US Manufacturing – Global Jack Rabbit?

In my last post (May 17) I made some comments about US manufacturing noting that output of manufacturing companies had grown in the last 10 years. I said I wanted to focus on output for that post and would see how comments might bring up some additional questions.  If US manufacturing output is rising then a couple questions arise. First, how did the US compare to other countries? Second, what are the sources of the output increases?

To answer the first question I found data at the U.S. Bureau of Labor Statistics http://bls.gov/news.release/pdf/prod4.pdf . The second question can be answered many ways but a first step is to recall that that output growth can always be decomposed into two parts – (1) the contribution from labor utilization plus (2) the contribution from the productivity of labor. Luckily the data source at the BLS had information for the years 2000 to 2007 for 19 countries and for manufacturing output, labor hours, and output per hour. Viola.   

The bottom line is that US manufacturing growth stood out when compared with 18 other countries.  The US was in a pack of countries (the Jack Rabbits) that had very high manufacturing output growth. Among those countries the US distinguished itself with respect to the relative contribution of manufacturing productivity growth to manufacturing output growth.  The Muddlers and the Brinkers had slower manufacturing output growth than the Jack Rabbits but in all cases would have done even worse had it not been for productivity growth. That is, productivity growth was important to all 19 countries.

This brings us back to macroeconomic policy. The data show that replacing labor with capital was common among almost all countries from 2000 to 2007. (The BLS also presents data for these countries for the 30-year time period from 1979 to 2009. The story is basically the same – virtually all countries had declines in manufacturing employment that were offset by increased productivity. I focus on the 2000 to 2007 time period to keep things current and simple.)

·        

• The   US was typical in the sense of having negative annual average growth in labor hours.
•   It also shows that to attain strong growth in manufacturing output it will take continued strong growth in productivity.
•   Finally, productivity growth will come only within a business environment that is conducive to investment with sanguine expectations.

Below are the details of the analysis and a presentation of the figures for the 19 countries.  I assign each of these countries to one of three groups with respect to growth: Jack Rabbits, Muddlers, and Brinkers.

How did US manufacturing output fare compared to other countries?

·         US output growth from 2000 to 2007 averaged 2.9% per year – the seventh highest rate among the 19 countries.

·         The rates ranged from 7.4% per year for the Czech Republic to -0.6% for Canada.

·         Notice that the top 8 countries were diverse – high income Nordic countries (Finland, Sweden, and Norway); Asian countries (Taiwan, S. Korea, and Singapore); and finally one Central European transforming nation (the Czech Republic).

·         The slowest growing manufacturing sectors were generally from high income European countries and Canada

% Change in manufacturing output, average annual 2000 to 2007

Czech Rep	7.4
Taiwan	7.2
S. Korea	6.8
Finland	6.1
Singapore	5.5
Sweden	5
USA	2.9
Norway	2.6
Japan	2.3
Germany	2.1
Netherlands	1.9
Australia	1.6
Spain	1.2
France	1.1
Belgium	0.8
Denmark	0.6
Italy	0.3
UK	0
Canada	-0.6

Next we examine how much of this output growth was the result of changes in labor hours, labor productivity, a combination of the hours and productivity.

The results for labor hours are as follows.

·         Singapore was the only country to increase labor hours from 2000 to 2007. Singapore’s strong output rate of 5.5% per year was very much the result of strong employment growth of 3.5% per year. Singapore is the only country among these 19 to generate most of its manufacturing growth through more labor input.

·         The UK and the USA led the 19 countries in labor input reduction with average annual decreases of 3.9% and 3.1% respectively. Other rich nations had similar patterns – Denmark, France, the Netherlands, Canada, and so on.

% Change in labor hours, average annual 2000 to 2007

UK	-3.9
USA	-3.1
Denmark	-2.4
France	-2.0
Netherlands	-1.7
Canada	-1.4
Japan	-1.4
Sweden	-1.4
Germany	-1.3
Belgium	-1.2
S. Korea	-1.1
Australia	-0.8
Finland	-0.7
Spain	-0.6
Taiwan	-0.4
Norway	-0.3
Italy	-0.1
Czech Rep	0.0
Singapore	3.5

Productivity growth helps explain the ability of countries to grow their manufacturing output despite these reductions in employment hours.

·         South Korea led this group of 19 countries with productivity growing of almost 8% per year.

·         US productivity growth averaged 6% per year.

·         S. Korea was followed by Taiwan, the Czech Republic, Finland, Sweden, and the USA

·         Countries with the slowest productivity growth were Italy, Canada, and Spain.

% Change in manufacturing productivity, average annual 2000 to 2007

S. Korea	7.9
Taiwan	7.6
Czech Rep	7.4
Finland	6.8
Sweden	6.4
USA	6.2
UK	3.9
Japan	3.7
Netherlands	3.6
Germany	3.4
France	3.1
Denmark	3.0
Norway	2.9
Australia	2.4
Belgium	2.0
Singapore	2.0
Spain	1.8
Canada	0.8
Italy	0.4

Below is a summary of the key points.

Because employment was shrinking in all countries except two, productivity is the key explanation for output growth.

Singapore is unusual because it had strong growth in employment – thus employment growth (3.5% per year) explained a great deal of that country’s growth of 5.5% per year.

The Jack Rabbits: Several countries with strong output growth had stellar productivity growth as the source of their manufacturing expansions – Sweden, South Korea, Taiwan, Norway, Finland and the Czech Republic

The US leads the Jack Rabbits – This group had strong productivity growth behind very strong output growth The US leads that group by virtue of the percentage contribution of productivity to output growth. In the US the productivity contribution of 6% per year was double the output growth of approximately 4% per year.  Several countries had stronger output growth than the US. Others had stronger productivity growth. But the US contribution of productivity to output deserves recognition.

Brinkers on the Edge – Canada, UK, Italy, France, Belgium, and Denmark were countries with very slow or negative manufacturing output growth. Without the productivity changes the labor reductions would have led to declines or larger declines in output.

Muddlers – had average to below-average manufacturing growth sparked by just enough productivity growth to offset the negative impacts of labor growth on output. Muddlers include the Netherlands, Germany, Japan, Spain, and Australia

In all three groups productivity was the key to manufacturing growth. Productivity is costly and requires significant investment. Investment requires financial markets that efficiently channel the supply of national savings to risk-taking firms. Some governments may use industrial policy to pick winners and funnel or incent financial flows to the chosen few but such policies have been shown to be risky and often wasteful. What is not controversial is that all business firms must have the freedom, flexibility, ability, and desire to take considerable risks. Congress and the President need to take that to heart.