Is the U.S. Losing Its Manufacturing Base? Georgia State University - - PowerPoint PPT Presentation

Is the U.S. Losing Its Manufacturing Base?

William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Georgia State University Economic Forecasting Center Atlanta, Georgia May 21, 2008

The Setup

Manufacturing output peaked in June 2000 and fell 6.8% over the following 18 months

60 70 80 90 100 110 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Industrial prodution - manufacturing

Index 2002 = 100

Manufacturing capacity utilization collapsed in the middle of 2000

70 72 74 76 78 80 82 84 86 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Capacity utilization - manufacturing

percent

Job declines in the manufacturing sector began to escalate, with nearly 1.5 million jobs lost

• 10
• 8
• 6
• 4
• 2

2 4 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Manufacturing employment

percent Quarterly change (saar) Percent change from year ago

Is the U.S. Losing Its Manufacturing Base?

Manufacturing employment as a share of national employment has been declining for over 50 years

5 10 15 20 25 30 35 40 1940 '50 '60 '70 '80 '90 '00

Manufacturing share of total nonfarm payroll employment

percent

4 8 12 16 20 1940 '50 '60 '70 '80 '90 '00

Manufacturing employment

millions

The number of jobs in manufacturing has been relatively stable over this period, averaging 0.1% growth per year since 1947

Not to make a mountain out of a molehill, but manufacturing employment was increasing up until 1979 and has been moving lower over the past 28 years

10 15 20 1940 '50 '60 '70 '80 '90 '00

Manufacturing employment

millions

+ 1 . 1 %

• 1

. 1 %

20 40 60 80 100 120 1940 '50 '60 '70 '80 '90 '00

Nonfarm employment

millions Manufacturing Service

However, service sector employment has grown more than fivefold over this period, averaging growth of 2.5% per year since 1947

While manufacturing employment growth was flat over the past 50 years, manufacturing output increased by 3.7% per year

20 40 60 80 100 120 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Manufacturing output

Index (2002=100)

20 40 60 80 100 120 1940 '50 '60 '70 '80 '90 '00 20 40 60 80 100 120

Manufacturing

Index (2002=100) Millions of w orkers Output -left scale Employment - right scale

This translated into an almost 700 percent increase in manufacturing output over this time period

The Caterpillar 797B costs over $5,000,000

The Caterpillar 797B costs over $5,000,000

The increase in output can be attributed to strong productivity growth experienced by the manufacturing sector

50 100 150 200 250 300 350 400 450 500 550 1950 '60 '70 '80 '90 '00

Productivity

Index (1950=100) Manufacturing

What took 1,000 workers to produce in 1950 takes less than 200 workers today

1960 1950 1970 1980 1990 2000 2007 100 200 300 400 500 600 700 800 900 1000

Manufacturing Sector: Number of workers needed to do the work of 1,000 workers in 1950

Number of w orkers

1,000 813 627 485 362 244 189

Manufacturing productivity growing faster

• ver the past 37 years

2.1 3.0 3.7 2.2 2.0 2.5 2.6 4.0 2.6 1.6 1.7 2.7 1 2 3 4 5 1950s 1960s 1970s 1980s 1990s 2000-2007 Manufacturing Nonfarm Business

Productivity

Average annual percent change

The divergence in productivity appears to have occurred around the mid-70s

50 100 150 200 250 300 1950 '60 '70 '80 '90 '00

Productivity

Index (1975=100) Nonfarm business Manufacturing

This divergence is especially apparent in durable manufacturing

50 100 150 200 250 300 350 400 1950 '60 '70 '80 '90 '00

Productivity

Index (1975=100) Nondurable manufacturing Durable manufacturing

Strong productivity growth has allowed the manufacturing sector to grow faster than the overall economy

100 200 300 400 500 600 700 800 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Output

Index (1947=100) Real GDP Industrial production: manufacturing

However, lower relative prices in the manufacturing sector has lead to manufacturing comprising a smaller share of GDP over time

10 15 20 25 30 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

GDP share of manufacturing

Percent

Winners and Losers Among Manufacturers

These industries have experienced significant losses in production over the past twenty years

40 50 60 70 80 90 100 110 120

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 textile mills apparel leather and allied products

These industries’ production has been flat

• ver the past twenty years

90 100 110 120 130

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 textile product mills paper beverage and tobacco printing

These industries’ production growth has been moderate

• ver the past twenty years

80 90 100 110 120 130 140

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 electrical equipment, appliances and components furniture petroleum and coal primary metals w ood products nonmetallic minerals

These industries’ production growth has been solid

• ver the past twenty years

90 100 110 120 130 140 150 160

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 food machinery transportation equipment fabricated metal products

These industries’ production growth has been among the strongest over the past twenty years

100 110 120 130 140 150 160 170 180 190 200 210

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 miscellaneous plastic and rubber products chemicals

Computer and electronic production growth has been in a league of its own

200 400 600 800 1,000 1,200 1,400 1,600 1,800

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 computer and electronic products 200 400 600 800 1,000 1,200 1,400 1,600 1,800

1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Industrial production

Index 1987 = 100 computer and electronic products

How profitable is manufacturing?

