Did Obama tell the truth about Manufacturing?

During his 2014 State of the Union Address, President Obama lauded the rebound in manufacturing as one of the bright spots in the economic recovery. In previous blogs we noted that in terms of employment, the manufacturing sector, while equally hurt by the 2008 downturn, was one of the first segments to start recovering.

The chart below shows new orders by the total US manufacturing sector from 1993 to 2013. The curve is normalized to 1993. We have included the inflation curve for the same time frame.

The red line shows the sharp drop in 2008, and it shows a steep recovery to the point today where total order volume is progressing at near the same rate as pre 2008. Note that the growth rate from 2000 to 2007 was much higher than historical rates and was largely affected by the housing boom.

The bad news or at least the not as optimistic news is that manufacturing employment is less than 80% of what is was in 2002. We showed the chart below in a previous blog regarding employment trend of major manufacturing employers.

From the chart above, one can see that jobs in the manufacturing sector fell in 2008 and bottomed out in 2010. The manufacturing sector has started to recover but still short of the 2003 benchmark. What are some reasons that employment levels have not kept pace with order levels:

  • Outsourcing: Many of the jobs present in 2002 have been outsourced to Asia, in the last decade it is estimated that 16 million jobs were outsourced. Some of those have returned to the US, but that number is probably less than 5% of the 16 million.
  • Automation/ productivity: High labor content work that was not outsourced has largely been automated. This is certainly true in transportation.
  • Temporary work force: Many manufacturing companies are opting to fill demand with temporary or contract labor rather than hiring full time. According to an article by USA today , the ratio of temps to full time workers is at an all time high. Furthermore the article speculates that a significant portion of the temp workforce is in the manufacturing sector. Reasons cited in the article include lack of confidence in the recovery and concerns over the impact of Obama Care.
  • Lack of Skill: Many employers are indicating that they are having trouble finding skilled labor to fill the new jobs that require math and computer skills.

The growth in new orders for the manufacturing sector does not extend across the board.

The Chart below breaks out new orders by some of the major manufacturing sectors.

As can be seen by the graph, transportation and Construction Materials have rebounded nicely, but Computer, Electronics and Information Technology have stayed flat or dropped. The Construction Material and Supplies sector seems to match up with data on new housing starts. Information Technology, Computers and Electronics have been a booming world-wide but US companies have lost market share to the rest of the word. Also productivity has played a major role in this trend as anyone who purchased a computer 10 years ago compared with prices today can testify. Computers and electronics are significantly less expensive than a decade ago and people are buying more, but the product mix is for lower cost electronics such as mobile devices as opposed to high end desktop computers. The average mobile device is about a third of the cost of a desktop.

In addition to touting the rebound of manufacturing, President Obama discussed investing in training and skills to close the skill gap. While it is encouraging to see the rebound in manufacturing and the possibilities of high paying jobs increasing because of that, one also needs to understand that manufacturing employment today constitutes about 8% of the total workforce – http://www.bls.gov/emp/ep_table_201.htm
and is projected to go down to a little over 7 % in the next 6 years. Manufacturing employment levels were 60% higher at its peak in 1979 and started a major decline as far back as 1999. Manufacturing training initiatives are very important and needed, but the impact on overall employment may be miniscule. The service sector, most notable, health and health services, professional services and education services will see the biggest gains in employment over the next few years. The biggest bang for training dollar might be in the service sector.

In conclusion, President Obama was right in touting the growth in manufacturing and any training initiatives that close the skill gap is well worth it, but future employment and economic recovery may depend more on the service sector than the goods producing sector. Investing in training and education in the Heath Care, Professional Services and Educators may be better for long term employment growth.

References:

http://www.bls.gov (labor statistics)

http://www.usatoday.com/story/money/business/2013/08/16/economy-temporary-workers/2665645/ (article on temp employment)

http://www.census.gov/ (data on manufacturing output)