The State of US Manufacturing

Arguably employment has been falling since 1978, but it really accelerated after 2000. It has gone from 17 million to about 12 million. That’s 6 million jobs. Note the 2-step fall in jobs. The two recessions were catalysts for the fall. Three possible explanations – (1) demand, (2) productivity, and (3) trade. Also, it may be that outsourcing (not simply offshoring) , due to computerization, has changed the definitions.

Note that the red line appears to have hit a bottom (7. 5%) Note that the red line appears to have hit a bottom (7.5%). The graph seems to be saying that job growth has really been in services. Look at the red line between 1960 and 1980. It is falling stably, but the blue line is growing. How can you explain this when trade is booming, and productivity is growing (albeit slowly)?

The development of the US manufacturing sector over the last half-century displays two striking and somewhat contradictory features: 1) the growth of real output in the US manufacturing sector, measured by real value added, has equaled or exceeded that of total GDP, keeping the manufacturing share of the economy constant in price-adjusted terms; and 2) there is a long-standing decline in the share of total employment attributable to manufacturing. The persistence of these trends seems inconsistent with stories of a recent or sudden crisis in the US manufacturing sector. After all, as recently as 2010, the United States had the world's largest manufacturing sector measured by its valued-added, and while it has now been surpassed by China, the United States remains a very large manufacturer. On the other hand, there are some potential causes for concern. First, though manufacturing's output share of GDP has remained stable over 50 years, and manufacturing retains a reputation as a sector of rapid productivity improvements, this is largely due to the spectacular performance of one subsector of manufacturing: computers and electronics. Second, recently there has been a large drop in the absolute level of manufacturing employment that many find alarming. Third, the US manufacturing sector runs an enormous trade deficit, equaling $460 billion in 2012, which is also very concentrated in trade with Asia. Finally, we consider the future evolution of the manufacturing sector and its importance for the US economy. Many of the largest US corporations continue to shift their production facilities overseas. It is important to understand why the United States is not perceived to be an attractive base for their production. – Abstract from Baily and Bosworth 2014 US Manufacturing: Understanding Its Past and Its Potential Future

Generally speaking, manufacturing real output is growing along with GDP in general. Thus, one cannot single out ,manufacturing and say there is a terrible recession in the industry. It is growing – just slower, as GDP is also growing slower. What percentage of US real GDP is real manufacturing output?

The graph above shows manufacturing ups and downs The graph above shows manufacturing ups and downs. Note how the downs generally occur whenever there is a recession (not always though – which years have false looking recessions). The latest figures are worrisome. The rapid decline indicates that we may be heading for a recession. The data can be choppy, so we cannot make a clear prediction from this latest downturn. Remember, the PMI above is a diffusion index, meaning that below 50 is a contraction.

Yet another, perhaps more dependable indicator of the future, is the movement in manufacturing new orders. It looks like we have been flat for several years, say since 2013. However, the most recent data has a downward trend, not very promising. Note that in the past we did not have extended periods of flat performance – either it was up or down. This may indicate that some structural shifts are taking place in manufacturing.

You might think that the previous downward movement is due to trade You might think that the previous downward movement is due to trade. There is some evidence for the strength of the dollar pulling down new orders. The data is too choppy to determine whether this is a long lasting trend or will subside after a few quarters. The index above shows how that the US can be hurt by a weakening international economy. But, it is important to realize that there are four large sources of demand in the US economy, and not just one. Domestic consumption is the largest and most important.

The graph above shows that inventories are rising, although their behavior has become much more volatile. Normally, one would think that rising inventories are bad since they show that people are not buying enough. However, inventory control by business is exactly the opposite. When the economy is doing better firms build their inventories up to be able to satisfy a rising demand. They do just the opposite during downturns. Falling inventories will be a bad sign in business, especially if it is accompanied by lower production.

The series we have above is multifactor productivity. What is MFP The series we have above is multifactor productivity. What is MFP? Check out the next page. Multifactor productivity is the growth of output due to a composite factor of labor and capital.

Lets suppose that we produce output Y with Labor L and Capital K Lets suppose that we produce output Y with Labor L and Capital K. Our production function is like this Now divide Y by the composite factor M to get (Y/M). Next, look at the growth rate of this ratio which becomes To compute this we need the parameters α and β, which are usually taken to be the estimated shares for labor and capital in the national income.

Since 2010, the proportion of manufacturing in GDP has been stable at 12%. This means that services have taken a slightly greater place in the structure of the economy. There was a drop from 13% to 12% after the recession. The change was sudden and this accords with our previous graph that showed that GDP and manufacturing out are growing roughly constant on average over time.

There are several points to be made about the graph above There are several points to be made about the graph above. First, the trend has been down from 1950s to 1990s, but then the trend reverses and goes up beginning in 2000. Second, the latest figures indicate that profits in GDP have stabilized at about 7%. Third, profits take a huge and immediate hit during recessions but rebound very quickly. The rebound after the most recent recession is very quick.

This graph mirrors the previous graph (1998-2014) This graph mirrors the previous graph (1998-2014). Notice the rebound from the recessions.

Services as % of GDP 1997 - 2013