Copyright © 2010 Rockwell Automation, Inc. All rights reserved.

Manufacturing Perspectives 2011

Is the U.S. Losing Its Manufacturing Base?

William StraussSenior Economistand Economic AdvisorFederal Reserve Bank of Chicago

Manufacturing PerspectivesAutomation Fair 2011November 15, 2011

The Setup

Manufacturing output peaked in December 2007and fell 20.5% over the following 18 months

50

60

70

80

90

100

110

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Industrial production ‐manufacturingIndex 2007 = 100

Manufacturing capacity utilization collapsedto the lowest rate in 70 years

646668707274767880828486

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Capacity utilization ‐manufacturingpercent

Job declines in the manufacturing sector were significant,with over 2 million jobs lost over that same period

‐20

‐15

‐10

‐5

0

5

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Manufacturing employmentpercent

Quarterly change (saar)

Percent change from a year earlier

Is the U.S. Losing ItsManufacturing Base?

Manufacturing employment as a share of national employment has been declining for over 50 years

0

5

10

15

20

25

30

35

40

1940 '50 '60 '70 '80 '90 '00 '10

Manufacturing employment asa share of total nonfarm employmentpercent

The number of jobs in manufacturing has beenrelatively stable over this period,

edging lower on average by -0.3% per year since 1947

02468101214161820

1940 '50 '60 '70 '80 '90 '00 '10

Manufacturing employmentmillions

Not to make a mountain out of a molehill,but manufacturing employment was increasing up until 1979

and has been moving lower over the past 30 years

10

12

14

16

18

20

1940 '50 '60 '70 '80 '90 '00 '10

Manufacturing employmentmillions

0.8%

‐1.6%

However, service sector employment has grown more than fourfold over this period,

averaging growth of 2.3% per year since 1947

0

20

40

60

80

100

120

1940 '50 '60 '70 '80 '90 '00 '10

Employmentmillions

service

manufacturing

While manufacturing employment growth has been edging lower over the past 63 years,

manufacturing output increased by 3.1% per year

0

20

40

60

80

100

120

1940 '50 '60 '70 '80 '90 '00 '10

Manufacturing outputIndex 2007=100

This translated into an almost 600 percent increase in manufacturing output over this time period

0

20

40

60

80

100

120

0

20

40

60

80

100

120

1940 '50 '60 '70 '80 '90 '00 '10

ManufacturingIndex 2007=100

output ‐ left scale

employment ‐ right scale

millions

The increase in output can be attributed to strong productivity growth experienced by the manufacturing sector

0

100

200

300

400

500

600

1950 '60 '70 '80 '90 '00 '10

Manufacturing productivityIndex 1950=100

What took 1,000 workers to produce in 1950takes 177 workers today

0100200300400500600700800900

1,000

1950 1960 1970 1980 1990 2000 2010

Manufacturing sector:Number of workers needed to do the work of 1,000 workers in 1950

Number of workers

1,000

813

627

485

362

243177

Manufacturing productivity growing faster over the past 40 years

2.2

2.7

1.7 1.6

2.1

2.8

2.1

2.6 2.63.0

4.13.7

0

1

2

3

4

5

1950s 1960s 1970s 1980s 1990s 2000‐2010

ProductivityAverage annual percent change

Nonfarm business Manufacturing

The divergence in productivity appearsto have occurred around the mid-1970s

0

50

100

150

200

250

300

350

1950 '60 '70 '80 '90 '00 '10

ProductivityIndex 1975=100

manufacturing

nonfarm business

This divergence is especially apparent indurable manufacturing

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100

150

200

250

300

350

400

1950 '60 '70 '80 '90 '00 '10

ProductivityIndex 1975=100

durable manufacturing

nondurable manufacturing

Strong productivity growth had allowed the manufacturing sector to grow faster than the overall economy

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200

300

400

500

600

700

800

900

1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

OutputIndex 1947=100

industrial production  ‐ manufacturing

real GDP

However, lower relative prices in the manufacturing sectorhas lead to manufacturing comprising

a smaller share of GDP over time

10

15

20

25

30

1947 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

Manufacturing share of GDPpercent

How profitableis manufacturing?

