The Disappearance of? Purdue University West Lafayette, Indiana April 1, 4 William Strauss Senior Economist and Economic Advisor Fact? The United States is losing its manufacturing base Economic Assessment 1
employment as a share of national employment has been declining for over 5 years share of total nonfarm employment percent 4 35 3 25 15 1 5 194 '5 '6 '7 '8 '9 ' The number of jobs in manufacturing has been relatively stable over this period, averaging.1% growth per year since 1947 employment millions 15 1 5 194 '5 '6 '7 '8 '9 ' Economic Assessment 2
The service sector has grown by more than fivefold over this period, averaging 2.5% growth per year since 1947 Nonfarm employment millions 1 1 8 Service 6 4 Manuf acturing 194 '5 '6 '7 '8 '9 ' This has decreased manufacturing s share of total jobs and increased the service sector s share Share of total nonfarm employment percent 9 8 7 Service 6 5 4 3 1 194 '5 '6 '7 '8 '9 ' Economic Assessment 3
While manufacturing employment was flat over the past 5 years, manufacturing output increased by 3.7% per year output Index (1997=1) 1 1 8 6 4 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '2 This translated into nearly a 6 percent increase over this time period Index (1997=1) 1 Millions of w orkers 1 1 8 Output -left scale 1 8 6 6 4 4 Employment - right scale 194 '5 '6 '7 '8 '9 ' Economic Assessment 4
The increase in output can be attributed to strong productivity growth experienced by the manufacturing sector Productivity Index (195=1) 5 45 4 35 3 25 15 1 5 195 '6 '7 '8 '9 ' Over the past 5 years productivity in the manufacturing sector increased 2.9% per year, more than the 2.3% for the nonfarm business sector Productivity Index (195=1) 5 45 4 35 3 25 Nonfarm business 15 1 5 195 '6 '7 '8 '9 ' Economic Assessment 5
Productivity in the durable manufacturing sector has been stronger than in nondurable manufacturing Productivity Index (195=1) 55 5 Durable manufacturing 45 4 35 3 25 Nondurable manufacturing 15 1 5 195 '6 '7 '8 '9 ' The divergence in productivity appears to occur around the mid-7s Productivity Index (1975=1) 25 15 1 Nonfarm business 5 195 '6 '7 '8 '9 ' Economic Assessment 6
This is especially apparent in durable manufacturing Productivity Index (1975=1) 3 25 Durable manufacturing 15 1 Nondurable manufacturing 5 195 '6 '7 '8 '9 ' Strong productivity growth has allowed the manufacturing sector of the U.S. economy to grow faster than the overall economy Output Index (1947=1) 8 7 Industrial Production 6 5 Real GDP 4 3 1 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '2 Economic Assessment 7
Due to strong productivity growth, price increases in the manufacturing sector have been lower than overall price increases Inflation Percent 6 5 Consumer price index 4 3 2 1-1 -2 1987 '92 '97 '2 The lower relative prices in the manufacturing sector has lead to manufacturing comprising a smaller share of GDP over time GDP Share Percent 35 3 25 15 1 5 FIRE Services 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '2 Economic Assessment 8
The current doldrums in manufacturing employment are closely linked with the most recent economic recession workers have suffered steep employment declines over the past few years Production Workers Trough = 1 115 11 Upper and low er bounds around GDP troughs 15 1 95 Current cycle 9 85 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 9
But so has everyone else Total Nonfarm Employment Trough = 1 112 11 18 16 14 12 1 Upper and low er bounds around GDP troughs 98 Current cycle 96 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 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 Soaring energy prices in late and again in late 2 The September 11, 1 attack on the United States The corporate governance scandals that started in late 1 The geopolitical uncertainties regarding Iraq that began in the summer of 2 Economic Assessment 1
These shocks hampered the current economic expansion Real Gross Domestic Product Trough = 1 1 115 Upper and low er bounds around GDP troughs 11 15 1 Current cycle 95 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 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 = 1 13 125 Upper and low er bounds around GDP trough 1 115 11 15 1 Current cycle 95 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 11
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 = 1 116 112 18 Upper and low er bounds around GDP troughs 14 1 96 Current cycle 92 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 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 - Sector Trough = 1 116 112 18 14 Upper and low er bounds around GDP troughs 1 96 Current cycle 92 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 11 12 Quarters away from trough of real GDP Late expansion and recession Recovery or expansion Economic Assessment 12
Recent manufacturing employment losses have occurred across a number of countries among big economies, 22 million jobs have been lost Percent change in manufacturing employment from 1995 to 2 percent 3 25 15 1 5-5 -1-15 - -25 India Austrailia Netherlands Malyasia Mexico Taiwan Philippines Canada Spain Brazil Japan China United Kingdom Russia South Korea United States Sweden Germany France Italy Fact? jobs are higher paying jobs, and if we lose these jobs, we will become a nation of hamburger flippers Economic Assessment 13
Wages are higher in the manufacturing sector Average Weekly Wage Dollars 7 6 5 4 3 Services 1 1965 '7 '75 '8 '85 '9 '95 ' 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 1 8 6 Services 4 2 1965 '7 '75 '8 '85 '9 '95 ' Economic Assessment 14
Union membership has played a major role in manufacturing having higher relative wages and consequently encouraging the substitution away from labor to capital Union employment as a share of labor force Percent 26 24 22 18 16 14 12 1968 '7 '75 '8 '85 '9 '95 ' Since 198, employment cost increases in the service sector has exceeded the manufacturing sector Employment Cost Index Index (198=1) 26 24 2 18 Service 16 14 1 1 8 198 '85 '9 '95 ' Economic Assessment 15
Standards of living in the United States have never been higher Real disposable personal income - per capita chained dollars $3, $25, $, $15, $1, $5, $ 196 '7 '8 '9 ' Lessons from the farm sector Economic Assessment 16
We are producing more in our farm sector than at anytime in our history Real Gross Domestic Farm Business Product Billions of chained dollars 8 7 6 5 4 3 1 1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '2 And we are accomplished this remarkable feat with just 2.4% of our employment devoted to farming Share of Total Employment Percent 7 6 Services 5 4 3 Manuf acturing 1 Agriculture 187 188 189 19 191 19 193 194 195 196 197 198 199 Economic Assessment 17
Chicago Fed Letter - June 3 www.chicagofed.org Questions Economic Assessment 18