is American Manufacturing in Decline?

Is American Manufacturing in Decline?

Kevin Kliesen Business Economist and Research Officer Federal Reserve Bank of St. Louis Trade and the Future of Industry: A Conference Co-Sponsored by the GIC and the Federal Reserve Bank of Chicago September 12, 2018

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Disclaimer The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

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Motivation •

This presentation is based on Kliesen-Tatom (2018).

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A popular view holds that manufacturing is in secular decline—and that China is the chief culprit.

•

This view is based on the loss of 5 million manufacturing jobs since 1998, a perceived loss of international competitiveness, and large trade deficits.

•

Our view: U.S. manufacturing remains globally competitive, but it faces some headwinds of uncertain duration.

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Diverging Trends in Output.

Real GDP and Manufacturing Industrial Production, 1950-2018 Index, 1950 = 100 900

China Joins WTO

800

Real GDP

700

Industrial Production

600 500 400 300 200 100 0 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: Department of Commerce (Bureau of Economic Analysis), Board of Governors of the Federal Reserve System, and Haver Analytics.

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Diverging Trends in Employment.

Private Nonmanufacturing and Manufacturing Payroll Employment, 1950-2018

(Thousands)

(Thousands) 120,000

20,000

Manufacturing (Right)

100,000

18,000

80,000

16,000

60,000

14,000

Total Nonfarm Less Manufacturing (Left)

40,000

12,000

10,000

20,000

China Joins WTO 8,000

0 1950

1957

1964

1971

1978

1985

1992

1999

2006

2013

SOURCE: Bureau of Economic Analysis and Bureau of Labor Statistics

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The Problem with Manufacturing.

Real Manufacturing Value Added Per Employee Index 1950=100

Percent changes at annual rates

900 800 700

Labor Productivity Growth: Nonfarm Business and Manufacturing Sectors, 1973 to 2018 5.0

4.4

China Joins WTO 4.0

600

3.0

500

2.6

400

2.0

300 200

1.4

0 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 SOURCE: Bureau of Economic Analysis (GDP by Industry) and Haver Analytics.

Manuf.

1.2

1.0

100

NFB

2.7

0.5

0.0 1973-1995

1995-2007

2007 to 2018

SOURCE: Forbes (2004), BLS, and Haver Analytics

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But the United States is Still the Low-Cost Manufacturer.

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OECD Manufacturing Output Shares.

OECD Manufacturing Output Shares: 1997 vs. 2016 Percent

40 35

1997 Shares

30

2016 Shares

25 20 15 10 5 0 Germany

France

United Kingdom

Italy

Japan

Korea, Rep.

Mexico

United States

Sources: OECD data from the World Bank and authors' calculations.

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Causes of Slower Growth • Domestic factors: − Poor cyclical performance since 2007 − Demographics and structural labor market effects: − Slower growth capital formation

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Foreign factors: − China effects. − We find mixed evidence for U.S. manufacturing employment.

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Domestic Factors: Cyclical and Structural Effects The Employment-to-Population Ratio, 1984 to Present Percent 66 65 64 63 62 61 60 59 58 57 56 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: Bureau of Labor Statistics.

Data through August 2018.

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Domestic Factors: Slower Growth of Business Fixed Investment Percent of Real Net National Product

Net Real Business Fixed Investment Has Slowed Sharply Since 2000 8 7 6 5 4 3 2

Actual

1

Trend

0 1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

Source: BEA and author's calculations. Final observation is 2016.

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Foreign Factors: A Widening Goods Trade Gap Real U.S. Goods Exports and Imports , 1950-2018 Index, 1950 = 100 5000

China Joins WTO

4500 4000

Goods Imports

3500 3000 2500

Goods Exports

2000 1500 1000 500 0 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: Department of Commerce (Bureau of Economic Analysis), Board of Governors of the Federal Reserve System, and Haver Analytics.

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Causes of Slower Growth: Empirical Analysis •

Domestic economic conditions are the most important variables that influence U.S. manufacturing output and employment.

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We also find some evidence that the rise of China lowers U.S. manufacturing employment after 2002. − Trend-break tests support empirical literature. − But real imports of Chinese goods are not significant in

explaining the growth of U.S. manufacturing employment.

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What Matters More to Manufacturing Production: Imports or Exports?

Growth of Manufacturing Production and U.S. Real Goods Exports Percent changes, annual data (1981-2017) IP-Mfg. 15

R² = 0.48

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Growth of Manufacturing Production and U.S. Real Goods Imports

Percent changes, annual data (1981-2017) IP-Mfg. 15 10

R² = 0.81

5

5

0

0

-5

-5

-10

-10

-15 -20

-15 -15

-10

-5

0

5

Real Goods Exports

10

Goods Exports

15

20

-20

-10

0

Real Goods Imports

10

20

30

Goods Imports 14

What Matters More to Manufacturing Employment: Imports or Exports?

Growth of Manufacturing Employment and U.S. Real Goods Exports Percent changes, annual data (1981-2017) Mfg. Employment 8

R² = 0.37

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Growth of Manufacturing Employment and U.S. Real Goods Imports Percent changes, annual data (1981-2017) Mfg. Employment 8

R² = 0.37

4

0

0

-4

-4

-8

-8

-12

-12

-16

-16 -15

-10

-5

0

5

Real Goods Exports

10

Goods Exports

15

20

-30

-20

-10

0

Real Goods Imports

10

20

30

Goods Imports 15

Conclusions •

Key insights from today’s presentation about U.S. manufacturing: − Output growth has not returned to pre-2007 rates. − Manufacturing has been hurt by cyclical and structural forces. − But U.S. manufacturing is globally dominant (size-wise) and

competitive. − Reliance on global supply chains for U.S. manufacturing output

(importance of goods imports).

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