The Disappearance of Manufacturing? Purdue University William - PDF document

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago The Disappearance of Manufacturing? Purdue University William Strauss West Lafayette, Indiana Senior Economist April 1, 2004 and Economic Advisor Federal Reserve Bank of Chicago Fact? The United States is losing its manufacturing base Economic Assessment 1

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Manufacturing employment as a share of national employment has been declining for over 50 years Manufacturing share of total nonfarm 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 15 10 5 0 1940 '50 '60 '70 '80 '90 '00 Economic Assessment 2

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago The service sector has grown by more than fivefold over this period, averaging 2.5% growth per year since 1947 Nonfarm employment millions 120 100 Service 80 60 40 20 Manufacturing 0 1940 '50 '60 '70 '80 '90 '00 This has decreased manufacturing’s share of total jobs and increased the service sector’s share Share of total nonfarm employment percent 90 80 Service 70 60 50 40 30 20 Manufacturing 10 0 1940 '50 '60 '70 '80 '90 '00 Economic Assessment 3

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago While manufacturing employment was flat over the past 50 years, manufacturing output increased by 3.7% per year Manufacturing output Index (1997=100) 120 100 80 60 40 20 0 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 This translated into nearly a 600 percent increase over this time period Manufacturing Index (1997=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 Economic Assessment 4

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago The increase in output can be attributed to strong productivity growth experienced by the manufacturing sector Productivity Index (1950=100) 500 450 Manufacturing 400 350 300 250 200 150 100 50 0 1950 '60 '70 '80 '90 '00 Over the past 50 years productivity in the manufacturing sector increased 2.9% per year, more than the 2.3% for the nonfarm business sector Productivity Productivity Index (1950=100) Index (1950=100) 500 500 450 450 Manufacturing Manufacturing 400 400 350 350 300 300 250 250 200 200 Nonfarm business 150 150 100 100 50 50 0 0 1950 1950 '60 '60 '70 '70 '80 '80 '90 '90 '00 '00 Economic Assessment 5

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Productivity in the durable manufacturing sector has been stronger than in nondurable manufacturing Productivity Index (1950=100) 550 500 Durable manufacturing 450 400 350 300 250 Nondurable manufacturing 200 150 100 50 0 1950 '60 '70 '80 '90 '00 The divergence in productivity appears to occur around the mid-70s Productivity Index (1975=100) 250 Manufacturing 200 150 Nonfarm business 100 50 0 1950 '60 '70 '80 '90 '00 Economic Assessment 6

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago This is especially apparent in durable manufacturing Productivity Index (1975=100) 300 Durable manufacturing 250 200 150 Nondurable manufacturing 100 50 0 1950 '60 '70 '80 '90 '00 Strong productivity growth has allowed the manufacturing sector of the U.S. economy 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 Economic Assessment 7

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Due to strong productivity growth, price increases in the manufacturing sector have been lower than overall price increases Inflation Percent 6 Consumer price index 5 4 3 2 1 0 Manufacturing -1 -2 1987 '92 '97 '02 The lower relative prices in the manufacturing sector has lead to manufacturing comprising a smaller share of GDP over time GDP Share Percent 35 Manufacturing 30 25 20 15 FIRE 10 Services 5 0 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 Economic Assessment 8

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago The current doldrums in manufacturing employment are closely linked with the most recent economic recession Manufacturing workers have suffered steep employment declines over the past few years Manufacturing Production Workers Trough = 100 115 Upper and low er bounds around GDP troughs 110 105 100 Current cycle 95 90 85 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 9

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago But so has everyone else Total Nonfarm Employment Trough = 100 112 Upper and low er bounds around GDP troughs 110 108 106 104 102 100 98 Current cycle 96 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery and expansion The economy has been hit hard by a number of negative economic shocks over the past few years •The equity market collapse that began in early 2000 •Soaring energy prices in late 2000 and again in late 2002 •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 Economic Assessment 10

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago These shocks hampered the current economic expansion Real Gross Domestic Product Trough = 100 120 Upper and low er bounds around GDP troughs 115 110 105 100 Current cycle 95 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion The loss of manufacturing employment is consistent with the declines in overall manufacturing production Industrial Production Trough = 100 130 Upper and low er bounds around GDP trough 125 120 115 110 105 100 Current cycle 95 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 11

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Productivity in the overall economy has grown at a faster rate than during any previous expansion – this is a double edged sword Productivity - Nonfarm Business Sector Trough = 100 116 112 Upper and low er bounds around GDP troughs 108 104 100 Current cycle 96 92 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Productivity within the manufacturing sector has also been growing at a faster rate than during any previous expansion Productivity - Manufacturing Sector Trough = 100 116 Upper and low er bounds around GDP troughs 112 108 104 100 Current cycle 96 92 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 12

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Recent manufacturing employment losses have occurred across a number of countries – among 20 big economies, 22 million jobs have been lost Percent change in manufacturing employment from 1995 to 2002 percent 30 25 20 15 U U n S i n t e 10 i o t d G e u S t K e d h F w R r i C J r m S n B a e K u a 5 I t g h r t d a o s a n a d i p a t r s n c n e e o a z l e i y e y n a m a n i s a l 0 S P M C T M N A I p h a n a e a e u a i d -5 n l i w x l t s i i y h i n p i t a a a c a e r p d n o s r a i a n i l i a a l e i a -10 n s d s -15 -20 -25 Fact? Manufacturing jobs are higher paying jobs, and if we lose these jobs, we will become a nation of hamburger flippers Economic Assessment 13

William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Wages are higher in the manufacturing sector Average Weekly Wage Dollars 700 600 Manufacturing 500 400 Services 300 200 100 0 1965 '70 '75 '80 '85 '90 '95 '00 However, over the last fifteen years, service sector wages have been growing at a faster rate – 2.9% per year for manufacturing vs. 3.4% per year for services Growth in Average Weekly Wages Percent 12 10 8 6 Services 4 2 Manufacturing 0 1965 '70 '75 '80 '85 '90 '95 '00 Economic Assessment 14