Sunday, May 01, 2011

How Increasing Worker Productivity Has Led to the "Decline of Manufacturing" as a Share of U.S. GDP

As a follow-up to Friday's CD post about U.S. (and world) manufacturing's declining share of GDP, here's some perspective from Chicago Fed economist William Strauss, who explains how rising worker productivity (see chart above) has contributed to that trend:

"In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? 

The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP."

17 Comments:

At 5/01/2011 9:29 AM, Blogger PeakTrader said...

The chart seems to show real manufacturing output rose less in the 1965-82 bear market than the 1982-00 bull market.

Yet, it rose at a much steeper rate after another bear market began in 2000.

 
At 5/01/2011 9:30 AM, Blogger BBL Jr said...

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At 5/01/2011 9:31 AM, Blogger Mark J. Perry said...

Peak: This chart shows real manufacturing output per worker, and not total manufacturing output.

 
At 5/01/2011 9:34 AM, Blogger PeakTrader said...

Yes, I forgot to write "per worker."

 
At 5/01/2011 10:24 AM, Blogger Johnster said...

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At 5/01/2011 10:26 AM, Blogger Johnster said...

What about a graph of average annual salary+benefits in 2009 dollars of a manufacturing worker in the US in the same time frame so we can see if they are receiving increased compensation proportional to their increased productivity? I highly doubt we will get this graph.

 
At 5/01/2011 11:04 AM, Blogger PeakTrader said...

Johnster, the price of the manufactured good should also be taken into account, e.g. after five years, your income is 50% higher and the price of the good you're manufacturing is 10% higher.

 
At 5/01/2011 11:09 AM, Blogger Benjamin said...

Again, real wealth, income and security come from our private-sector, not from federal civilian and military agencies.

This chart shows the incredible innovation of the private sector.

Anything we do now to expand and vivify the private sector, and reduce the public sector, will boost our real living standards.

 
At 5/01/2011 11:14 AM, Blogger PeakTrader said...

Capital equipment, paid by the manufacturer, to increase productivity can make worker's jobs easier.

 
At 5/01/2011 12:34 PM, Blogger Walt G. said...

Johnster,

You can make your own graph(s) from Bureau of Labor Statistics (BLS) data including total compensation. The BLS has a great search function to find whatever you want. The following is from their March 11, 2011 public release.

Manufacturing hourly compensation costs in the United States in 2009 were lower than in 12 European countries and Australia, but higher than in 20 other countries covered by the Bureau of Labor Statistics (see chart 1). U.S. hourly compensation costs rose about 4 percent from the previous year to $33.53.

 
At 5/01/2011 3:29 PM, Blogger Terry said...

The graph is somewhat misleading. During this period of time the US shed thousands of textile, sewing, shoes, and other types of jobs. Fortunately the low end manufacturing jobs were replaced with airline, computer, and auto production of much higher value. There was productivity gains but most of the increase has been a shift in type of production. As the US continues to lose manufacturing jobs, the country will begin to see a drop in manufacturing output.

 
At 5/01/2011 5:54 PM, Blogger PeakTrader said...

Terry says: "As the US continues to lose manufacturing jobs, the country will begin to see a drop in manufacturing output."

While U.S. manufacturing has been losing jobs, the value of manufacturing output has been increasing:

Economy of the United States-Manufacturing, Wikipedia:

The United States is the world's largest manufacturer, with a 2007 industrial output of $2.69 trillion... the US leads the world in airplane manufacturing...Main industries include petroleum, steel, automobiles, construction machinery, aerospace, agricultural machinery, telecommunications, chemicals, electronics, food processing, consumer goods, lumber, and mining.

The U.S. produces approximately 21% of the world's manufacturing output, a number which has remained unchanged for the last 40 years.

The job loss during this continual volume growth is explained by record breaking productivity gains. In addition, growth in telecommunications, pharmaceuticals, aircraft, heavy machinery and other industries along with declines in low end, low skill industries such as clothing, toys, and other simple manufacturing have resulted in U.S. jobs being more highly skilled and better paying.

 
At 5/01/2011 6:04 PM, Blogger PeakTrader said...

The U.S. will maintain its global manufacturing share, in part, because the U.S. produces goods other countries can't.

Federal Reserve Bank of Chicago
Is U.S. Manufacturing Disappearing?
August 19, 2010

By 2006, the U.S. economy employed about as many workers in manufacturing as in 1950, just over 14 million.

While employment has changed very little over the past 60 years, output in manufacturing has increased at an annual rate of 3.4%. Manufacturing output in 2007 was over 600% higher than in 1950.

 
At 5/01/2011 6:22 PM, Blogger PeakTrader said...

The statement...:

"The U.S. produces approximately 21% of the world's manufacturing output, a number which has remained unchanged for the last 40 years."

...is amazing, because the U.S. has imported up to $800 billion a year more than it has exported, which raises manufacturing output in other countries.

 
At 5/01/2011 7:34 PM, Blogger Benjamin said...

China’s Manufacturing Output Now Tops U.S. Production in Dollar Value, Firm Says
March 21, 2011 in WTO Reporter
Leave a Comment
A private economic consulting firm March 14 said China overtook the United States in 2010 as the world’s top manufacturer in terms of annual value-added production.
“While the U.S. and much of the world saw manufacturing contract during the recent recession, output in China continued to expand throughout,” said Mark Killion, director of world industry services at IHS Global Insight.
But a leading U.S. manufacturing trade group disputed the finding, saying the United States continues to be the largest producer.
Nonetheless, the Englewood, Colo.-based firm estimated that although U.S. industrial output has turned around since mid-2009, China’s production growth outpaced that of the United States last year (18.0 percent versus 12.6 percent). In addition, China’s currency has appreciated against the U.S. dollar in recent years, also helping to boost the value of its manufacturing output, it said.
“Thus the size of the manufacturing sector in China in 2010, when measured in nominal [U.S. dollar] terms, is now larger than the U.S. manufacturing sector, “despite the fact that the size of the entire U.S. economy is nearly three times as large as that of China,” Killion said.
The size of each country’s manufacturing sector is roughly double that of the next biggest producer, Japan, and three times that of Germany, the fourth largest in the world…

This suggests that outside of USA, China, Japan and Germany, hardly squat goes on.

 
At 5/02/2011 7:41 AM, Blogger juandos said...

A follow up on pseudo benny's comment:

China has ended a 110-year-long US leadership, overtaking the country as the world's top manufacturing nation in 2010, reports quoting a research report by US-based consultancy IHS Global Insight said...

China last year accounted for 19.8% of the world's manufacturing output while the US accounted for 19.4%, according to the study. The findings, however, were far from bleak for US manufacturing, said Mark Killion, IHS's head of world industry services.

The US has a huge productivity advantage in that it produced only slightly less than China's manufacturing output in 2010 but with 11.5 million workers compared to the 100 million employed in the same sector in China” Killion said, who added that much of China's manufacturing output was driven by the Chinese subsidiaries of US companies and was based around US-derived technologies.

IHS Global Insight: Country & Industry Forecasting

 
At 5/02/2011 7:43 AM, Blogger juandos said...

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