While more cyclical, profits in manufacturing have out-performed returns in nonfinancial corporate businesses

0

5

10

15

20

25

30

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Profits ‐ as a percentof value addedpercent

manufacturing

nonfinancial corporate business

Lessons from the farm sector

We are producing more in our farm sectorthan at any time in our history

0

20

40

60

80

100

120

1947 '57 '67 '77 '87 '97 '07

Real gross value added: farm businessBillions of chained 2005 dollars

And we have accomplished this remarkable featwith less than 2.0% of our employment devoted to farming

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20

30

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50

60

70

80

90

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Share of total employmentpercent

services

agriculture

manufacturing

Trade with China

China has risen to number one in terms of U.S. imports, representing 19.1% of all imports in 2010

0

500

1,000

1,500

2,000

2,500

1975 '80 '85 '90 '95 '00 '05 '10

Imports (customs value)billions of dollars

China

Canada

Mexico

Japan

GermanyUK

Korea

rest ofimports

While China has risen to be our third largest export country, it represents only 7.2% of U.S. exports

0

200

400

600

800

1,000

1,200

1,400

1975 '80 '85 '90 '95 '00 '05 '10

Exports (f.a.s.)billions of dollars

China

Canada

MexicoJapan

GermanyUK

Korea

rest ofexports

This difference has led to China havingthe largest trade deficit with the U.S.

‐900‐800‐700‐600‐500‐400‐300‐200‐100

0100

1975 '80 '85 '90 '95 '00 '05 '10

Trade balance (customs value)billions of dollars

China

Canada

MexicoJapan

Germany

UKKorea

rest oftradedeficit

China has certainly increasedthe amount of goods flowing into the U.S.

0

500

1,000

1,500

2,000

2,500

1975 '80 '85 '90 '95 '00 '05 '10

Imports (customs value)Index 1990=100

China

Canada

Mexico

JapanGermany UKKorea

rest of imports

They have also represented the largest gain for exports from the U.S.

0

500

1,000

1,500

2,000

1975 '80 '85 '90 '95 '00 '05 '10

Exports (f.a.s.)Index 1990=100

China

Canada

Mexico

JapanGermanyUK

Korea

rest of imports

While China has increased its share of imports to the U.S., the Pacific Rim as a whole has hada declining share since the mid-90s

0

5

10

15

20

25

30

35

40

45

1974 '78 '82 '86 '90 '94 '98 '02 '06 '10

Share of U.S. importspercent

Pacific Rim

China

Pacific Rim excluding China

The Current Expansion

Beginning in July 2009, manufacturing output in theUnited States has been increasing at a 5.8% annualized rate

and has recovered 52.8% of its drop in output

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60

70

80

90

100

110

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Industrial production ‐manufacturingIndex 2007 = 100

50

60

70

80

90

100

110

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Industrial production ‐manufacturingIndex 2007 = 100

Manufacturing capacity utilization rebounded

646668707274767880828486

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Capacity utilization ‐manufacturingpercent

646668707274767880828486

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Capacity utilization ‐manufacturingpercent

Summary

The trends that have dominated manufacturing for the past70 years are suggestive of the future for U.S. manufacturing: ever increasing output with employment representing asmaller share of total employment

Manufacturing employment has shown little change over thepast 70 years – with a steady decline over the past 30 years

Manufacturing output is in the process of recovering its lossesThe success of manufacturing has been driven by productivity

The most recent decline in manufacturing was cyclical,not structural

Profits in manufacturing have outperformed profits for therest of the nation

Chicago Fed Letter - June 2003www.chicagofed.org

Copyright © 2009 Rockwell Automation, Inc. All rights reserved.

Manufacturing Perspectives 2011