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

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

3. The Current Employment Situation

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

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

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

7. 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%

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

9. 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

10. Looking Inside the Productivity Machine

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

12. 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

13. PRODUCTIVITY GROWTH 1990-1995 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.

14. PRODUCTIVITY GROWTH 1990-1995 Growth rate (annual average) Percent of employment Manufacturing Services Commercial equipment Specialty food stores Grocery stores Mean is 2.4% Mean is 3.7%

15. 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 1990-1995

16. PRODUCTIVITY GROWTH 1996-2001 Growth rate (annual average) Percent of employment Manufacturing Computer and peripheral eqpt. Semiconductor eqpt. Apparel knitting mills Mean is 3.7%

17. PRODUCTIVITY GROWTH 1996-2001 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%

18. 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 1996-2001

19. CORRELATION BETWEEN PRODUCTIVITY AND OUTPUT

20. CORRELATION BETWEEN PRODUCTIVITY AND EMPLOYMENT

21. CORRELATION BETWEEN OUTPUT AND PRODUCTIVITY (Manufacturing 1996-2001) Output growth (%) Productivity growth (%)

22. Where Have the Workers Gone?

23. BUSINESS CYCLE PATTERN: NONFARM EMPLOYMENT Months from previous peak 2001- Average range Average Percent change from previous peak

24. BUSINESS CYCLE PATTERN: UNEMPLOYMENT RATE Months from previous peak Change from previous peak 2001 - Average range Average

25. UNEMPLOYMENT RATE Percent Manufacturing Total

26. Fraction of Manufacturing Workers Employed Next Year Percent

27. Annual Flows of Former Manufacturing Workers Percent

28. 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

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