Tuesday, June 14, 2011

Phenomenal Gains in Manufacturing Productivity

The chart above shows annual real manufacturing output per worker from 1947-2010 using data from the BEA for manufacturing output by industry and data from the BLS on manufacturing employment.  

In 1950, the average U.S. manufacturing employee produced $19,600 (in 2010 dollars) of output, and by 1976 the amount of output per worker had doubled to $38,500.  During that period manufacturing productivity was growing annually at 2.63%.  Output per worker doubled again to $75,000 by 1997 (21 years later), as productivity per worker increased to 3.23%.  Manufacturing output per worker approximately doubled again to $149,000 by 2010, but it only took 13 years because worker productivity accelerated to 5.42% during this period.

This is an amazing story of huge increases in U.S. worker productivity in the manufacturing sector.  In fact, the growth in manufacturing worker productivity more than doubled from 2.63% per year in the period between 1950 and mid-1970s to 5.42% annually between 1997 and 2010.  Whereas it took 26 years for output per worker to double during the first period (1950-1976), it only took 13 years during the more recent period (1997-2010). 

We are constantly hammered with bad news about the decline in the number of manufacturing jobs in the U.S., but we never hear the good news about why that is happening: Manufacturing workers in America keep getting more and more productive, which then allows us to produce more and more output over time, with fewer and fewer workers.  That's a great story about an American industry that is healthy, successful and thriving, and not an industry in decline.  

By continually increasing worker productivity and productive efficiency, the American manufacturing sector has been hugely successful at achieving one of the most important economic outcomes of being able to "produce more with less." In the process, those efficiency and productivity gains have helped conserve scarce resources, including human resources, more effectively than almost any other industry, except maybe farming. It's hard to overstate how much the efficiency gains achieved by U.S. manufacturing have contributed to the improvements in our standard of living by making manufactured goods more affordable over time.  We should spend less time complaining about fewer workers in manufacturing, and more time celebrating the phenomenal gains in manufacturing worker productivity.    

42 Comments:

At 6/14/2011 9:52 PM, Blogger Rufus II said...

Yes, if you're not an out-of-work manufacturing worker.

Look, of course, this is wonderful news. It's just what we dreamed would happen. And, it's, almost surely, going to get even better.

However, you could have said almost the exact same thing in 1929. In fact, some did.

We have to be ready to mitigate the "negative" consequences of such growth. Approx. 20% of our workers are now "unemployed," or "underemployed." And, a huge amount of our investment capital is locked up overseas.

The Republicans are holding back the FTA agreements with Colombia, Panama, and S. Korea, because they don't want the "worker retraining" provisions. That's bizarro-world.

We are on the edge of another '30's-level depression, and some of our politicians (primarily Republicans) are dead-set on repeating the same types of actions that pushed us over the brink that time.

Times of Great Change are Dangerous times, and these Are times of great change. We need to "choose wisely."

 
At 6/15/2011 12:18 AM, Blogger JoeMac said...

How have these gains in productivity improved the lives of Americans?

 
At 6/15/2011 2:10 AM, Blogger juandos said...

"The Republicans are holding back the FTA agreements with Colombia, Panama, and S. Korea, because they don't want the "worker retraining" provisions. That's bizarro-world"...

Hmmm, how many of these 'worker retraining' programs have worked out so far?

I only remember two of them off hand, one with NAFTA and one for laid off airline employees about five or six years ago...

I don't think either one of them made any impact but I could be wrong...

BTW considering your '1929' comment consider the following from Zer0Hedge: The First Great Depression: Blow By Blow, From The BIS, And How It Mirrors Our Ongoing Second Great Depression

 
At 6/15/2011 4:10 AM, Blogger Bernie Ecch said...

From a Nick Gillepsie article on reason.coM about "Obama's super Lame-o Council".

General Electric's workforce shrunk by 25,000-almost 16%-between 2001 and 2010. Overseas jobs increased.

