There is a common theme across the internet: US manufacturing is dead and it's never coming back. Well, there's a big problem with that analysis: it's not true. In fact, as the chart above indicates, it's actually false. Note that since 1960, the index of industrial production has risen from a little below 30 to its current level of about 100. And note the increase is continual -- meaning the number didn't just hover around 30 for most of that time only to spike up in one big move. The index has continually risen over that entire period.
Instead, what people are commenting on is the drop in manufacturing employment. Consider these two charts.
Durable Goods Employment remained fairly steady at 10 million to 11.5 million employees between the mid-1960s to the early 2000s. Then total employment dropped like a stone, losing three million people over the last 10 years. These are levels last seen in 1950.
Non-durable goods manufacturing is even worse. From the mid-1960s to the early 200s, total employment in this area hovered around a 6.8 million. However, starting in 2000, the number fell off a cliff, losing almost 2 million people. This is the lowest the number has been in over 60 years.
However, over the last 15 years we've seen an increase in manufacturing productivity. Consider the following:
Manufacturing Output per hour has increased continually since records have been kept, as has
Multi-factor productivity.
What does all this information tell us?
US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.
In addition, SilverOz adds the following:
Many people have a knee-jerk reaction to the decline in manufacturing jobs and immediately blame outsourcing/imports for this decline. The following graph demonstrates that the linkage between increased imports and a decline in manufacturing jobs is virtually nonexistent.
What we clearly see is that imports increased quite dramatically over the last 30 years, while good producing jobs remained fairly level (dipping during recession and then recovering) until this last recession, which took a huge toll on manufacturing employment even though imports actually declined. This again plays much better to the argument that productivity increases are the greatest contributor to our decline in manufacturing employment than the outsourcing/imports argument.
9 comments:
The reason for the persistent drop in manufacturing employment is technological innovation, which is the long-term driver of productivity in high wage countries. The problem is the service sector cannot pick up the slack of that lost manufacturing employment, in terms of wages, and maybe not even in terms of aggregate employment.
Well this is good news in that fears that the manufacturing strength of the US is being decimated are unfounded. This is some excellent and much needed analysis. I've always thought automation was underplayed as a factor in our economy, but this pretty well proves it. Having said that however there's a big socioeconomic impact from this trend that we still have to deal with.
Historically the manufacturing base in this country was the bottom rung of the ladder for people moving up in our economy. You could get a job that paid a good living with good benefits while possessing a limited education and skill set. What you earned in that job is what would set up your children to achieve greater prosperity than you started with. That's what made the American dream a reality.
Today that simply doesn't exist and while outsourcing may not be destroying US output, what it is doing is destroying the entry level of our nation's economy. We are demanding more and more of entry level workers all the while making it more and more costly to get the necessary skills. In the long run this feeds a gap between rich and poor that is getting demonstrably worse.
The problem we face is the economic plight of the middle and lower-middle class. People have been grasping for explanations for the problem, and yes, the concern over trade policy has been a convenient scape goat. Identifying the real culprit is great, but we're still left with a real issue we need to resolve.
Hopefully information like this will turn people away from pointless protectionist instincts and instead help them focus on what we really need to be doing: educating our work force and helping provide assistance to entrepreneurs starting small business here in the US.
Yes manufacturing output is up but what I would like to see is consumption over that period. Is this parallel or has consumption grown at an even faster pace? Our imports over this time have grown faster than our exports but for a real comparison one would need these broken down to show manufactured goods. My gut feeling is that our consumption has grown faster than our manufacturing and the difference has been made up with imports. Other informative comparisons would be our percentage of global manufacturing and overall production over that period.
In the first half of the last century, the same process was seen with agriculture.
The less clear question is what is happening with engineering employment and the production of new engineers, without which that technical innovation will by and by run out of steam.
My husband and I own I guess what you would call a micro-factory. We have very large, very expensive equipment that we use to make high-precision metal components. It only takes 3 people to run the entire operation, but if we were running this operation in 1960, it would have taken about 20-25 people for the exact same productivity. Technology and automation have come a long way.
How does the data account for value provided by Tier I, Tier II and Tier III suppliers? Because while I won't dispute the data was honestly collected, that level of detail would be difficult to parse. Also, on an anecdotal level, my experience of the U.S. manufacturing scene is nothing short of horrifying. In almost all cases, "made it the USA" merely means a product's final assembly took place in America. The parts all came from overseas. If those parts are included in the value of U.S. produced goods, instead of merely the assembly labor, the numbers are badly skewed.
I also wonder how the productivity is figured. Again, this is most likely a case of the U.S. data piggybacking off BRUTAL competition overseas, if not automation. Every factory I've visited in my time of industrial sales support was nothing short of horrifying. After so many years of purchasers and executives from finance backgrounds COMPLETELY disgregarding anything a production engineer or plant manager would have to say about cost reduction (and why wouldn't they -- they buy and sell manufacturers like baseball cards), American plant productivity expertise is regressing to Stone Age efficiency. These guys have flat-out NO idea what the heck they're doing, and there's no inherent incentive to infuse new blood into the field.
In short, I have valid reasons to believe both the U.S. productivity AND U.S. manufacturing numbers are vastly inflated, and for the exact same reason -- they're including the contributions of overseas Tier I-III suppliers.
Question: Has the definition of "manufacturing" changed in any meaningful way that might affect the data? Obviously the definition of manufacturing must be a moving target as the underlying manufacturing basis of the economy changes due to technological innovation, etc. But when you dig down into the metric, has there been any meaningful change in what is defined as "manufacturing" that might alter the data?
Much of the increase in industrial production is from the increase in utility, refinery, and mining output (not manufacturing). Manufacturing output has been exaggerated by counting the mark up of imported goods by manufacturers as increased "production". Only the cost to import is subtracted out of GDP and industrial production, not the mark up for the final sale. For example, Ford and GM import a very large percentage of their parts and components while selling virtually the same number of cars over the last few decades; yet amazingly the auto category of industrial production has continued to go up.
@ Anonymous: Industrial production is measured in number of "widgets", not cost and thus the GDP issue you are discussing (which has been noted to account for no more than a .2% reduction in GDP) is irrelevant to this discussion of productivity.
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