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Surveying manufacturing's role in the U.S. economy

Last week, Atlanta Fed President Dennis Lockhart delivered a speech on U.S. manufacturing to the Knoxville Economics Club. In the speech, he discussed the manufacturing sector's role in the economic recovery. Among the points President Lockhart made were the following:

Part of the economic recovery is attributable to the relatively strong rebound in manufacturing production and employment from the depth of the recession. In 2010, both production and manufacturing employment outpaced growth in the rest of the economy.
Increased demand for U.S. manufactured goods abroad is also acting as a shot in the arm for the sector. Last year, the net exports component of the gross domestic product (GDP) formula made its largest contribution to GDP growth since World War II.

President Lockhart also addressed some growing concerns regarding the U.S. manufacturing sector but, to paraphrase a line from Twain, Lockhart said that in his opinion, rumors of the death of U.S. manufacturing have been greatly exaggerated.

Below are some additional insights regarding the concerns President Lockhart addressed as well as some information about manufacturing in the Sixth District.

Concern: Manufacturing is a decreasing source of employment in the United States.
Response:   Not even the most optimistic analyst could refute that manufacturing represents a gradually decreasing share of employment in the United States. This decrease has been a long-term trend since the 1950s. Chart 1 shows the share of all U.S. jobs accounted for by the manufacturing sector. In the 1950s, one in three employed Americans worked in the manufacturing sector. That figure today is now down to less than one in ten. Why? Much of the answer lies in the greatly increased productivity of manufacturing firms since the 1950s. Gains in per-worker output in manufacturing have greatly exceeded those in the overall business sector just about every year data have been collected for this series.

Concern: The United States doesn't actually make anything anymore.
Response:   Oh yes, we do. Manufacturing output represents 11 percent to 12 percent of the U.S. economy in terms of real GDP. This share has remained constant for several decades. Manufacturing output's share of nominal GDP is ticking down over time because the relative prices of things we make get cheaper over time as we make them more efficiently. Adjusting for the relative change in price, we see the manufacturing sector's output has remained a critical piece of the U.S. economy.

What we make has changed, though, and the overall health of manufacturing depends heavily on the type of manufacturing in question. Take a look at the Federal Reserve Board's indexes for the production of three industries: apparel and leather goods, computers and electronic products, and fabricated metals (see chart 3). This chart tells quite a story. We're making more than we used to of some things (computers/electronics), and less than we used to of other things (apparel/leather goods). Some manufacturing industries feel the effects of the business cycle but haven't changed that much over time at all (fabricated metals, for example).

Concern: Chinese manufacturing is putting U.S. factories out of business.
Response:   While China is definitely growing rapidly and increasing its share of global manufacturing output in the process (see chart 4), the United States remains the largest manufacturing country in the world, providing about 20 percent of the entire world's manufactured goods. We're not, however, the world's largest exporter of manufactured goods. China takes the cake there, followed by Germany. (The United States is third, though our exports of services are often understated, as discussed in this article from The Economist.) Recent efforts have been made to form a more modern and comprehensive export strategy. So the United States does export goods. In fact, the US-China Business Council recently announced that the state of Georgia alone exported more than $2.4 billion in goods and services to China last year. Also, from 1999 to 2010, U.S. sales to China grew by 468 percent.

Back in the Sixth District…
Some fresh regional manufacturing data also came out last week: our friends at the Kennesaw State University Econometrics Center released the March Southeast Purchasing Managers Index (PMI) report. The Southeast's manufacturing sector is roughly on par with that of the nation as a whole. New orders, production, employment, and inventories all reportedly expanded for Southeast manufacturers over the month of March (see chart 5), but growth in new orders and production cooled off a bit (down 3.9 index points and 1.6 index points, respectively). Relatively small declines in the PMI like the one for March (down by 0.4 index points) are not troubling signals, as long as the index hovers above 50 points, the index's benchmark for growth. Overall, the Southeast PMI, like the national PMI, remains at elevated levels. March's Southeast PMI was 64.4.

Photo of Mark Carter By Mark Carter
an analyst in the Atlanta Fed research department

April 14, 2011 in Manufacturing | Permalink


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