Today is a big day for the debt ceiling. So I am going to avoid that topic for a little while. My last posting brought out a couple of issues so I would like to focus on those. First, what is up with manufacturing? I will show below that while manufacturing output has become a smaller portion of the US economy in the last 60 years – the sector has grown tremendously and there is an apparent change in trend toward increasing relative importance since about 1998. This posting is about the data and leaves little space for what it all means. I hope you help me get to that in the comments. Second, who reads this blog? Some of you have asked so I will say a little about that.
One on my reasons for starting this blog in March of 2010 was that I wanted to have a way to stay connected to friends, students, colleagues, relatives, neighbors, high school girl friends, etc. Being newly retired in 2010 I also wanted to have something to do that kept me connected to the world of economics . So there you have it – a blog about econ that harasses a wide range of people. As far as I am concerned it has worked. Whenever I say I am working on my blog, Betty does not ask me to take out the trash or weed the garden. The weekly blog postings have also led to lots of nice communications with old friends and new – and most of which have little to do with economics. For example, one student from a macro class I taught in 1986 wrote and asked me to change his grade. The rough edge is that since the audience is so varied in background and interest it makes it difficult to really connect with any or all of you. So if you were thinking that you were alone in this regard, then you can quit thinking that. But I am undaunted. I will continue to try to write about econ and hope that some of you get the main gist of what I am saying. If not, you can always send me notes about other topics and just stay in touch.
Now let’s get to manufacturing. I think there is a lot of misunderstanding about manufacturing in the USA and I want to get started on that topic. In my last blog I wrote about US business competitiveness and I singled out the recent news regarding growing strength in manufacturing output. Clearly manufacturing is important to the USA so I want to dig deeper into what’s true and what isn’t so true about manufacturing. I am going to use some data to back-up what I say. If you are skeptical about data then you won’t be much convinced.
So let’s start with a word about data. One constant about data is that it never really adequately measures the item of your interest. There is always something lacking. How many cars crossed the bridge today? That sounds easy but we might have a disagreement about what constitutes a car. For example, is a Kia Soul really a car or is it a vehicle from outer space? Anyway, I think you know what I mean. The key question about data is whether or not it is good enough to indicate something about the subject. The scale says I gained 18 pounds in Italy (Did I tell you that we went to Italy for 19 days?). Okay, so another scale says I gained 28 pounds. Who cares if it is 18 or 28 pounds, I ate enough to fill three Rhinos in mating season and I had to buy new pants with elastic fabric. So long as the data is good enough for the purpose at hand and is not purposely biased in one direction or another – then we collect and use data and don’t worry too much about it not being perfect.
In this post about manufacturing I am not going to focus on employment. There are few major misunderstandings about manufacturing employment. It is down. Period. Down. I would rather concentrate on output of manufacturing companies. There is some belief that we are producing less in the way of manufacturing in this country and we have become a nation of burger flippers. Having eaten at 5 Guys lately I see nothing much wrong with being a national of burger sellers, but let’s not get back to my weight right away. My point is that while there is a smidgen of truth about manufacturing output, it is a bit misleading. So let’s get a t it.
The source of the data is the Bureau of Economic Analysis – GDP by Industry found at http://bea.gov/industry/gdpbyind_data.htm There are several tables available at the site – the data I am quoting comes from what is called value added in chained 2005 dollars. In short, this data tells you what each industry produced and it purges price changes. Changes discussed below are totally the result of changes in output. Because of the distorting effects of the last recession, I am going to use data from 2007 and backward. In 2007 GDP was $13.23 trillion and manufacturing output was $1.69 trillion. Thus the output of manufacturing companies amounted to about 12.8% of US GDP (output produced within the borders of the USA). Sixty years before in 1947 manufacturing output was $62.4 billion and was about 25.6% of that year’s GDP. What can we learn from that?
· First, manufacturing output, sans prices, grew from $62.4 billion to $1.69 trillion in 60 years. It grew by a factor of 27 times.· Second, even back in 1947 when the US was producing much of the world’s manufactured goods, it represented only a little more than a quarter of the nation’s output. Back in 1947 wholesale and retail trade accounted for about 20% of US GDP and various services sectors (finance, insurance, real estate) accounted for another 16%. So even if we go back to when I was a cute little tyke in Roy Rogers PJs, manufacturing in the USA was never the only dog in the race – the US was already a major producer of sales and services.
