Some bloggers have suggested that manufacturing is doing well, just because output has grown for the past few months. One sets up a straw man in a piece title "No, Virginia, U.S. Manufacturing isn't dead," but no serious economist claims that manufacturing is dead. Manufacturing employed 11.5 million workers in January, 2010, 8.9% of U.S. non-farm employment. However, nearly 6 million manufacturing jobs have disappeared since 1998, and manufacturing's share of GDP has fallen by a similar share in that time. The Bonddag blog and many others claim that productivity growth is responsible for manufacturing job loss, but they've got it wrong. Growing manufacturing trade deficits from 1998 to 2006, and the worst recession since the 1930s are responsible for the vast majority of all manufacturing job loss. We can reclaim a large share of these jobs by shrinking the trade deficit and putting this recession behind us.
I explained the relationship between manufacturing output, productivity growth, trade deficits and job loss in my Snapshot on Manufacturing Job Loss: Productivity is not the culprit. It shows that productivity has always grown rapidly in manufacturing--there was no big upsurge in the past decade. The recent uptick in productivity occurred in other sectors of the economy, which does help explain why job growth economy-wide was so terrible in the Bush era, but that's another story. With manufacturing, the story is simple.
In the past, we had high growth in real output and high output growth in manufacturing leading to stable employment. Then, after 2000, productivity growth continued but output growth flat-lined and manufacturing employment collapsed. The reason: a soaring trade deficit in manufacturing products. People kept buying more manufactured goods; they just bought them from China and other exporters, not from U.S. manufacturers. Josh Bivens reviewed this history in his earlier Snapshot on Trade Deficits and Manufacturing Employment.
In the past, employment and the trade deficit in manufacturing were roughly stable for 30 years from the late 60s through the late 90s.* Then the Asian financial crisis hit in 1998. The value of the dollar soared along with the manufacturing trade deficit. Manufacturing employment fell like a rock, with a lag of about 2 years, as shown in the graph below. The manufacturing trade balance did start to improve in 2007, but the big drop in the deficit came in 2008 and 2009, and was caused by the recession. The recession was also responsible for the loss of about 2 million of the 5.7 million manufacturing jobs lost since 1998.
In fact, growth in U.S. manufacturing output dropped sharply after 2000, as shown in my snapshot above. If we use the FRB industrial production index and the business cycle peaks shown on Bonddad's graph, and calculate simple compound average growth rates, the index grew 4.1% per year between July 1990 and March 2001 (the Clinton Business cycle). However, growth in the index fell to only 1.8% between March of 2001 and December 2007. The BLS output numbers show even slower growth in the Bush era, as indicated in my snapshot above.
Bonddad makes a number of mistakes in analyzing the relationship between trade and employment. First, he cites a chart from SilverOz that supposedly compared imports of total goods and services with manufacturing employment. However, exports matter too, and for manufacturing, what is most relevant is the manufacturing trade balance, the difference between imports and exports of manufactured goods. The graph reportedly includes imports of both services and non-manufactured commodities, which are clearly un-related to manufacturing. Furthermore, exports sales can support domestic employment, and imports displace employment. You have to look at changes in the manufacturing trade balance to get an accurate picture of the impact of trade on the demand for manufacturing output and labor.
But there are more problems with Bonddad's trade and employment graph. It has a blue line which purports to measure imports of goods and services (measured with a negative sign, which is appropriate). But this series never exceeds $700 billion in imports. However, U.S. imports exceeded $2.5 trillion in 2008. Something is wrong here. It's not the trade deficit either, because that was $-760 billion in 2006. Finally, the story is about manufacturing employment. The graph reports employment in "goods producing industries," which include a number of domestic, non-manufacturing industries. The graph should compare manufacturing employment with the trade balance in manufactured goods, as I do in the chart above.
To close the trade gap and rebuild manufacturing will required a coherent trade and industrial strategy. We must end currency manipulation by China and other Asian countries, aggressively attack unfair trade practices and rebuild manufacturing. We also need to create at least 4 to 5 million jobs in the rest of the economy to help end the recession, and rebuild demand for manufactured products. These are topics for another day. That discussion should start by acknowledging that productivity growth is a key source of strength and competitiveness in manufacturing, and is not responsible for manufacturing job loss.
*The exception was the period from 1979-1989, when the trade deficit also soared and manufacturing employment also dropped. This was also caused by an over-valued currency, which was corrected by the 1985 Plaza Accord. Subsequently, the trade deficit declined and manufacturing employment stabilized.
For more information, please visit EPI.org.
1. American manufacturing as a share of employment peaked in August 1943, and has been on a straight-as-an-arrow, no deviation downward trajectory each and every decade since then. Nevermind the Japanese, Taiwanese, Koreans, Mexicans or Chinese: 66+ years in one direction is totally unrelated to what anyone else is doing.
