Is the U.S. Losing Its
Manufacturing Base?
Rocky Mountain Economic Summit
Afton, WY
July 10, 2014
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
The Setup
2
Manufacturing output peaked in December 2007
and fell 20.8% over the following 18 months
Industrial production ‐ manufacturing
Index 2007 = 100
110
100
90
80
70
60
50
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
3
Manufacturing capacity utilization collapsed
to the lowest rate in 70 years
Capacity utilization ‐ manufacturing
percent
86
84
82
80
78
76
74
72
70
68
66
64
62
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
4
Job declines in the manufacturing sector were significant,
with over 2.0 million jobs lost over that same period
Manufacturing employment
percent
5
0
‐5
Percent change from a year earlier
‐10
‐15
Quarterly change (saar)
‐20
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
5
Is the U.S. Losing Its
Manufacturing Base?
6
Manufacturing employment as a share of national
employment has been declining for over 60 years
Manufacturing employment as a share of total nonfarm employment
percent
40
35
30
25
20
15
10
5
0
1940
7
'50
'60
'70
'80
'90
'00
'10
The number of jobs in manufacturing has been
relatively stable over this period,
edging lower on average by -0.3% per year since 1947
Manufacturing employment
mi l lions
20
18
16
14
12
10
8
6
4
2
0
1940
8
'50
'60
'70
'80
'90
'00
'10
Not to make a mountain out of a molehill,
but manufacturing employment was increasing up until 1979
and has been moving lower over the past 30 years
Manufacturing employment
mi l lions
20
18
0.8%
16
‐1.3%
14
12
10
1940
9
'50
'60
'70
'80
'90
'00
'10
However, service sector employment has grown
more than fourfold over this period,
averaging growth of 2.3% per year since 1947
Employment
mi l lions
120
100
s ervi ce
80
60
40
20
ma nufacturing
0
1940
10
'50
'60
'70
'80
'90
'00
'10
While manufacturing employment
has been edging lower over the past 63 years,
manufacturing output increased by 3.2% per year
Manufacturing output
Index 2007=100
120
100
80
60
40
20
0
1940
11
'50
'60
'70
'80
'90
'00
'10
This translated into an almost 600 percent increase in
manufacturing output over this time period
Manufacturing
Index 2007=100
mi l lions
120
120
100
100
output ‐ l eft scale
80
80
60
60
40
40
20
20
empl oyment ‐ ri ght s cale
0
0
1940
12
'50
'60
'70
'80
'90
'00
'10
The increase in output can be attributed to strong
productivity growth experienced by the manufacturing sector
Manufacturing productivity
Index 1950=100
600
500
400
300
200
100
0
1950
13
'60
'70
'80
'90
'00
'10
What took 1,000 workers to produce in 1950
takes 167 workers today
Manufacturing sector:
Number of workers needed to do the work of 1,000 workers in 1950
Number of workers
1,000
900
800
700
600
500
400
300
200
100
0
1,000
813
627
485
377
253
1950
14
1960
1970
1980
1990
2000
183
175
2010
2013
Manufacturing productivity has been growing faster
over the past 40 years
Productivity
Avera ge annual percent change
5
Nonfa rm business
Ma nufacturing
4.1
4
3.3
2.8
3
2.6
2.6
2.6
2.2 2.1
2.6
2.2
1.7
2
1.7
1.5
0.7
1
0
1950s
15
1960s
1970s
1980s
1990s
2000s
2010‐2013
The divergence in productivity appears
to have occurred around the mid-1970s
Productivity
Index 1975=100
350
300
ma nufacturing
250
200
150
nonfarm business
100
50
0
1950
16
'60
'70
'80
'90
'00
'10
This divergence is especially apparent in
durable manufacturing
Productivity
Index 1975=100
450
400
dura ble manufacturing
350
300
250
200
nondurable
ma nufacturing
150
100
50
0
1950
17
'60
'70
'80
'90
'00
'10
Strong productivity growth had allowed the manufacturing
sector to grow faster than the overall economy
Output
Index 1947=100
900
800
i ndustrial production ‐ ma nufacturing
700
600
rea l GDP
500
400
300
200
100
0
1947
18
'52
'57
'62
'67
'72
'77
'82
'87
'92
'97
'02
'07
'12
However, lower relative prices in the manufacturing sector
has lead to manufacturing comprising
a smaller share of GDP over time
Manufacturing share of GDP
percent
30
25
20
15
10
1947
19
'52
'57
'62
'67
'72
'77
'82
'87
'92
'97
'02
'07
'12
However, the US still makes over 70% of what it consumes
% of US manufactured goods consumed in 20101 by source
100
Made
in:
80
China
60
Other lowcost
countries
40
Rest of
the
World
20
Net US
0
Food and Beverages
Petroleum and Coal
Fabricated
ChemicalsPrimary metal Transportation goods Machinery
Computers Apparel,
Wood Products
Plastics and Rubber
Furniture Textiles and Fabrics
metals
& electronics footwear, &
Paper Products
Glass, Stone, and Minerals
Miscellaneous
accessories
Appliances &
Electrical equipment
Value of US manufactured goods consumed by category (Billion USD)
From the Boston Consulting Group
20
How profitable
is manufacturing?
