Structural Change in Manufacturing Mark Schweitzer Federal Reserve Bank of Cleveland April 27, 2004

Outline The current situation and the business cycle Look inside manufacturing productivity growth Where are the workers going?

The Current Employment Situation

MANUFACTURING: SHARE OF EMPLOYMENT Percent of total employment Note: Shading indicates periods of economic contraction.

MANUFACTURING: LEVEL OF EMPLOYMENT Millions of workers Note: Shading indicates periods of economic contraction.

BUSINESS CYCLE PATTERN: MANUFACTURING EMPLOYMENT Months from previous peak Percent change from previous peak Average Average range Total Change from March 2001: -2,621,000

MANUFACTURING GROWTH FROM PREVIOUS PEAK (March’01 to Feb’04) Growth rate from the previous peak Share of employment (percentage) Overall manufacturing growth: -15.5%

MANUFACTURING GROWTH (Aug’03 to Feb’04) Growth rate Share of employment (percentage) Overall manufacturing growth Aug’03 to Feb’04: -0.7%

Fourth District Beigebook Manufacturing has experienced a profound scaling back over the last 5 years –Employment reduced sharply –Capital spending held very low –Turned around only over the past few months Manufacturers outlook –Cautious about the future –Employment gains likely to be limited –Productivity growth continuing

Looking Inside the Productivity Machine

MANUFACTURING PRODUCTIVITY Annual percent change Note: Shading indicates periods of economic contraction. Manufacturing Nonfarm business sector

BLS INDUSTRY PRODUCTIVITY PROGRAM The Bureau of Labor Statistics produces annual measures of productivity by detailed industry –Manufacturing Industries Data provide nearly complete coverage 4-digit NAICS industries (e.g., basic chemicals or industrial machinery) –Services Industries Data provide coverage of about half of the service sector 4-digit NAICS industries (e.g., full service restaurants or automotive repair and maintenance) The industries for which data are available are the ones with the most reliable productivity measures

PRODUCTIVITY GROWTH Growth rate (annual average) Percent of employment Manufacturing Computer and peripheral eqpt. Iron and steel mills Ship and boat building Mean is 3.7% Semiconductor eqpt.

PRODUCTIVITY GROWTH Growth rate (annual average) Percent of employment Manufacturing Services Commercial equipment Specialty food stores Grocery stores Mean is 2.4% Mean is 3.7%

Motor vehicle parts (4.1%) Plastic products (2.2%) Motor vehicle (0.7%) Metalworking machinery (3.1%) Machine shops (4.7%) Rubber products (2.3%) Foundries (1.8%) Iron and steel mills (5.3%) Converted paper products (1.4%) Aerospace products and parts (1.4%) Grocery stores (-1.0%) Department stores (2.4%) Commercial banking (3.6%) Automobile dealers (1.1%) Building materials and supplies (2.7%) Machinery and supplies (3.2%) Newspaper/book/directory publishing (-0.8%) Commercial equipment (17.4%) Sporting goods and musical instrument stores (3.1%) Advertising agencies (2.4%) ManufacturingServices PRODUCTIVITY GROWTH

PRODUCTIVITY GROWTH Growth rate (annual average) Percent of employment Manufacturing Computer and peripheral eqpt. Semiconductor eqpt. Apparel knitting mills Mean is 3.7%

PRODUCTIVITY GROWTH Growth rate (annual average) Percent of employment Manufacturing Services Wholesale chemicals Electronics and appliance stores Advertising agencies Mean is 2.7% Mean is 3.7%

Manufacturing Services Motor vehicle parts (4.3%) Plastic products (3.1%) Motor vehicle (4.0%) Metalworking machinery (0.8%) Machine shops (1.5%) Rubber products (2.0%) Foundries (2.6%) Iron and steel mills (2.6%) Converted paper products (0.6%) Aerospace products and parts (3.9%) Grocery stores (1.3%) Department stores (1.2%) Commercial banking (0.7%) Automobile dealers (1.8%) Building materials and supplies (3.4%) Machinery and supplies (2.0%) Newspaper/book/directory publishing (3.1%) Commercial equipment (13.7%) Sporting goods and musical instrument stores (7.0%) Advertising agencies (4.4%) PRODUCTIVITY GROWTH

CORRELATION BETWEEN PRODUCTIVITY AND OUTPUT

CORRELATION BETWEEN PRODUCTIVITY AND EMPLOYMENT

CORRELATION BETWEEN OUTPUT AND PRODUCTIVITY (Manufacturing ) Output growth (%) Productivity growth (%)

Where Have the Workers Gone?

BUSINESS CYCLE PATTERN: NONFARM EMPLOYMENT Months from previous peak Average range Average Percent change from previous peak

BUSINESS CYCLE PATTERN: UNEMPLOYMENT RATE Months from previous peak Change from previous peak Average range Average

UNEMPLOYMENT RATE Percent Manufacturing Total

Fraction of Manufacturing Workers Employed Next Year Percent

Annual Flows of Former Manufacturing Workers Percent

Conclusions The decline in employment in the latest recession has been unusually large and has abated little Manufacturing productivity has risen substantially However the correlation with employment growth is weak Manufacturing workers continued to flow out of employment through 2003 Job losers have largely joined the unemployed

Structural Change in Manufacturing Mark Schweitzer Federal Reserve Bank of Cleveland April 27, 2004