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.
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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.
Posted by Testa at 2:05 PM | Comments (0)
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.
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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.
Posted by Testa at 1:13 PM | Comments (0)
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.
Posted by Testa at 2:01 PM | Comments (0)
October 5, 2006
Indiana observations
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.
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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.
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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.
Posted by Testa at 2:47 PM | Comments (0)
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.
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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.
Posted by Testa at 1:00 PM | Comments (0)
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.
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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.
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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.
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Posted by Testa at 10:05 AM | Comments (0)
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.
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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.
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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.
Posted by Testa at 8:42 AM | Comments (0)
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.
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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.
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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.
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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.
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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.
Posted by Testa at 1:43 PM | Comments (0)
August 4, 2006
Manufacturing Update
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.
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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.
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Posted by Testa at 2:16 PM | Comments (0)
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.
Posted by Testa at 9:00 AM | Comments (0)
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.
Source: Bureau of Labor and Statistics/HAVER Analytics
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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.
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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.
Posted by Testa at 10:22 AM | Comments (2)