American manufacturing is bigger than ever. But if we expect manufacturing to support the U.S. and Midwest economies, forget it.
These two statements sound contradictory, but they're facts that need to guide some of our thinking as we plot the Midwest's post-recession future.
The contradiction was laid out in a fascinating article by William Strauss, senior economist at the Federal Reserve Bank of Chicago, presented in the invaluable blog run by Bill Testa, the Chicago Fed's vice president and director of regional programs. Strauss' article is entitled "Is U.S. Manufacturing Disappearing?" His answer is no, but the real interest is in the details.
Strauss's data covered the entire U.S. economy, but it applies directly to the Midwest. He makes three main points:
- For all the outsourcing of industry and decline of old manufacturing towns, manufacturing output in the U.S. has been growing at an astounding rate of 3.4. percent per year for decades. In 2007, just before the recession began, America produced no less than six times as many manufactured goods as it did 60 years earlier, in 1950.
- But the number of jobs in manufacturing has been shrinking just as steadily. In 1950, Strauss says, some 31 percent of all American non-farm workers were in manufacturing. If manufacturing output has been growing by 3.4. percent per year, manufacturing's share of total employment has been falling just as fast. As of last year, it was only 9.1 percent of all jobs.
- Back in 1950, manufacturing accounted for 27 percent of the total American gross domestic project. In 2007, after decades of increasing output, it was only 12.1 percent of total GDP.
The reason behind these figures is productivity, as Strauss says. Labor-saving technology has done exactly what its name implies. It has saved labor (although not the workers who used to do that labor.) According to Strauss, it took 1,000 workers to do in 1960 what 184 workers can do now. In some industries, the cut in the work force has been even more severe: U.S. Steel and other giant mills in northwest Indiana turn out as much steel now as they ever did, with about one-tenth the work force.
This increase in productivity -- what an individual worker can turn out -- has been going on at a steady 2.9 percent annual increase over the past 60 years, even faster in recent years, and shows no sign of slowing.
Supporters of industry deny say that manufacturing is as important to the Midwest as it ever was and must be encouraged. In a sense, they're right. Skeptics says that we're in the post-industrial age now and can no longer rely on industry to underpin our economy, and they're right, too.
Globalization, of course, helps to propel this. Since 1950, we've learned that other people in other countries can do what the Midwest does, and do it a lot cheaper. One solution is to move into high-end manufacturing, producing things that can only be made by highly-skilled labor, to stay ahead of the rest of the world. Another solution is to keep making the same things, but with ever fewer workers.
I was in a small Midwestern factory town recently, visiting a plant where they make batteries. The plant had been there 50 years and was the only one left in the country making this kind of battery: all the rest had gone away, mostly to Mexico. The only way to stay competitive, the manager said, was through automation -- doing more with fewer workers. The plant once had 35 workers on one of its assembly lines: now seven workers run the line. Before the recession, the manager said, the entire plant had 780 workers: now it's down to 540 and, when the recession ends, there are no plans to return to the former staffing.
If all goes well, the plant will stay in this town. This is good. But the plant will support ever fewer workers, and this is bad. Little by little, the plant's value to the town will erode. This is no reason to kick it out of town. But it's also no reason to think that this kind of manufacturing will keep the town alive.
The plant manager said that, as more routine work is outsourced, he wants to move into more high-skilled manufacturing. So anyone he hires in the future will be more skilled than most of the workers in the past. This is the "return to skills" that economists talk about -- the idea that future rewards will go to those with the most education and skills, with everyone else left behind. This clearly is the wave of the future, but it doesn't do much for the town, where most workers are not high-skilled. And it doesn't do much right now for the Midwest, for the same reason.
Strauss mentioned another reason why manufacturing provides an increasingly smaller share of the GDP. If inflation averaged 3.7 percent per year since 1980, the price of cars -- and, by implication, other manufactured goods -- has been going up only 1.7 percent per year. Again, globalization has something to do with it: many emerging nations are making cars and other formerly high-end products now, creating a global glut that drives down prices everywhere.
What's the future? Pretty clearly, more of the same.
Strauss says all the manufacturers he meets tell him that they plan to be even more efficient, even more productive, in the future. That's the story I heard from that small-town battery maker.
As Strauss says, "we can look forward to an industry that will continue to produce more, contributing to a stronger U.S. economy, with manufacturing employment representing a smaller share of the overall U.S. labor market." He acknowledges that this is cold comfort for old factory towns and their workers but argues that this will lead to a "globally competitive U.S. manufacturing sector," benefiting everyone.
Not necessarily. All this resembles farming in the Midwest. The region produces more food now than it ever did, but with fewer workers every year: no more than 2 percent of the region's labor force is needed now by agriculture. The people who used to work on farms were absorbed into the manufacturing economy, just as factory workers are now being absorbed into the service economy. But rural towns that used to rely on lots of farmers are withering as the farm population shrinks: old factory towns that can't reinvent themselves will similarly wither as the factory jobs -- if not the factories themselves -- go away.
For more information on economic development, visit the In the News section of the Global Midwest Web site.
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