Michael Evans
1/24/2006, 05:23 PM
The Long-Term Outlook: Can Manufacturing Survive?
There has been a lot of discussion about whether the manufacturing sector is keeping pace with the rest of the economy. Measured by employment, that is clearly not the case. Over the past decade, manufacturing employment has declined 18% at the same time that all other employment has risen 20%. On the other hand, over the same period, industrial production has risen 34% while real GDP has risen 39%. Is that keeping up or not?
It all depends on what ?output? means. If we are talking steel or autos, the meaning is clear enough. But suppose we are talking about high-tech equipment. If a computer runs twice as fast as its predecessor, did output double?
Over the past decade, production of electronics and computers rose an average of almost 20% per year. But employment fell more than 2% per year.
Production of high-tech goods now account for about 10% of total mfg production. They are growing about 20% per year, according to the Fed, compared to 3% for other production. If this keeps up for 20 years, they will account for 230% of total production. Obviously something is wrong here.
The answer is that the numbers are rebased every five years; the production numbers were rebased last November. The same problem occurs with GDP, although to a lesser extent. That is why the growth rates keep getting revised down every time there is a major data revision. Apparently no one at BEA has been able to solve this problem.
There are various methods of adjusting for the declining prices of high-tech goods. Our calculations show that if the numbers are adjusted correctly, manufacturing production is rising about 2%, compared to 3 ½% for the rest of the economy. So the manufacturing sector is not really keeping up after all.
Some economists have pointed out that in 1820, three out of every four Americans worked on a farm. Today the number is less than 3%. However, the U.S. produces far more than it needs to feed its citizens, and even with substantial exports, surpluses are the rule rather than the exception. Furthermore, production could be increased sharply if necessary by lifting various restrictions on acreage.
However, no one in their right mind suggests that 3% of the workforce can produce more than enough manufactured goods to meet the demands of the domestic economy, let alone exports. Instead, the losses here are not at all comparable, because domestic production has been replaced by imports. This is perfectly obvious to all NPES members, but from time to time there will be an article about how the manufacturing sector is following the path of agriculture, and somehow we are all better off because of this switch.
The sharp decline has been quite recent. From 1995 through 2000, manufacturing employment was virtually unchanged in spite of China, NAFTA, and other forces that boosted imports. However, over the past five years, employment has declined in every single manufacturing industry as measured by the NAICS 3-digit level (essentially the old SIC 2-digit level). The changes are shown in Table 7.
Table 7. Employment Changes, and Ratio of Wages to Shipments, by 3-digit NAICS Industry for Manufacturing
Employment
Wages Shipment Ratio 1995 2000 2005 % chg % chg
Mfg 687.7 4429 15.5 17241 17263 14228 0.1 -17.6
Dur 450.2 2373 19.0 10372 10876 8948 4.9 -17.7
Wood 18.75 110.3 17.0 574 613 546 6.8 -10.9
Nonmet minerals 21.28 91.3 23.3 513 554 500 8.0 -9.7
Primary 23.7 165.7 14.3 642 622 467 -3.1 -24.9
Fabr 61.66 272.5 22.6 1623 1753 1521 8.0 -13.2
Mchy 58.02 294.3 19.7 1440 1457 1156 1.2 -20.7
Computer 97.05 469.7 20.7 1688 1820 1332 7.8 -26.8
Elec eqpt 20.56 106.5 19.3 593 591 438 -0.3 -25.9
Motveh 60.45 462 13.1 1242 1316 1089 6.0 -17.2
Oth trans 40.47 186.5 21.7 735 740 680 0.7 -8.1
Furn 18.54 75.3 24.6 607 680 568 12.0 -16.5
Misc 29.76 138.6 21.5 715 733 651 2.5 -11.2
Nondur 237.46 2056.8 11.5 6869 6388 5280 -7.0 -17.3
Food/tob 62.11 536.3 11.6 1763 1760 1678 -0.2 -4.7
Textiles 13.32 79.3 16.8 687 594 403 -13.5 -32.2
Apparel 9.9 56.6 17.5 814 497 257 -38.9 -48.3
Paper 24.89 172.5 14.4 640 605 490 -5.5 -19.0
Printing 26.9 94.9 28.3 817 807 654 -1.2 -19.0
Petr 8.32 337.6 2.5 140 123 117 -12.1 -4.9
Chem 60.33 506.1 11.9 988 980 879 -0.8 -10.3
Plastics 31.68 202.9 15.6 915 952 802 4.0 -15.8
Column 3 in Table 7 shows the ratio of wages to shipments for 2004. In general, industries with labor costs more than 10% of total shipments are vulnerable to further foreign competition; in most cases, if labor costs are less than 10% of shipments, the U.S. can remain competitive even at high wage rates because of offsetting costs, such as transportation. Based on this strict criterion, only petroleum makes the cut. A slightly less draconian measure of 15% suggests that food, chemicals, motor vehicles, and primary metals will not lose too many more jobs to foreign operations in the future.