21
While more cyclical, profits in manufacturing have
out-performed returns in nonfinancial corporate businesses
Profits ‐ as a percent of value added
percent
30
25
ma nufacturing
20
15
10
nonfinancial corporate business
5
0
1950
22
'55
'60
'65
'70
'75
'80
'85
'90
'95
'00
'05
'10
The Manufacturing Sector
Continues to Re-invent Itself
23
Over the last twenty years the fastest growing sector,
not surprisingly, has been
computer and electronic components
Industrial output: 1990 ‐ 2013
percent change (annual ra te)
‐10
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Computer and Electronic Components
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
24
‐5
0
5
10
15
There has been a large number of industrial sectors
that have risen and fallen over the past twenty years
Industrial output: 1990 ‐ 2013
percent change (annual ra te)
‐8
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
25
‐6
‐4
‐2
0
2
4
6
The collapse in manufacturing
experienced in 2008-2009
was closely linked with
the economic recession
26
Declines in manufacturing output were
broad-based during the Great Recession –
especially in vehicle and primary metals manufacturing
Industrial output: December 2007 ‐ June 2009
percent change
‐60
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Computer and Electronic Components
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
27
‐50
‐40
‐30
‐20
‐10
0
The recovery has also been broad-based with
motor vehicles and primary metals manufacturing
leading the way
Industrial output: June 2009 ‐ May 2014
percent change
‐20
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Computer and Electronic Components
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
28
0
20
40
60
80 100 120 140
Manufacturing workers have suffered
steep employment declines over the current cycle
Manufacturing employment
trough = 100
125
upper and lower bounds around GDP troughs
120
115
110
105
100
current cycle
95
90
85
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
29
18
20
22
24
26
28
But the overall economy’s
employment growth also struggled
Total nonfarm employees
trough = 100
130
upper and lower bounds around GDP troughs
125
120
115
110
105
100
current cycle
95
90
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
30
18
20
22
24
26
28
When changes in nonfarm employment are considered,
the most recent manufacturing employment downturn
is not unprecedented
Manufacturing employment share
percent
10
8
6
4
2
0
‐2
‐4
‐6
‐8
‐10
1947
31
'52
'57
'62
'67
'72
'77
'82
'87
'92
'97
'02
'07
'12
The financial crisis and its aftermath has hampered
the current economic expansion
Real GDP
trough = 100
150
upper and lower bounds around GDP troughs
140
130
120
110
current cycle
100
90
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
32
18
20
22
24
26
28
The recovery in manufacturing output is in-line
with past industrial recoveries
Industrial production ‐ manufacturing
trough = 100
170
upper and lower bounds around GDP troughs
160
150
140
130
current cycle
120
110
100
90
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
33
18
20
22
24
26
28
Productivity in the overall economy has grown at a
rate below the low-end of previous expansions
Productivity ‐ nonfarm business
trough = 100
130
upper and lower bounds around GDP troughs
125
120
115
110
105
current cycle
100
95
90
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
34
18
20
22
24
26
28
However, productivity within the manufacturing sector
has grown at a somewhat faster pace
Productivity ‐ manufacturing
trough = 100
135
upper and lower bounds around GDP troughs
130
125
120
115
110
current cycle
105
100
95
90
‐8
‐6
‐4
‐2
0
2
4
6
8
10
12
14
16
Quarters away from trough of real GDP
35
18
20
22
24
26
28
Manufacturing employment losses have occurred across
numerous countries –
among 20 big economies, 22 million jobs were lost
36
Is the U.S. positioned to
continue its strong
productivity gains?
37
U.S. maintaining its commitment to
research and development
Research and development expenditures as a share of GDP
percent
3.0
2.5
2.0
1.5
1.0
1953
38
'58
'63
'68
'73
'78
'83
'88
'93
'98
'03
'08
The vast majority of U.S. research and development
is being privately funded
Share of research and development that is privately funded
percent
80
70
60
50
40
30
1953
39
'58
'63
'68
'73
'78
'83
'88
'93
'98
'03
'08
Lessons from the farm sector
40
We are producing more in our farm sector
than at any time in our history
Real gross value added: farm business
Bi l lions of chained 2005 dollars
140
120
100
80
60
40
20
0
1947
41
'57
'67
'77
'87
'97
'07
And we are accomplished this remarkable feat
with less than 2.0% of our employment devoted to farming
Share of total employment
percent
90
80
services
70
60
50
40
30
manufacturing
20
10
agriculture
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
42
Trade with China
43
China has risen to number one in terms of U.S. imports,
representing 19.4% of all imports in 2013
Imports (customs value)
bi l lions of dollars
2,500
2,000
rest of
imports
1,500
UK
Korea
Germany
1,000
Japan
Mexico
Canada
500
China
0
1975
44
'80
'85
'90
'95
'00
'05
'10
While China has risen to be our third largest export country,
it represents only 7.7% of U.S. exports
Exports (f.a.s.)
bi l lions of dollars
1,600
1,400
1,200
rest of
exports
1,000
Korea
800
Germany
600
400
Japan
China
Mexico
200
Canada
0
1975
45
UK
'80
'85
'90
'95
'00
'05
'10
This difference has led to China having
the largest trade deficit with the U.S.