American Express employs 28% fewer than a decade ago.

Kodak's workforce is now 18,800 after being 75,000 in 2001.

Xerox's workforce shrank by nearly a third between 2001 and 2009 before it acquired Affiliated Computer Services.

Certainly worker's pay didn't reflect these productivity gains while corporate pay certainly. So what few worker bees there are left..continue to toil harder so your corporate masters can trade in their BMWs for Ferraris. Soon enough, you will be out trying to get by owning a food truck

 
At 6/15/2011 5:34 AM, Blogger cluemeister said...

The ATM's are taking our jobs!

 
At 6/15/2011 7:58 AM, Blogger morganovich said...

this whole argument is flawed.

real productivity is a function of inflation.

the inflation calculation was changed.

look at the chart.

there's an inflection point right when it happened (1992).

this is like taking a temperature chart in Celsius, grafting on a new series in Fahrenheit and claiming "wow is it hotter". it's meaningless.

whatever you believe about the proper CPI forumla, you cannot compare the pre 1992 series to the one after.

and to claim that such a change was some sort of real inflection point is just bad statistics.

normalize the series using pre 1992 CPI and this whole story goes away. i don't know how to adjust the old series to the new CPI (nor does anyone which is why it has not been done)

 
At 6/15/2011 8:12 AM, Blogger Mark J. Perry said...

The BEA GDP data are not adjusted for inflation using the CPI from the BLS, the GDP deflator for the manufacturing sector was used from the BEA.

 
At 6/15/2011 8:16 AM, Blogger Walt G. said...

"normalize the series using pre 1992 CPI and this whole story goes away."

As you say, how much gain is questionable. But I don't think anyone in a manufacturing plant doesn't know a lot more is being done with a lot fewer people. I would guess we have eliminated our headcount requirements by 1/2 to 2/3 over the last 15-20 years while obtaining the same output. That's pretty substantial, and fairly common.

 
At 6/15/2011 8:27 AM, Blogger morganovich said...

perhaps you should tell this to new york?

oopsie.

"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated in June. The general business conditions index slipped below zero for the first time since November of 2010, falling twenty points to -7.8.

The new orders and shipments indexes also posted steep declines and fell below zero. The index for number of employees dropped fifteen points to 10.2"

 
At 6/15/2011 8:29 AM, Blogger morganovich said...

mark-

you make that argument over and over, but that does not change the fact that the gdp delfator etc moved to keep pace with CPI as well through the same kinds of adjustments.

the same argument can be made about the defaltor as CPI and the timing was the same.

 
At 6/15/2011 8:40 AM, Blogger Rufus II said...

Empire Index Down 7.8

 
At 6/15/2011 8:48 AM, Blogger Rufus II said...

Ah, the phone rang as I was getting ready to hit submit. I didn't see Morgan's post on the Empire Index.

The Empire Index is volatile, but it does tend to lead (both in, and out, of recessions.)

 
At 6/15/2011 9:31 AM, Blogger Rufus II said...

That was an interesting link, Juandos.

 
At 6/15/2011 9:53 AM, Blogger Buddy R Pacifico said...

"perhaps you should tell this to new york?

oopsie."


From Keys to a Manufacturing Resurgence in New York, May 2011:

"According to the Tax Foundation, we have the highest per capita individual income tax collections in the nation and rank second in per capita corporate income tax collections. New Yorkers pay the highest fueltaxes, and we rank fth in per capita residential property tax burdens."

New York also imposes a heavy regulatory burden on its manufacturing sector, especially in the environmental area, where the state’s permitting and emission requirements are typically among the most rigorous in the nation."


It is not surprising to many that NY state manufacturing is reporting weak numbers, as compared to other regions.

 
At 6/15/2011 10:24 AM, Blogger morganovich said...

"It is not surprising to many that NY state manufacturing is reporting weak numbers, as compared to other regions."

the empire state survey led out of the downturn. it's now leading into the next.

the other regions are deteriorating as well. we don't have their june numbers yet. they will make for interesting reading.