Detroit may not agree at all with that last sentence, but in fact the industry is rapidly rationalizing itself. Furthermore, there are many new auto and truck plants being built in this country ? one of the few industries where expansion is taking place. It is just that the plaques on the door say Toyota and Nissan and Mercedes and BMW instead of Ford and Chevrolet.
Machinery remains at risk, and many of those jobs will continue to move to foreign locations. Printing actually has the highest labor/output ratio; in this case, I am not suggesting that the daily newspaper will be printed in China or India, but that it won?t be printed at all. You can read it over the Internet. News will still be gathered much as it is now, but it will be distributed differently. Over the past year, total newspaper sales fell 2.6%, a trend that is likely to continue. Do the math.
The wage/shipment ratio is not an unequivocal guide to which industries will lose the most jobs; over the past five years, job losses occurred in high cost and low cost industries alike. However, it is a guideline that indicates the industries in which labor will either have to make major concessions, or most of the jobs will move elsewhere. Over the next five years, manufacturing employment will decline at least 10% even if we do not have any recessions during that period. With a recession, the figure will rise to almost 20%, depending on the length and severity of the downturn.
Where will these people find jobs? To answer that, we can check to see where they found jobs over the past five years, when the U.S. economy added more than 5 million non-manufacturing jobs. The cliché answer is Wal-Mart and McDonald?s, but in fact that is not correct. The employment data show that retail trade employment is virtually unchanged since 2000, and while leisure and hospitality employment is up about 0.5 million, most of that is in hotels, casinos, and full-scale restaurants, as opposed to fast-food outlets. The lion?s share of the gain in employment has occurred in health care, up about 3 million, and state and local government, up about 1 million ? most of which is also health care. There have also been substantial gains in construction and financial services ? the building and selling of houses ? although those gains are winding down.
Total government employment surpassed manufacturing employment back in 1990. Health care employment is likely to surpass manufacturing employment by 2008. By 2010, total manufacturing employment will probably represent only 8% of total employment (12 million compared to 150 million) and production workers will represent only 5.7% of total employment. These trends will not be reversed in the foreseeable future.
It is a different economic world because of the global economy, one that requires new linkages. Manufacturing jobs disappear overseas, and as a result the U.S. has an enormous trade deficit. At the same time, the Republican government introduces massive increases in health care paid by the public sector, virtually guaranteeing deficits forever. The extra dollars from our trade deficit are invested in Treasury securities, hence allowing the government deficit to increase without boosting interest rates or inflation. Meanwhile, the demand for health care employees continues to rise rapidly, so people who are displaced from manufacturing end up working, directly or indirectly, in the health care industry. As the aging of American intensifies, these trends can only accelerate.
There has been a lot of discussion about whether the manufacturing sector is keeping pace with the rest of the economy. Measured by employment, that is clearly not the case. Over the past decade, manufacturing employment has declined 18% at the same time that all other employment has risen 20%. On the other hand, over the same period, industrial production has risen 34% while real GDP has risen 39%. Is that keeping up or not?
It all depends on what ?output? means. If we are talking steel or autos, the meaning is clear enough. But suppose we are talking about high-tech equipment. If a computer runs twice as fast as its predecessor, did output double?
Over the past decade, production of electronics and computers rose an average of almost 20% per year. But employment fell more than 2% per year.
Production of high-tech goods now account for about 10% of total mfg production. They are growing about 20% per year, according to the Fed, compared to 3% for other production. If this keeps up for 20 years, they will account for 230% of total production. Obviously something is wrong here.
The answer is that the numbers are rebased every five years; the production numbers were rebased last November. The same problem occurs with GDP, although to a lesser extent. That is why the growth rates keep getting revised down every time there is a major data revision. Apparently no one at BEA has been able to solve this problem.
There are various methods of adjusting for the declining prices of high-tech goods. Our calculations show that if the numbers are adjusted correctly, manufacturing production is rising about 2%, compared to 3 ½% for the rest of the economy. So the manufacturing sector is not really keeping up after all.
Some economists have pointed out that in 1820, three out of every four Americans worked on a farm. Today the number is less than 3%. However, the U.S. produces far more than it needs to feed its citizens, and even with substantial exports, surpluses are the rule rather than the exception. Furthermore, production could be increased sharply if necessary by lifting various restrictions on acreage.
However, no one in their right mind suggests that 3% of the workforce can produce more than enough manufactured goods to meet the demands of the domestic economy, let alone exports. Instead, the losses here are not at all comparable, because domestic production has been replaced by imports. This is perfectly obvious to all NPES members, but from time to time there will be an article about how the manufacturing sector is following the path of agriculture, and somehow we are all better off because of this switch.
The sharp decline has been quite recent. From 1995 through 2000, manufacturing employment was virtually unchanged in spite of China, NAFTA, and other forces that boosted imports. However, over the past five years, employment has declined in every single manufacturing industry as measured by the NAICS 3-digit level (essentially the old SIC 2-digit level). The changes are shown in Table 7.