2. Manufacturing as a share of GDP peaked in 1947-48, at just below 52%, and has been losing average of 3.3 percentage points each and every decade since then. Over the past 25 years, when China usually gets the blame, manufacturing shed 8.5 percentage points. In the 25 years prior to that, when people thought it was fun to bash up Japanese cars, it was down 7.5 percentage points. And, in the 25 years to 1960, when we still can’t figure out who to blame, it lost another 6.4 points.
3. In February 2010, America had 8.02 million manufacturing production workers, about 5% of total employment. The last time there were fewer metal basher, in absolute numbers, was July 1939, over 73 years ago.
Must be the fault of the Chinese, eh?
He's been banging on for years that the non-oil good trade deficit is causing job losses. He takes the number of jobs that would be need if all of the imported goods were somehow produced in the US and then subtracts the number of jobs in producing US exports. The resulting number is the job losses from the trade deficit. He even has the audacity to break it up by US state. He should be ashamed of the rubbish he writes.
That was all going well for him when the deficit was rising. But now it's falling. All his dreams are coming true. But the unemployment rate is rising. His response: well, that's due to the recession.
So his take home message is that rising trade deficits cause unemployment and falling trade deficits also cause unemployment. You can't win with Mr Scott.
He would do well to read the document at http://italy.usembassy.gov/pdf/other/RL31032.pdf, particularly the quotes that "Standard economic analysis indicates that a trade deficit does not cause a net loss of output or jobs in the overall economy".
He should also take a look at http://www.edcchicago.org/presentations/Manufacturing%20EDC%20080625.pdf. He might be interested in the chart showing that from 1995 to 2002 South Korea, China, the UK, Japan and Brazil ALL LOST MORE MANUFACTURING JOBS THAT THE US.
Spin, spin, spin.
No doubt, rising productivity is one cause of the long-term decline in manufacturing employment PER CAPITA but, just as surely, rising international trade is another.
And if you object to Scott's measure of the latter effect, what would you propose in its place?
Or perhaps you think there is no such thing as a trade deficit?
Golly, RW11, you should get a job with the government.
Time might be better spent challenging the claim productivity surges can all be attributed to ""technological advances"....
A common meme in the MSM to avoid those obvious icebergs called trade deficit, globally sourced production and my fave, offshore outsourcing.
With normal development it will be a year before fractional Hydrogen after market installations could perhaps double fuel mileage in a car or truck. Replacements for home furnaces that run on natural gas or oil would take a few months longer. Engines that run on water are probably three years out.
After Pearl Harbor was attacked, Ford opened the Willow Run Assembly plant in a matter of months. A bomber rolled off the line every 59 minutes and a huge number of jobs resulted.
We are in a similar emergency. Development on a 24/7 basis is costly but possible. It could advance the manufacturing time table substantially.
Those companies that supply raw material to manufacturers are also having trouble getting credit, therefore the entire supply chain is frozen up.
The real economy has been sacrificed so the financial mobster bankers can be supplied with taxpayer cash in order to make sure their balance sheets are full.
http://eye-on-washington.blogspot.com
You ever been inside an American factory, Dr. Scott ?
I mean a FACTORY, not an "assembly plant," or a petroleum or food processing plant ~ but a factory, like a (steel, lumber, textile, etc.) mill, or a (sweat shop = piece-work, like a) clothing manufacturer? Yes?
then... would YOU want to work in a place like that? How about your children, would you want THEM to work in places like that?
Dr. Scott, you look at (evolution) the demise of an archaic life-cycle, interpret this as "entropy" and not progress: and call for us to march into the future looking confidently into our rear-view mirrors.
I found your article to be a very astute rebutal and debunking of many commonly espoused views on American manufacturing and recovery.
I'd be interested in hearing more your views on the subject of how "outsourcing" jobs (formerly done by American labor, which is now performed by "sweat shop/slave labor" in other countries) affect the current American labor situation and how to overcome its effects, if we can.
Also, what --if any -- impact might the imposition of importation tariffs have on closing the gap in our trade deficit. You've touched on these points briefly here. More detail would be appreciated.
See the article: High Oil Prices May Soon Threaten the Economy! - Introducing Cars as Power Plants to Provide Alternative Possibilities...posted at: http://www.aesopinstitute.org
The surprising solutions in that article can cause manufacturing to take off, beginning with the automobile industry, the backbone of the economy. Millions of well paid jobs will result.
See the Human Investment Tax Credit 2009 program on the same website. It contains a very different economic analysis by L.V. Watkins, one of the original authors of the earlier versions which contributed to the Job Tax Credit of 1977. The N.Y. Times recently stated that 2.1 million jobs were claimed as a result.
His contact information is on the cover of the free download. He has prepared an updated version which he will send upon request.
These two programs could make a huge dent in the unemployment problem.
Moreover, the first will dramatically decrease the need for oil as ordinary water will become a transportation fuel. A single barrel of water can replace 200 barrels of oil.
Cars, trucks and buses as power plants, selling substantial power to the grid when suitably parked, can also end the need for coal burning and new nuclear installations.
Accelerating the development to a 24/7 program, once national laboratories have confirmed the technologies, could provide daylight at the end of our dark tunnel.