 
At 6/15/2011 10:29 AM, Blogger Walt G. said...

morganovich and Rufus II,

Isn't it possible to have spectacular gains in productivity even with terrible business conditions? In fact, wouldn't that force the issue?

I don't about the deflator measurements, but huge gains in output have been made with huge decreases in inputs. Maybe you have to see it to believe it. This is not just the auto industry--ask the experts around the business community.

 
At 6/15/2011 10:30 AM, Blogger Buddy R Pacifico said...

"the other regions are deteriorating as well"

Factory production increases in May after April decline.

 
At 6/15/2011 10:36 AM, Blogger morganovich said...

walt-

i talk to dozens of companies a week, many in manufacturing.

the "spectacular gains" you describe are not as big a deal as you seem to be making them out to be.

autos may be an exception, but productivity in textiles or board assembly hasn't moved much.

i think you are taking too narrow a sample to stand for the whole.

regarding you idea about productivity gains and business conditions, i don't understand that at all. how would productivity gains drive down business conditions?

they should increase real productions and keep prices stable driving profits up.

 
At 6/15/2011 10:49 AM, Blogger morganovich said...

buddy-

philly fed showed sharply slowing growth over the last 2 months.

"The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 18.5 in April to 3.9, its lowest reading since last October "

june will likely go negative.

this index literally fell of a cliff a couple of months ago.

the future general activity index is down 46 points in 2 months.

richmond fed looks similar.

"Manufacturing activity in the central Atlantic region paused in May, after expanding during the previous seven months, according to the Richmond Fed's latest survey. The index of overall activity was pushed into negative territory by weak readings for shipments and new orders"

so does kansas city:

"The latest results are indicating that the manufacturing expansion slowed significantly, falling to a near contraction level of 1 from a level of 14 a month earlier, while the employee index declined to 9 and the prices paid for raw materials declined to 54."

the national ISM index also fell sharply in may from 60.4 to 53.5.

new orders were worse, dropping from 61.7 to 51. (very near contraction)

the rate of change on every economic measure in that series was "slower". (except for customer inventories, and you don't want that too high)

you seem to be confusing "deteriorating" with contracting.

few of these indexes actually contracted in may, but all showed SHARPLY lower growth, most to almost zero.

like the empire state, many will likely slide into contraction in june when those numbers are reported.

watch and see.

 
At 6/15/2011 11:02 AM, Blogger Jet Beagle said...

I agree completely with Walt. U.S. companies have continued to realize real productivity gains throughout not just manufacturing but also through service operations. Anyone who believes otherwise has probably not been in a position to witness those gains.

Walt is correct. It is not just the auto industry which found ways to increase output with fewer inputs. Operations as diverse as giant Wal-Mart distribution centers and the neighborhood McDonalds restaurants have implemented productivity-increasing machinery and methods.

 
At 6/15/2011 11:07 AM, Blogger Walt G. said...

"i think you are taking too narrow a sample to stand for the whole."

Maybe. But I think you will find the same in steel, rubber etc . . . . People who build manufacturing machines have to design them to run with many fewer people, and that's across industries.

Productivity does not drive down business conditions. Business conditions (good or bad) can drive up productivity.

 
At 6/15/2011 11:07 AM, Blogger Jet Beagle said...

Rufus II: "We have to be ready to mitigate the "negative" consequences of such growth."

Right. Except that "we" have done exactly that already. The five years of highest civilian employment in the U.S. were 2006-2010.

For the past 50 years, U.S. business operations have continued to find ways to increase worker productivity. At the same time, the number of jobs have continued to grow.

 
At 6/15/2011 11:12 AM, Blogger Buddy R Pacifico said...

morganovich, thanks for your response.

"you seem to be confusing "deteriorating" with contracting.

How about growing more slowly?

BTW, Boeing is upping 737 production from 31.5 to 42 planes a month by 2014 -- all at the Renton, WA plant.

