Thursday, December 15, 2016

The Efficiency of Manufacturing

Mark Knold, Supervising Economist

During the recent U.S. presidential election, Mr. Trump shined a spotlight upon the American manufacturing industry. A big part of his “Make America Great Again” motto had behind it the idea of returning manufacturing employment to the more pervasive levels of three or four decades ago.

An interesting footnote is that while manufacturing employment has slipped over the decades, manufacturing output has not. In real terms (i.e., adjusted for inflation), manufacturing output is as high as it has ever been. Fewer and fewer workers are putting out more and more product, as outlined in this recent article in the MIT Technology Review.
That same manufacturing phenomenon is seen here in Utah. Unlike much of the rest of the nation, Utah is fortunate in that manufacturing employment has been able to remain at a relatively even level. But while manufacturing employment levels may not be much different now than they were in 1997, Utah manufacturing output in inflation-adjusted dollars is nearly twice as high as it was in 1997. In other words, the same amounts of workers are producing twice the value of product.

Yet, while Utah’s manufacturing employment is largely the same as 20 years ago, most of the rest of the economy has grown in relation to manufacturing. Manufacturing’s share of total Utah employment has declined from 12 percent in 1997, to just over 9 percent in 2015. Conversely, manufacturing’s percentage of overall statewide real Gross Domestic Product (GDP) — the value of the goods and services produced — has increased from 10.5 percent to 11.5 percent.
In terms of the threat to manufacturing jobs, relocating out of the country is not the most impactful issue. Instead, it is productivity gains. Technological advancements and automation are the main displacers of foregone manufacturing jobs. Those are trends destined not to reverse.

Manufacturing is often divided into two segments: 1) durable goods and 2) nondurable goods. Durable goods are products whose shelf live is to be three years or greater. Conversely, nondurable goods have a shelf life less than three years. Examples of durables are cars, trucks, computers and appliances. Nondurables would include foodstuffs, paper, cloth and chemicals. The production of nondurables is a bit more labor intensive than durables, yet both have seen increases in output per worker across time. The durables side has experienced more striking output gains than has the nondurable side. In Utah, durable goods employment is double that of nondurable employment.