Today’s economic article at 538 is from me (Hale Stewart) and my co-blogger at the Bonddad Blog Silver Oz. Over the last few weeks we have been discussing manufacturing in the US – or, more specifically, the argument that the US doesn’t make things anymore largely as a result of free trade agreements. Unfortunately, the US still makes plenty of goods. In addition, free trade is not the boogie-man job killer many purport it to be. As always, please click on all the pictures to get a larger picture.

There is a common theme across the internet: US manufacturing is dead and it’s never coming back. Well, there’s a big problem with that analysis: it’s not true. In fact, as the chart above indicates, it’s actually false. Note that since 1960, the index of industrial production has risen from a little below 30 to its current level of about 100. And note the increase is continual — meaning the number didn’t just hover around 30 for most of that time only to spike up in one big move. The index has continually risen over that entire period. This situation is also obvious on a logarithmic chart:

Instead, what people are commenting on is the drop in manufacturing employment. Consider these two charts.

Durable Goods Employment remained fairly steady at 10 million to 11.5 million employees between the mid-1960s to the early 2000s. Then total employment dropped like a stone, losing three million people over the last 10 years. These are levels last seen in 1950.

Non-durable goods manufacturing is even worse. From the mid-1960s to the early 200s, total employment in this area hovered around a 6.8 million. However, starting in 2000, the number fell off a cliff, losing almost 2 million people. This is the lowest the number has been in over 60 years.

However, over the last 15 years we’ve seen an increase in manufacturing productivity. Consider the following:

Manufacturing Output per hour has increased continually since records have been kept, as has

Multi-factor productivity.

What does all this information tell us?

US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.

Many people have a knee-jerk reaction to the decline in manufacturing jobs and immediately blame outsourcing/imports for this decline. The following graph demonstrates that the linkage between increased imports and a decline in manufacturing jobs is virtually nonexistent.

What we clearly see is that imports increased quite dramatically over the last 30 years, while good producing jobs remained fairly level (dipping during recession and then recovering) until this last recession, which took a huge toll on manufacturing employment even though imports actually declined. This again plays much better to the argument that productivity increases are the greatest contributor to our decline in manufacturing employment than the outsourcing/imports argument.

And the following is from co-blogger SilverOz:

A recent debate elsewhere interested me enough to do some research on the effects trade has on goods producing employment in the US. Now, I want to state upfront that this is a look at the aggregate and that there are obviously anecdotal cases of individual companies/plants moving to overseas locations for competitive reasons, however, I want to separate the publicized and emotional loss of individual plants from the broad case that free trade is a job killer.

As we all know, the trade deficit has ballooned in recent decades as is evidenced by the following graph (all graphs are thumbnails due to the quantity in this piece):

We can clearly see that really beginning for good at the end of the 1991 recession the trade balance went down dramatically, with the only sustained recoveries occurring during recessions. So, let’s look at how goods producing employees have been affected by this trade deficit by decade.

The trade deficit really got its start during the early 80’s recessions when high interest rates by the Fed created a strong dollar really hurt exports causing their nominal dollar value to flat line from 1981 through 1986 before they took off again in 1987. The following graph shows goods employment vs. the trade deficit for the 80s:

This graph shows no link between the increasing trade deficit and goods employment in the 80s with goods employment rebounding even while the deficit grew following the end of the 81 recession.

Next up are the 90s; the decade of grunge, the stock market bubble, and NAFTA. One would expect to see massive declines in goods employment following the implementation of NAFTA and a ballooning trade deficit towards the end of the decade, but as you can see by the following graph the opposite actually occurred. Following goods jobs reaching their post-recession trough (the first jobless recovery) in late 1992, the exploded up 10% from that bottom at the same time that the trade deficit went from essentially -$18 billion to over -$90 billion.

Now let us move on to our most recent decade; where trade with China exploded, we endured two recessions (both with jobless recoveries), and an enormous increase in national debt. AS you can see from the following graph, the goods employment trough didn’t occur until about 2 years after the first recession ended, which also coincided with a huge increase in the trade deficit, yet once again goods jobs held their own during the massive trade imbalance.

Then, during the most recent recession, goods jobs dropped like a rock (down nearly 20% from the pre-recession peak) and yet the trade deficit actually decreased (and yes, oil was a part of this, but it has also been a big part of our trade deficit all along.

So then, what does can account for our decline in goods employment over recent years, especially over the last decade where it really dropped off a cliff? The most simple answer seems to be that our productivity has reached a point where it can outstrip production demands, which leads to a decline in the labor intensity needed for goods production.

Let’s examine this a bit further. From the end of the 1990 recession to the pre-2001 recession peaks productivity was up about 47%, industrial production was up about 61%, and goods employment was up about 9.3% (I used the end of 1990 recession value and not the trough in actual goods employment here). So during the 90s, production outstripped productivity (although both were up a ton), while job creation came in at only +9.3%, obviously lagging. However, from their 2001 recession troughs (again using the end of the recession for jobs), productivity was up about 25%, industrial production was up about 15%, and jobs declined by about 4.3%. This graph demonstrates that when productivity outstrips production goods jobs decline, but that even when production outstrips productivity job growth can be anemic so long as the productivity growth is still substantial. The current recession is showcasing productivity’s effects on jobs very well, as while production has dropped about 13% during this recession, productivity is actually up over 5%, and industrial production is now at it’s 2002 levels, but with roughly 20% fewer workers making those goods.

In conclusion, the data appear to show that the real factor in goods job creation (or loss) is the relationship between productivity and production, which unfortunately leaves little room for protectionism (even sans the trade war implications that would create), as unless productivity falls precipitously we would see no net job creation from any such endeavor.

And just so we don’t define this as a US problem, I will direct you to a conference board study that highlights China’s loss of manufacturing jobs to productivity too.

Here are some general conclusions.

1.) The US still manufactures goods. In fact, the US still manufactures plenty of goods. Take a look at the types of exports in the latest trade data from the Census. It includes exports of industrial supplies, capital goods, autos and consumer goods.

2.) While outsourcing does happen — that is, companies do go overseas to open new factories at the expense of US employees — it is not the primary cause of manufacturing job losses.

3.) Going back to the recent post on employment remember that in this recession the unemployment rate of specific groups was heavily influenced by education level. In fact, according to the BLS, higher education levels (college graduates and above) were remarkably untouched in the latest recession while lower education levels (high school graduates, high school with some secondary education) had higher rates of unemployment. Lower levels of education are typically associated with manufacturing and construction employment — the two areas of jobs that account for the largest percentage of job losses in this recession.

US manufacturing would be greatly helped by two developments.

First, China needs to float its currency. A country that has 10% GDP growth but little currency appreciation is obviously manipulating its currency’s value to a high degree. Given China’s growth rate, investors should be flocking to China driving up the yuan’s value. That is not happening. A real free-floating currency would cure a lot of the trade deficit problems.

Secondly, there have been calls for a US industrial policy — that is, for Washington to essentially “pick winners and losers” by promoting some industries that they feel have a high probability of success. Asian countries have been doing this for years with remarkable success and it is a policy which we clearly need to copy. I’m a big promoter of nano-technology, alternative energy and stem cell research, but those are just my choices. There are plenty others out there that would also make sense.