 
At 6/15/2011 11:12 AM, Blogger Jet Beagle said...

morganovich: "i talk to dozens of companies a week, many in manufacturing."

My coworkers and I do business with dozens of companies a week, many in manufacturing. Those companies continue to find ways to improve productivity. They do so because buyers such as us continue to demand more value, and our suppliers' competitors continue to find ways to provide it.

 
At 6/15/2011 11:20 AM, Blogger Benjamin said...

The private sector does more for less every year.

The federal military and civilian agencies do less for more every year.

 
At 6/15/2011 11:22 AM, Blogger NormanB said...

Professor Perry: Semi-log graphs, please.

 
At 6/15/2011 12:01 PM, Blogger morganovich said...

"Those companies continue to find ways to improve productivity."

jet, don't misunderstand me. i am not arguing that there are no productivity gains, i am saying that they are being significantly overstated.

if you underestimate inflation, you overestimate productivity.

over the last 2 years, most of these gains have been inflation.

there was no sudden productivity surge.

 
At 6/15/2011 12:15 PM, Blogger Benjamin said...

Morgan:

In what capacity do you "talk to dozens of companies every week?"

 
At 6/15/2011 12:42 PM, Blogger morganovich said...

benji-

as you know, i run a small cap hedge fund.

we invest in a wide variety of industries. we talk to the companies, their customers, distributors, and other market participants in whatever space we become interested in.

we do this every day. there are 2 of us. if we each talk to 4 companies a day (a very conservative assumption), then between us, that's 40 a week. (we download info to each other).

we are constantly asking about demand, business conditions, new technologies and developments, pricing, things that drive gross and operating margins and what sorts of things companies are worried or excited about.

this gives us a pretty good sense of what's going on. that's our job.

you make bar tables, i gather corporate and economic data and sift it into investable form.

ps.

feeling as good about that rabid bull call on the stockmarket as you were yesterday?

bear market rallies are always short and sharp.

the dow is down 1000 points from your last big bull call.

nasdaq is already down on the year. the other markets will follow soon.

 
At 6/15/2011 1:56 PM, Blogger Jet Beagle said...

morganovich: "this gives us a pretty good sense of what's going on. that's our job."

Such hubris!

I suppose that ends any debate, doesn't it? After all, none of the rest of us could possibly have the "good sense of what's going on" as does a hedge fund manager.

 
At 6/15/2011 1:58 PM, Blogger Rufus II said...

Conventional (Fed) Wisdom is that: we'll have a "little" slowdown, the price of petroleum/products will drop, drastically, folks will start feeling better, and start "moving" again.

Well, we're getting the "slowdown" (whether it will be a "little" one we'll have to wait and see,) now, the question is, "will the price of gasoline drop enough to boost consumer confidence, and spending?"

The answer, I think, is "It might."

My fear is: At some point, a slowing U.S. economy won't be able to drive the cost of energy down enough to spark a "rebound." If not this time, then a very good chance of "next time."

 
At 6/15/2011 2:29 PM, Blogger Buddy R Pacifico said...

"such hubris"

A lot of self confidence is needed to run a hedge fund. I often disagree with morganovich, which can be seen above, but his views bring other perspective in concise and lucid commments. I appreciate his effort and time in posting.

I do wonder if m. is going to run a Hedge Farm? A Hedge Farm might offer the inflationary protection and capital safety needed, at this point in financial history.

 
At 6/15/2011 2:30 PM, Blogger VangelV said...

I am sorry but the productivity numbers are not exactly accurate. The actual physical output per person has not grown by nearly as much over the past few decades. There are two primary reasons that provide an improper picture.

First, as regulatory burdens increase low margin manufacturing jobs are lost to other nations. Eliminate all such jobs and you will wind up with those that are left looking much more productive, even if their adjusted output is not particularly impressive.

Second, the gain in productivity comes from looking at the price output and not accounting properly for the inflation rate. If the right numbers were used things would look a lot different.