Now let’s focus on more recent changes – from 1998 to 2007. In the table below I present changes in output of manufacturers, first in dollars and then in percents: The clear result is that the last 10 years have seen manufacturing keep up and compete. In those years manufacturing output rose in real terms by $445 billion – a 36% increase. That compares to real GDP rising by 29%. Thus during that period of economic growth between 1998 and 2007 the share of manufacturing output rose from 12% to 13% of GDP. While manufacturing did not rise as much as FIRE (Finance, Real Estate, and Insurance), it clearly grew more than many of the other key services sectors. Notice that while Retail Services increased, in dollar terms manufacturing increased three times more and at a much faster pace.
NOTE: It may appear that I was enjoying a little JD this morning while editing these tables but I assure that nothing could be farther from the truth (burp) and that the fault for the wavy columns is totally this website. These columns look perfectly straight to me in edit mode.
NOTE: It may appear that I was enjoying a little JD this morning while editing these tables but I assure that nothing could be farther from the truth (burp) and that the fault for the wavy columns is totally this website. These columns look perfectly straight to me in edit mode.
Output Change: 1998 to 2007
GDP $2.95 trillion 29%
Manufacturing $445 billion 36%
FIRE $772 billion 39%
Professional & Business Services $391 billion 34%
Education, health and Social assist. $218 billion 28%
Retail $162 billion 23%
Not all sectors of manufacturing rose by 36% between 1998 and 2007. I list below the biggest winners and losers in manufacturing sectors in terms of dollar change between 1998 and 2007:
Computer and electronic Products $208 billion
Chemical Products (includes pharma) 55
Petroleum and Coal Products 33
Food, Beverage and Tobacco Products 32
Motor Vehicles and Parts 31
Misc Manufacturing 25
Fabricated Metal Products 14
Paper and Printing -6
Nonmetallic minerals -6
Textiles -6
Apparel and Leather -7
Primary Metals -17
Other manufacturing sectors with positive growth of at least $3 billion but not in the table include: electrical equipment and appliances, machinery, wood, and plastics.
In short, despite what you might have thought manufacturing output is larger and is growing. Before the last recession hit, the manufacturing sector was showing a reversal in long-term trend and from 1998 to 2007 had shown both absolute and relative growth. It has grown in terms of output produced and in terms of its relative position with respect to GDP. Manufacturing has grown because of success in some key sectors but clearly the successes have been widespread. Lost output was clustered in six manufacturing sectors and amounted to a total of $42 billion, with much of that coming from primary metals (mostly declines in US production of steel).
One final dimension of manufacturing competitiveness is exports from the US to the rest of the world. Between 1998 and 2007 US real exports of goods rose from $670 billion to $1.16 trillion -- an increase of 73%. Only a very minor portion of those goods are non-manufacturing foods and feeds. Thus US manufacturing is thriving when you measure our ability to compete in world markets. If the USA has a trade deficit it is not because of deficient exports—it is because of our increased desire to consumer caused imports to rise even more than exports.
I really like your positive outlook and perspective on US manufacturing. You are right, that we can become disillusioned by deliberately isolated facts. I read an article in BW that mid-sized US businesses were withdrawing from China due to unrealized savings. Also, are the numbers in 2007 dollars?
ReplyDeleteThanks Robert. The numbers are in 2005 dollars. I look forward to seeing you in August.
ReplyDeleteDear LSD. Another magnificent blog! As the liberal TV talk host Chris Mathews said Feb. 13, ‘08, “I felt this thrill going up my leg.” Your numbers present a much better picture of U.S. manufacturing than I believed, which was that it was in decline. Actually, both your presentation and my belief are true, I believe. While U.S. manufacturing output has improved in both dollars and % of GDP since 1998, manufacturing companies and manufacturing employment have been declining for at least twenty years. My career at Georgia Tech focused on manufacturing so I have been “keen” on its macro performance. U.S. Census Bureau numbers report that between 1997 and 2007 manufacturing companies decreased from 342,000 to 331,000 and employment declined from 16.9 million to 13.3 million; average employment per company declined from 46 to 40. I attribute U.S. manufacturing’s improved output\GDP performance relative to its overall shrinkage to better processes and technologies resulting in higher productivity; it’s producing more with less.
ReplyDeleteAs you point out, some sectors show negative growth and there are reasons for that – many are labor-intensive (apparel and textile) and\or are too susceptible to U.S. schizo trade policy. As Robert pointed out, many U.S. companies are repatriating due to a rebalancing of global competitiveness and the value of the dollar. As China’s workers demand more money and its growing middle class demands non-Chinese goods and services it is beginning to lose its competitive edge. Let’s hope the trend you point out – combined with globalization leveling the completive playing field – results in a reversal of the numbers I presented.