Trade balance (customs value)
bi l lions of dollars
100
0
‐100
China
‐200
‐300
Japan
‐400
‐500
UK
Canada
Germany
Mexico
Korea
‐600
rest of
trade
deficit
‐700
‐800
‐900
1975
46
'80
'85
'90
'95
'00
'05
'10
China has certainly increased
the amount of goods flowing into the U.S.
Imports (customs value)
Index 1990=100
3,000
China
2,500
2,000
1,500
Mexico
1,000
rest of imports
Canada
500
Germany
UK
0
1975
47
'80
'85
'90
'95
'00
'05
Korea
Japan
'10
They have also represented the
largest gain for exports from the U.S.
Exports (f.a.s.)
Index 1990=100
3,000
China
2,500
2,000
1,500
1,000
Mexico
rest of imports
Canada
500
Germany Korea Japan
0
1975
48
'80
'85
'90
'95
'00
'05
'10
UK
While China has increased its share of imports to the U.S.,
the Pacific Rim as a whole has had
a declining share since the mid-90s
Share of U.S. imports
percent
45
40
Pacific Rim
35
30
Pacific Rim excluding China
25
20
15
10
China
5
0
1974
49
'78
'82
'86
'90
'94
'98
'02
'06
'10
U.S. share of world manufacturing steady for last 40 years
Manufacturing value added, % of world
100
80
58%
58%
46%
Rest of World
60
China
15%
40
Japan
17%
...and remains the
biggest in the world in
mfg value add by a
sizeable margin
20
US
0
1950
1960
25%
1970
1980
1990
From the Boston Consulting Group
50
2000
15%
24%
2010
U.S. share of world manufacturing steady for last 40 years
Manufacturing value added, % of world
100
80
58%
58%
46%
Rest of World
60
China
15%
40
Japan
17%
...and remains the
biggest in the world in
mfg value add by a
sizeable margin
20
US
0
1950
1960
25%
1970
1980
1990
From the Boston Consulting Group
51
2000
15%
24%
2010
Energy
52
Adjusted for inflation, current oil prices are below
the levels that existed thirty years ago
Real West Texas Intermediate oil price
dol lars per barrel, 2013 dollars
160
140
120
100
80
60
40
20
0
1970
53
'75
'80
'85
'90
'95
'00
'05
'10
Natural gas prices are quite low
Real natural gas price
dol lars per mmbtu, 2013 dollars
16
14
12
10
8
6
4
2
0
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
54
Due to technology that now allows access to
reserves that have been known for quite a few years
55
Between 1994 and 2005 the natural gas to oil price ratio
averaged 13.4% - year-to-date it has averaged 4.8% in 2014
Natural gas price to oil price ratio
percent (dollars per mmbtu/dollars per barrel West Texas i ntermediate)
35
30
25
20
15
10
5
0
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
56
Implication: The U.S. is one of the world's lowest-cost
countries for manufacturing
Major exporting nation average manufacturing cost structures relative to U.S. (2015 projections)
Manufacturing cost index (U.S. = 100)
140
123
120
115
115
108
38
100
100
110
30
28
2
6
2
7
77
78
21
25
2
5
2
6
US = 100
94
19
80
1
2
78
4
4
15
80
77
2
4
77
74
0
U.S.
Germany
France
Labor (productivity-adjusted)
57
Italy
United
Kingdom
Electricity
Natural Gas
From the Boston Consulting Group
Japan
Other
China
The Current Expansion
58
Beginning in July 2009, manufacturing output in the
United States has been increasing at a 4.8% annualized rate
and as of May 2014 it finally regained all the output lost
during the Great Recession
Industrial production ‐ manufacturing
Index 2007 = 100
110
100
90
80
70
60
50
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
59
Manufacturing capacity utilization
has been rising since June 2009
Capacity utilization ‐ manufacturing
percent
86
84
82
80
78
76
74
72
70
68
66
64
62
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
60
And while manufacturing jobs have been rising,
they have only recovered 29.1% of the jobs
lost during the downturn
Manufacturing employment
percent
5
0
‐5
Percent change from a year earlier
Percent change from a year earlier
‐10
‐15
Quarterly change (saar)
Quarterly change (saar)
‐20
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
61
Summary
Manufacturing output is in the process of recovering its losses
The success of manufacturing has been driven by productivity
Manufacturing employment has shown little change over the
past 70 years – with a steady decline over the past 30 years
The most recent decline in manufacturing was cyclical,
not structural
Profits in manufacturing have outperformed profits for the
rest of the nation
The trends that have dominated manufacturing for the past
70 years are suggestive of the future for U.S. manufacturing:
ever increasing output with employment representing a
smaller share of total employment
62
Chicago Fed Letter - June 2003
www.chicagofed.org
63