 
At 6/15/2011 2:32 PM, Blogger morganovich said...

jet-

"I suppose that ends any debate, doesn't it? After all, none of the rest of us could possibly have the "good sense of what's going on" as does a hedge fund manager."

you have awfully thin skin. there are lots of hedge fund managers. many disagree with me. this was not some appeal to authority to attempt to end an argument, it as a direct response to benji's question "In what capacity do you "talk to dozens of companies every week?""

it was not directed at you in any way.

you may need to lighten up a bit.

 
At 6/15/2011 2:38 PM, Blogger morganovich said...

buddy-

i have seen people talk about hedge farms (generally private equity guys).

personally, i wouldn't touch it with a 10 foot pole. farming is a rough business, and highly weather dependent.

i have seen a number of funds (including greenlight capital, where i keep some money) shift to a gold backing.

they have walked away from the dollar entirely and are hedging inflation and dollar debasement by backing the whole fund dollar for dollar with physical gold. i think they own about $5 billion worth.

such trends have been on the rise for the last few years ever since the fed lost it's mind.

 
At 6/15/2011 2:43 PM, Blogger morganovich said...

jet-

i was thinking about this a bit further.

since when is "pretty good" hubristic? perhaps "fantastic" or "epic" or "world class" or "infallible" might point that way, but "pretty good" seems fairly tepid.

if i said i was a pretty good cook, would that sound conceited and hubristic?

i think you are really over reacting a bit here.

 
At 6/15/2011 3:05 PM, Blogger Jet Beagle said...

morganovish: "i think you are really over reacting a bit here."

Perhaps. It may just be my bias against all investment and Wall Street types. Most I've run into are arrogant as hell. I was pleased that many found themselves out of a job over the past few years.

Sorry if the knowledge that you run a hedge fund caused me to have less respect for you.

 
At 6/15/2011 5:59 PM, Blogger Benjamin said...

Morgan-

Your fund registers almost nothing with the SEC. Your name shows up nowhere.

 
At 6/16/2011 5:37 AM, Blogger cluemeister said...

Just a thought on productivity gains. When the recession hit, our company laid off our least productive employees. We've also squeezed productivity with new software, and set up new systems. The end result? Staff reduction 50%, production down 17%.

That's not bragging, that's survival.

 
At 6/16/2011 8:45 AM, Blogger morganovich said...

bunny-

"Your fund registers almost nothing with the SEC. "

just when i though we had plumbed the depths of your ignorance, you spout nonsense like that. i don't even know that that is supposed to mean.

hedge funds do not register with the SEC, you are thinking of mutual funds and once more proving how unsophisticated you are despite your claims to the contrary... we briefly has to register as an RIA, but pulled it the minute the law was overturned.

go look us up on hedgefund.net.

you know my name, go find me on linked in.

unlike you, i can substantiate all my claims.

small hedge funds make an EFFORT not to show up. it's the law. our lawyers will not even let us have a website. that's the trade off for being unregulated.

you're just trying to drag the argument into something personal to avoid the fact that you have no response at all to the substance, which seems to be your consistent strategy: lose, be unable to talk to the issue, resort to appeal to authority.

that's the debate technique of a 4 year old.

 
At 6/16/2011 7:43 PM, OpenID Sprewell said...

cluemeister raises a great reason why recessions are a necessary part of the economy. How much pressure would his firm have faced to cut those less-productive employees and install new software if it weren't for the recession? We have some pretty good evidence from the fact that they didn't do it till forced to. Recessions can and do drive productivity, though one would hope that competition in a rising market would be enough, but given human nature and complacency, it has never sufficed.

 
At 6/17/2011 6:07 AM, Blogger QualityPointOPM said...

Excellent post ..great work sir I was looking for a nice article over the net regarding phenomenal gains in manufacturing productivity and its
timesheet inflence...nice work..It is always good to spend some time on reading some good articles and your's come under that category..

 

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