Thought you'd find this interesting: http://heritage.org/Research/Reports/2010/10/Technology-Explains-Drop-in-Manufacturing-Jobs
ReplyDeleteThanks Crash. I am traveling now and will look at this when I return.
ReplyDeleteCharles could not get access so I am posting this for him -- this Charles -- not me.
ReplyDeleteCrash. I read your Heritage reference and found it very interesting . . . but am unsure if you meant it for LSD or me, or both. It does support my point that U.S. manufacturing’s productivity increase (producing more with less) has contributed to decreased employment . . . . rather than mostly due to job exports to ferrin countries as is the popular explanation. Still, while the Heritage doc poses a fine logical and well-documented explanation that bridges past higher U.S. manufacturing employment to current lesser employment there remains unsettled and churning tides beneath.
A main tenet of the doc implies a shift from labor to capital – e.g. computers, robots, etc. – that accounts for much of the dynamic . . . but offers few examples of the types of products produced naming only cars and unspecified commodities that afford American families “manufactured goods otherwise out of their reach” – due to lower production costs and consequent lower prices. A recent ABC Evening News With (the lovely) Diane Sawyer segment showcased a “typical” ‘merican family’s entire household country of origin and could not find any items – apparel, jewelry, furniture, appliances, accessories, etc. – made in ‘merica. This begs the question, “To what (made in ‘merica) products now being bought by ‘merican families does the Heritage doc refer?”
My inference of the author’s point that a shift to capital from labor has occurred suggests to me he contemplated\researched large manufacturing companies with substantial balance sheets to support expensive investment in capital. However, roughly 95% of U.S. manufacturing companies (and most family-owned\operated) employ 100 or fewer with average sales per employee about $115,000 to $120,000. The average employees per company per U.S. 2007 Census is 40; so with average sales per employee @ $120,000, such a company would average $4.8 million in annual sales. Extrapolating this to that company’s balance sheet one might infer that the average U.S. manufacturing company cannot easily afford progressing to capital-intensive from labor-intensive production as Heritage says. My own experience with hundreds of typical manufacturers (most family-owned\operated) bears this out – most struggle with cash flow (BTW, most are Sub-chapter S corps) and with inherently ineffective business practices, hardly positioned to attain the image Heritage presents.
The author does not differentiate between U.S. manufactured B2B goods (consumed by other business and\or used to produce other goods) and B2C (produced for the U.S. consumer). So, if U.S. manufacturing has surged who is consuming the output? Mr. Davidson says exports drive much of it; Heritage says only that foreign trade has created more export opportunities for the “more productive” U.S. firms – the less productive ones go out of business. Diane Sawyer says she cannot find any U.S. made “consumer” goods in the typical U.S. household. It seems to me that the resurgence pertains more to B2B for U.S. consumption and export and less on B2C; thus the big trade deficit with China’s Tinker Toys, Legos, bar stools, lamps, and end tables.
To the author’s conclusion for better macro\policy changes to facilitate U.S. manufacturing – which I whole-heatedly endorse – I add that the majority of U.S. manufacturing companies should look internally to more micro issues, such as improving business and management practices – and focus on B2B markets rather than B2C. All the benefit from said macro stuff would fail the moment it encounters the constraints\issues that exist internal to these (lesser productive?) companies.
Sir Charles,
ReplyDeleteThe Heritage piece is for anybody who chooses to read it. I'm a Heritage member and tend to scour it for items that can make me almost as smart,charming, and debonair as LSD. I have low standards. Most of their items tend to support Larry's positions in his blogs.
While Ms. Sawyer is indeed pleasant to look upon, she does work for ABC News, and, therefore, in my tiny military mind has somewhere between zippo and nada for credibility. I can say the same for most of the FNC news babes, except when they cross their legs, I tend enter the initial stages of a trance and can no longer comprehend the world around me. I have no idea what they're saying so I can't question their credibility. I believe at GT back in the late '60s, we called it an "elt ne." Has to do with loss of skin elasticity.
Something in the article led me to believe the author was focusing on the big boys of manufacturing. If you ask me to point out why I take that view, all I can say is that perhaps it's the tone of the article.
Crash, I share your fine impression and opinion of the newz eyecandies – tranceindental, no less.
ReplyDeleteMost articles\studies\research deal with big companies (and almost exclusively consumer; not B2B\industrial – and I have some research that bears that out . . . . ) because the SMMs (small-to-medium manufacturers) are way below the radar screen and few know anything about them. Ironic that they account for 95% of manufacturing companies. I think your take on the author’s tone was right-on.
I also think if articles\studies\research on manufacturing included the SMMs the impressions and conclusions would be much different . . . . as would govomit policies, etc.