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

Is the U.S. Losing Its Manufacturing Base? Georgia State University William Strauss Economic Forecasting Center Senior Economist Atlanta, Georgia and Economic Advisor May 21, 2008 Federal Reserve Bank of Chicago

The Setup

Manufacturing output peaked in June 2000 and fell 6.8% over the following 18 months Industrial prodution - manufacturing Index 2002 = 100 110 100 90 80 70 60 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Manufacturing capacity utilization collapsed in the middle of 2000 Capacity utilization - manufacturing percent 86 84 82 80 78 76 74 72 70 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Job declines in the manufacturing sector began to escalate, with nearly 1.5 million jobs lost Manufacturing employment percent 4 Percent change from year ago 2 0 -2 -4 -6 -8 Quarterly change (saar) -10 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Is the U.S. Losing Its Manufacturing Base?

Manufacturing employment as a share of national employment has been declining for over 50 years Manufacturing share of total nonfarm payroll employment percent 40 35 30 25 20 15 10 5 0 1940 '50 '60 '70 '80 '90 '00

The number of jobs in manufacturing has been relatively stable over this period, averaging 0.1% growth per year since 1947 Manufacturing employment millions 20 16 12 8 4 0 1940 '50 '60 '70 '80 '90 '00

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 Manufacturing employment millions 20 + 1 . 1 % - 1 . 1 % 15 10 1940 '50 '60 '70 '80 '90 '00

However, service sector employment has grown more than fivefold over this period, averaging growth of 2.5% per year since 1947 Nonfarm employment millions 120 Service 100 80 60 40 20 Manufacturing 0 1940 '50 '60 '70 '80 '90 '00

While manufacturing employment growth was flat over the past 50 years, manufacturing output increased by 3.7% per year Manufacturing output Index (2002=100) 120 100 80 60 40 20 0 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

This translated into an almost 700 percent increase in manufacturing output over this time period Manufacturing Index (2002=100) Millions of w orkers 120 120 100 100 Output -left scale 80 80 60 60 40 40 20 20 Employment - right scale 0 0 1940 '50 '60 '70 '80 '90 '00

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 Productivity Index (1950=100) 550 500 Manufacturing 450 400 350 300 250 200 150 100 50 0 1950 '60 '70 '80 '90 '00

What took 1,000 workers to produce in 1950 takes less than 200 workers today Manufacturing Sector: Number of workers needed to do the work of 1,000 workers in 1950 Number of w orkers 1000 1,000 900 800 813 700 600 627 500 485 400 362 300 244 200 189 100 0 1950 1980 1960 1990 1970 2000 2007

Manufacturing productivity growing faster over the past 37 years Productivity Average annual percent change 5 Manufacturing Nonfarm Business 4.0 3.7 4 3.0 2.6 2.7 2.6 3 2.5 2.2 2.1 2.0 1.7 1.6 2 1 0 1950s 1960s 1970s 1980s 1990s 2000-2007

The divergence in productivity appears to have occurred around the mid-70s Productivity Index (1975=100) 300 250 Manufacturing 200 150 Nonfarm business 100 50 0 1950 '60 '70 '80 '90 '00

This divergence is especially apparent in durable manufacturing Productivity Index (1975=100) 400 350 Durable manufacturing 300 250 200 150 Nondurable manufacturing 100 50 0 1950 '60 '70 '80 '90 '00

Strong productivity growth has allowed the manufacturing sector to grow faster than the overall economy Output Index (1947=100) 800 Industrial production: manufacturing 700 600 Real GDP 500 400 300 200 100 0 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

However, lower relative prices in the manufacturing sector has lead to manufacturing comprising a smaller share of GDP over time GDP share of manufacturing Percent 30 25 20 15 10 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Winners and Losers Among Manufacturers

These industries have experienced significant losses in production over the past twenty years Industrial production Index 1987 = 100 120 110 textile mills 100 90 80 70 apparel 60 leather and allied 50 products 40 1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

These industries’ production has been flat over the past twenty years Industrial production Index 1987 = 100 130 120 paper textile product mills printing 110 100 beverage and tobacco 90 1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

These industries’ production growth has been moderate over the past twenty years Industrial production Index 1987 = 100 140 electrical equipment, appliances and components furniture 130 w ood products 120 110 primary metals petroleum and coal 100 nonmetallic minerals 90 80 1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

These industries’ production growth has been solid over the past twenty years Industrial production Index 1987 = 100 160 machinery 150 140 fabricated metal products 130 120 food 110 transportation equipment 100 90 1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

These industries’ production growth has been among the strongest over the past twenty years Industrial production Index 1987 = 100 210 200 miscellaneous 190 180 170 plastic and rubber products 160 150 140 130 120 chemicals 110 100 1987 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Computer and electronic production growth has been in a league of its own Industrial production Industrial production Index 1987 = 100 Index 1987 = 100 1,800 1,800 1,600 1,600 1,400 1,400 computer and electronic products computer and electronic products 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 0 1987 1987 '89 '89 '91 '91 '93 '93 '95 '95 '97 '97 '99 '99 '01 '01 '03 '03 '05 '05 '07 '07

How profitable is manufacturing?

While more cyclical, profits in manufacturing have out-performed returns in nonfinancial corporate businesses Profits - as a percent of value added percent 30 25 20 manufacturing 15 10 nonfinancial corporate business 5 0 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

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 Manufacturing production workers Trough = 100 125 Upper and low er bounds around GDP troughs 120 115 110 105 100 95 Current cycle 90 85 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion

But the overall economy’s employment growth has also struggled Total nonfarm employment Trough = 100 130 Upper and low er bounds around GDP troughs 125 120 115 110 105 Current cycle 100 95 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Quarters away from trough of real GDP Late expansion and recession Recovery and expansion

When changes in nonfarm employment are considered, the most recent manufacturing employment downturn is not unprecedented Manufacturing employment share percent change from a year earlier 10 8 6 4 2 0 ‐ 2 ‐ 4 ‐ 6 ‐ 8 ‐ 10 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

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 •A war with Afghanistan in late 2001 •The geopolitical uncertainties regarding Iraq that began in the summer of 2002 •The hurricanes that hit the Gulf Coast in 2005 •The housing market correction that began in 2005

These shocks hampered the current economic expansion Real gross domestic product Trough = 100 150 Upper and low er bounds around GDP troughs 140 130 120 Current cycle 110 100 90 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 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 Industrial production Trough = 100 170 Upper and low er bounds around GDP trough 160 150 140 130 120 110 Current cycle 100 90 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion