Thursday, September 1, 2011

Manufacturing slows, but still grows

The August ISM manufacturing index slipped a little, but was nevertheless somewhat stronger than expectations (50.6 vs. 48.5). As the chart above shows, at this level the index is consistent with overall GDP growth of about 2%. For most of the recovery to date, the manufacturing sector has been the star performer, but now it too has slowed down, along with the rest of the economy.

But this does not mean we are on the cusp of another recession. The economy has been fighting numerous headwinds this year (e.g., the Japanese tsunami, bad weather, increased regulatory burdens, and the threat of a Eurozone banking system collapse), so forward progress has been slow. However, it's my belief that growth and expansion are the natural state of affairs when it comes to the U.S. economy. It takes an awful lot to stop it or to drag it down to recessionary levels. Left to its own devices, the economy will expand by roughly 3% a year. Given the proper incentives, and given the unusually large amount of idle resources present these days, the economy could easily enjoy 5-6% growth for several years. That the economy is not doing a lot better is the problem, not that it risks slipping into a recession. The notion that slow economic growth is like "stall speed" for an airplane—below which you abruptly lose altitude—is terribly misleading; analogies are not always helpful aids to understanding.

The rather abrupt slowdown in growth this year is reflected in an equally abrupt decline in productivity. After rising at an almost 4% annual rate in the two years ending last December, productivity plunged to -0.7% in the first half of this year. This in turn has meant a sharp increase in unit labor costs, as shown in the chart above. A highly productive labor force contributed to low inflation through the end of last year, but now, weak productivity is contributing to higher inflation via higher unit labor costs. But as the chart also suggests, all of this is fairly typical in the early years of a business cycle expansion, so it is not deeply troubling. Recessions oblige business to drive down costs and increase worker productivity, and most of those gains have now been realized. Going forward, growth will be more a function of new hiring, rather than getting more out of the existing workforce.


Benjamin Cole said...

Interesting wrap-up, the usual excellent thorough job by our leader, Scott Grannis.

"Given the proper incentives, and given the unusually large amount of idle resources present these days, the economy could easily enjoy 5-6% growth for several years."---Finally, something I can wholeheartedly and 100 percent agree with!!

I can't think of any federal regulatory burdens we have now that are worse than three years ago (health care is pending, but may lower costs for some employers, and may never happen anyway).
In some ways we are better off than 30 years ago--there has been dereg in transportation, finance and telecom, and the minimum wage is lower than in the 1960s and only 9 percent of the private labor force is unionized.

Also, we have 50 states and who knows how many local governments, all increasing or decreasing their regulatory burdens.

Most regulatory burdens are local--try running a law firm, a medical practice, and insurance company, anything to do with liquor, food, or real estate development--you will run into local impediments, not federal. States license everything, thus constricting supply.

Try building a condo skyscraper on the water in Newport Beach--it will be state and local agencies that will thwart you (and local voters in Newport beach, where property right have been obliterated). And you can't drill for oil off of Florida, thanks to Gov, Bush.

What we need to the Triple Nickel: Five years of real GDP growth at 5 percent and five percent annual inflation.

A national moratorium on local/state real estate regs would be nice, but that ain't going to happen.

TradingStrategyLetter - Weekly Summary said...

Agreed. Tremendous room for expansion and growth. Time to eject those misguided souls who are preventing it from happening. I love everything American - but man you guys have been in a leadership void for over a decade! You really got to clean house.

TradingStrategyLetter - Weekly Summary said...

You can start with the lawyers first!
Less than 20% of congress have business education or experience! The other 80% can be pink slipped any time!

Benjamin Cole said...


Recently, the WSJ op-ed'd we need national dreg on lawyers. No licensing.

I agree.

From what I see, 90 percent of disputes better handled in binding arb. anyway, and most law school students today are women.

Huge opp. here to get rid of the structural impediment known as lawyers--but it is the states in the way, not the feds, as so often is the case.

TradingStrategyLetter - Weekly Summary said...

Seperate state from church & lawyers.

McKibbinUSA said...
This comment has been removed by the author.
McKibbinUSA said...

The number of Americans working in manufacturing has not changed hardly at since 1939 -- that's an empirical fact -- see for yourselves:

Growth in manufacturing has nothing at all to do with growth in US employment -- nothing all -- zero -- nada -- zip!

If the US is going to grow jobs and properity for everyone in America, then society needs to accept once and for all that manufacturing is emphatically not the future of employment in America -- yes, investors get rich from manufacturing -- but significant changes in employment do not result from increased manufacturing in the US -- that's the empirical record since the late 1930's...

McKibbinUSA said...

PS: The numbers shown working in manufacturing at the link above are in real numbers -- the real numbers show that employment from manufacturing has changed very little since 1939 -- for America to thrive again, we need Americans to invest themselves into acquiring certified skills that sell in the global marketplace -- that's reality -- investing in US manufacturing makes capitalists wealthy, but does not generate significant employment along the way...

Benjamin Cole said...

In defense of manufacturing, there are those who contend that every job in manufacturing generates many more in allied industries, such as trucking, warehousing, exporting, and in services for industry, such as accounting, lawyers etc.

I would be loath to underestimate the impact of manufacturing.

John said...

Dr. Bill
I believe your assessment of the manufacturing compared to government workers graph is wrong.

Manufacturing jobs were roughly 9 million in 1939, trending up to about 19 million in 1978 and then the trend becomes negative, landing at about 12 million by 2010.

I think the correct interpretation of the graph is the change in trend that occurred around 1978.

TradingStrategyLetter - Weekly Summary said...

...combined with an incredible growth in bloated unaffordable non productive government bureaucracy and related 'industry!'

To this point all these tremendous negative costs have simply been added to the unsustainable credit card. The giagantic 'political' cesspool can't even come close to covering its costs ... even in a zero interest rate structure. Watching the masterminds try to produce a 'single' productive job is almost laughable if it wasn't so tragic.

Manufacture or perish!

mmanagedaccounts said...

Dr. McKibbin, you write that the numbers in your graph are "real numbers." What does that mean? Is it different from nominal numbers?

I can understand your point, it also doesn't matter the number of workers employeed in manufacturing. What matters is our gross level of manufacturing production. Do we in fact manufacture as much or more as we always have?

Manufacturing as a % of GDP is much lower today than 30 years ago, but that is true globally, not just in the U.S.

Are utilities and mining included in the manufacturing jobs data? Also, do you know if any products that are outsourced are included as US manufacturing products?

Benjamin, my industry is constantly impacted by new rules written by federal agencies. Just look at the growth of government employment in Dr. McKibbin's graph since 1939 and one cannot deny government's hand in the economy. The Dr. does not tell us if this graph represents all levels of government employment. I assume it does. You are right that the regulatory burden is not just from the federal level.

TradingStrategyLetter - Weekly Summary said...

Great points. Plus I do not buy the 'investing in manufacturing only makes capitalists wealthy...' line.
The 'entire' country of China is being transformed by the tremendous surge in manufacturing. Millions are entering the middle class each month. 10m+ new drivers hit the road EACH year. Luxury goods are flying off the shelves. The standard of living has exploded.
We can only dream about such a 'manufacturing' problem!