Table 7. Employment Changes, and Ratio of Wages to Shipments, by 3-digit NAICS Industry for Manufacturing
Employment
Wages Shipment Ratio 1995 2000 2005 % chg % chg
Mfg 687.7 4429 15.5 17241 17263 14228 0.1 -17.6
Dur 450.2 2373 19.0 10372 10876 8948 4.9 -17.7
Wood 18.75 110.3 17.0 574 613 546 6.8 -10.9
Nonmet minerals 21.28 91.3 23.3 513 554 500 8.0 -9.7
Primary 23.7 165.7 14.3 642 622 467 -3.1 -24.9
Fabr 61.66 272.5 22.6 1623 1753 1521 8.0 -13.2
Mchy 58.02 294.3 19.7 1440 1457 1156 1.2 -20.7
Computer 97.05 469.7 20.7 1688 1820 1332 7.8 -26.8
Elec eqpt 20.56 106.5 19.3 593 591 438 -0.3 -25.9
Motveh 60.45 462 13.1 1242 1316 1089 6.0 -17.2
Oth trans 40.47 186.5 21.7 735 740 680 0.7 -8.1
Furn 18.54 75.3 24.6 607 680 568 12.0 -16.5
Misc 29.76 138.6 21.5 715 733 651 2.5 -11.2
Nondur 237.46 2056.8 11.5 6869 6388 5280 -7.0 -17.3
Food/tob 62.11 536.3 11.6 1763 1760 1678 -0.2 -4.7
Textiles 13.32 79.3 16.8 687 594 403 -13.5 -32.2
Apparel 9.9 56.6 17.5 814 497 257 -38.9 -48.3
Paper 24.89 172.5 14.4 640 605 490 -5.5 -19.0
Printing 26.9 94.9 28.3 817 807 654 -1.2 -19.0
Petr 8.32 337.6 2.5 140 123 117 -12.1 -4.9
Chem 60.33 506.1 11.9 988 980 879 -0.8 -10.3
Plastics 31.68 202.9 15.6 915 952 802 4.0 -15.8
Column 3 in Table 7 shows the ratio of wages to shipments for 2004. In general, industries with labor costs more than 10% of total shipments are vulnerable to further foreign competition; in most cases, if labor costs are less than 10% of shipments, the U.S. can remain competitive even at high wage rates because of offsetting costs, such as transportation. Based on this strict criterion, only petroleum makes the cut. A slightly less draconian measure of 15% suggests that food, chemicals, motor vehicles, and primary metals will not lose too many more jobs to foreign operations in the future.
Detroit may not agree at all with that last sentence, but in fact the industry is rapidly rationalizing itself. Furthermore, there are many new auto and truck plants being built in this country ? one of the few industries where expansion is taking place. It is just that the plaques on the door say Toyota and Nissan and Mercedes and BMW instead of Ford and Chevrolet.
Machinery remains at risk, and many of those jobs will continue to move to foreign locations. Printing actually has the highest labor/output ratio; in this case, I am not suggesting that the daily newspaper will be printed in China or India, but that it won?t be printed at all. You can read it over the Internet. News will still be gathered much as it is now, but it will be distributed differently. Over the past year, total newspaper sales fell 2.6%, a trend that is likely to continue. Do the math.
The wage/shipment ratio is not an unequivocal guide to which industries will lose the most jobs; over the past five years, job losses occurred in high cost and low cost industries alike. However, it is a guideline that indicates the industries in which labor will either have to make major concessions, or most of the jobs will move elsewhere. Over the next five years, manufacturing employment will decline at least 10% even if we do not have any recessions during that period. With a recession, the figure will rise to almost 20%, depending on the length and severity of the downturn.
Where will these people find jobs? To answer that, we can check to see where they found jobs over the past five years, when the U.S. economy added more than 5 million non-manufacturing jobs. The cliché answer is Wal-Mart and McDonald?s, but in fact that is not correct. The employment data show that retail trade employment is virtually unchanged since 2000, and while leisure and hospitality employment is up about 0.5 million, most of that is in hotels, casinos, and full-scale restaurants, as opposed to fast-food outlets. The lion?s share of the gain in employment has occurred in health care, up about 3 million, and state and local government, up about 1 million ? most of which is also health care. There have also been substantial gains in construction and financial services ? the building and selling of houses ? although those gains are winding down.
Total government employment surpassed manufacturing employment back in 1990. Health care employment is likely to surpass manufacturing employment by 2008. By 2010, total manufacturing employment will probably represent only 8% of total employment (12 million compared to 150 million) and production workers will represent only 5.7% of total employment. These trends will not be reversed in the foreseeable future.
It is a different economic world because of the global economy, one that requires new linkages. Manufacturing jobs disappear overseas, and as a result the U.S. has an enormous trade deficit. At the same time, the Republican government introduces massive increases in health care paid by the public sector, virtually guaranteeing deficits forever. The extra dollars from our trade deficit are invested in Treasury securities, hence allowing the government deficit to increase without boosting interest rates or inflation. Meanwhile, the demand for health care employees continues to rise rapidly, so people who are displaced from manufacturing end up working, directly or indirectly, in the health care industry. As the aging of American intensifies, these trends can only accelerate.