieved through strong productivity growth and with little expansion in the work force. As indicated by the charts below, these productivity trends are playing out in both the nation and the region. The region’s higher concentration in manufacturing may be retarding its employment and population growth in relation to the U.S., even while it is lifting household incomes and standards of living across the nation.
July 6, 2006
Manufacturing exit tough on Midwest central cities
If current trends continue, manufacturing activity will soon become extinct as a part of central city economies. The reasons for this exodus are largely the result of shifts in the technology of many types of production activity. Central cities—especially in the Midwest and Northeast—are generally densely populated and somewhat congested. Such conditions are not ideal for production activity. Many central cities vigorously attempt public policies to preserve manufacturing jobs, but the opposing forces appear to be very strong.
At one time, many central cities were the preferred locale for manufacturers. The reasons can be boiled down to two, transportation of laborers and transportation of materials.
As for labor, factories were once teeming with laborers. But due to labor-saving productivity gains, today’s factories are sparsely populated even though they produce many times more output. Senior Business Economist Bill Strauss calculates that today it takes 200 U.S. manufacturing workers to produce the same amount of product as 1,000 workers in 1950. Accordingly, during those earlier labor-intensive times, the transportation of manufacturing workers to the job site figured much more heavily into the factory cost equation. Transportation efficiency once was served by factory neighborhoods in central cities where workers could more easily commute by walking, driving, or by public transportation. The higher living density of central cities also meant that public services such as education and sanitation could be delivered cheaply to workers. Of course, it is not only manufacturing technology that changed. Better highways and rising standards of living (translated into higher car ownership) have also contributed to the ability of factories to staff their factories with (fewer) workers who live farther away. In turn, this opens up factory sites in suburban and rural areas.
Better highways, road vehicles, and logistics technology have also made the transportation of production material to central cities less attractive in comparison to areas of lower population density. Economically, railroads once dominated long-haul truck transportation of materials and components used in manufacturing, as well as the shipment of finished goods to other final markets. The technology of rail favors convergence into a central location (i.e., central cities) rather than the dispersed locations that are served by the crisscross pattern of our now ubiquitous highways. Over time, construction of divided highways and the advent of trucks having features such as refrigeration, trailers, and easily transferred containers have facilitated factory sites served by roads rather than by rail. Accordingly, factory sites can now better take advantage of the low land costs of rural and suburban areas rather than being restricted to those of the central cities.
The City of Chicago exemplifies the central city experience with manufacturing jobs. The chart below shows that, by one reckoning, manufacturing jobs in the city have declined from 367,000 in 1976 to under 100,000 today—a loss of approximately 10,000 per year. In contrast, the employment experience of Chicago’s suburban areas has been much milder.
The experiences of other central cities has been somewhat similar to Chicago’s, even some of those cities located in the faster-growing Sunbelt regions. The table below, drawing on data from the Census of Manufactures, describes the manufacturing job changes from 1977–2002 of the 10 most populous U.S. cities (as of 1980). Over the period, manufacturing jobs in these 10 cities dropped by 62%, which is more than double the pace of manufacturing job loss in the overall U.S. Although the job gains of San Diego and the slight loss by Phoenix seem to be exceptions, they are not. Rather, their experience reflects the fact that the land area of those cities has expanded by 2.5 times and 4 times, respectively, through annexation since 1980. At the same time, Midwest city boundaries have remained essentially fixed.
So too, as shown by the table below, the city of Chicago’s experiences are mirrored closely by the central cities of the industrial Midwest. The high population density of places such as central city Milwaukee and Cleveland came about during a different era than the more recent growth of low-density (and expanding) cities of the West and Southwest.
Many central cities of the Midwest owe their original existence to manufacturing, so the steep loss of manufacturing jobs in central cities has typically been painful. In response, these cities often attempt to combat manufacturing decline through public policies. For example, some policy initiatives to make manufacturing activity more competitive in cities include clearing land, cleaning up environmental hazards, preserving or setting aside land exclusively for manufacturing purposes, or easing freight transportation congestion. However, so far, the allure of suburban and ex-urban manufacturing locales has been too strong to overcome.
April 17, 2006
Manufacturing and regional policy
The manufacturing downturn that began the current decade affected the Midwest more severely than the rest of the nation. In response to recent manufacturing decline, at least one consortium of manufacturers is now forming on a region-wide basis to share best practices and to promote manufacturing in the Midwest.
As measured by manufacturing employment, the combined declines in the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin were very sharp. The chart below shows a decline of 18.7% in the Seventh District since 1999, accounting for a net job loss of 616,900 workers in the sector. The pace of these declines was roughly in line with the national experience. However, because the region is so highly concentrated in manufacturing, the sting of manufacturing decline was sharper here. The second half of the chart below recasts manufacturing job loss in the region, weighting it proportionately by the higher concentration of manufacturing in the region versus the overall United States. In doing so, the index suggests that the impact of the actual 18.7% decline in the Midwest was similar to that of a 25.7% nationwide decline.
Manufacturing job losses may also be magnified in the Midwest to the extent that ancillary activities to manufacturing are lost, such as transportation, warehousing, and the business services purchased regionally by manufacturing companies. Estimates are that, for each $1 of manufacturing production, manufacturing companies spend another 33 cents on purchased services.
Both Midwest manufacturing output and manufacturing employment are growing once again, roughly keeping pace with the nation. However, in the Seventh District, neither recent gains in output nor employment have as yet made up for previous losses.
One response to lagging manufacturing has been the formation of a multi-state coalition of manufacturing organizations named the Great Lakes Manufacturing Council. Initiated by the Detroit Regional Chamber of Commerce, last year the group began working on a regional economic development entity to position the region to compete in the global marketplace.
Last month, the Council traveled west to Chicago to broaden the discussion and partnership among manufacturing stakeholders. Those who are interested in participating or learning more should contact Lisa Katz, Director of Government Relations at the Detroit Chamber.
Click to enlarge image.
To date, the Council has identified these top priorities: 1) clarifying and promoting the region’s manufacturing image to the world and to incoming work force; 2) developing and certifying work force skills relating to manufacturing activities; 3) identifying and sharing best innovative practices and technologies among manufacturers; 4) keeping the vital U.S.–Canada border open and efficient for the flow of goods and people; and 5) articulating infrastructure needs to maintain the region’s advantage in logistics.
Are such efforts worthwhile? The results of such initiatives have been little studied. And the strategic responses of individual companies most likely overwhelm cooperative policy in ultimately determining competitive strength. However, manufacturing operations in the Midwest are tightly linked through supply linkages and through a shared labor pool and transportation infrastructure. And so perhaps the recent time of stress will spur cooperative policies that prove to be helpful in sustaining the region’s manufacturing base in the years ahead.