While more cyclical, profits in manufacturing have

• ut-performed returns in nonfinancial corporate businesses

5 10 15 20 25 30 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

Profits - as a percent of value added

percent

manufacturing nonfinancial corporate business

The doldrums that manufacturing experienced in 2000-2003 were closely linked with the economic recession

Manufacturing workers have suffered steep employment declines over the current cycle

85 90 95 100 105 110 115 120 125 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Manufacturing production workers

Trough = 100 Upper and low er bounds around GDP troughs Current cycle

Quarters away from trough of real GDP

Late expansion and recession Recovery or expansion

But the overall economy’s employment growth has also struggled

95 100 105 110 115 120 125 130 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Total nonfarm employment

Trough = 100 Upper and low er bounds around GDP troughs Current cycle

Quarters away from trough of real GDP Late expansion and recession Recovery and expansion

‐10 ‐8 ‐6 ‐4 ‐2 2 4 6 8 10

1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Manufacturing employment share

percent change from a year earlier

When changes in nonfarm employment are considered, the most recent manufacturing employment downturn is not unprecedented

The economy has been hit hard by a number of negative economic shocks over the past years

• The equity market collapse that began in early 2000
• Soaring energy prices
• The September 11, 2001 attack on the United States
• The corporate governance scandals that started in late 2001
• The geopolitical uncertainties regarding Iraq that began

in the summer of 2002

• A war with Afghanistan in late 2001
• The hurricanes that hit the Gulf Coast in 2005
• The housing market correction that began in 2005

These shocks hampered the current economic expansion

90 100 110 120 130 140 150 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Real gross domestic product

Trough = 100 Upper and low er bounds around GDP troughs Current cycle

Quarters away from trough of real GDP Late expansion and recession Recovery or expansion

The loss of manufacturing employment is consistent with the relatively sluggish performance of manufacturing production

90 100 110 120 130 140 150 160 170 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Industrial production

Trough = 100 Upper and low er bounds around GDP trough Current cycle

Quarters away from trough of real GDP Late expansion and recession Recovery or expansion

Productivity in the overall economy has grown at a rate within the range of previous expansions

90 100 110 120 130 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Productivity - nonfarm business sector

Trough = 100 Upper and low er bounds around GDP troughs Current cycle

Quarters away from trough of real GDP Late expansion and recession Recovery or expansion

However, productivity within the manufacturing sector has grown at a faster rate than during any previous expansion

90 95 100 105 110 115 120 125 130 135 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Productivity - manufacturing sector

Trough = 100 Upper and low er bounds around GDP troughs Current cycle

Quarters away from trough of real GDP Late expansion and recession Recovery or expansion

Manufacturing employment losses have occurred across numerous countries – among 20 big economies, 22 million jobs were lost

B r a z i l J a p a n C h i n a U n i t e d K i n g d

• m

R u s s i a S

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t h K

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e a U n i t e d S t a t e s S w e d e n G e r m a n y C a n a d a S p a i n P h i l i p p i n e s T a i w a n M e x i c

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a l y a s i a N e t h e r l a n d s A u s t r a i l i a I n d i a I t a l y F r a n c e

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 30

Percent change in manufacturing employment from 1995 to 2002

percent

Is the U.S. positioned to continue its strong productivity gains?

U.S. maintaining its commitment to research and development

1.0 1.5 2.0 2.5 3.0 3.5 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Research and development expenditures share of GDP

percent

Lessons from the farm sector

We are producing more in our farm sector than at any time in our history

10 20 30 40 50 60 70 80 90 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Real gross domestic farm business product

Billions of 2000 chained dollars

And we are accomplished this remarkable feat with just 2.0% of our employment devoted to farming

10 20 30 40 50 60 70 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Share of total employment

Percent Agriculture Manufacturing Services

The Current Expansion

60 70 80 90 100 110 120 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Industrial prodution - manufacturing

Index 2002 = 100 60 70 80 90 100 110 120 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Industrial prodution - manufacturing

Index 2002 = 100

Manufacturing output in the United States is at an all-time record high, nearly 18% higher than at the end of 2001

Manufacturing capacity utilization recovered back-up to its historical average

70 72 74 76 78 80 82 84 86 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Capacity utilization - manufacturing

percent 70 72 74 76 78 80 82 84 86 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Capacity utilization - manufacturing

percent

Job losses in manufacturing have moderated

• 10
• 8
• 6
• 4
• 2

2 4 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Manufacturing employment

percent Quarterly change (saar) Percent change from year ago

• 10
• 8
• 6
• 4
• 2

2 4 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Manufacturing employment

percent Quarterly change (saar) Percent change from year ago

Summary

• The trends that have dominated manufacturing for the past

60 years are suggestive of the future for U.S. manufacturing: ever increasing output with employment representing a smaller share of total employment

• Manufacturing employment has shown little change over the

past 60 years

• Manufacturing output in the U.S. has never been higher
• The success of manufacturing has been driven by productivity
• The most recent decline in manufacturing was cyclical,

not structural

• Profits in manufacturing have outperformed profits for the

rest of the nation

Chicago Fed Letter - June 2003 www.chicagofed.org

Questions