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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. 2


Motivation •

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

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. 3


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

Foreign factors: − China effects. − We find mixed evidence for U.S. manufacturing employment. 9


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. 11


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.

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. 13


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

4

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). 16

is American Manufacturing in Decline?  

Kevin Kliesen at Trade and the Future of Industry in Chicago, IL on September 12, 2018.

is American Manufacturing in Decline?  

Kevin Kliesen at Trade and the Future of Industry in Chicago, IL on September 12, 2018.