The way the U.S. economic system is structured, employment is key: an unemployment rate higher than 6% is a problem. And there is great concern about job losses in manufacturing. How justified is this concern? To understand what is happening, a brief review of how overall employment in the U.S. has changed since the end of World War II is in order.
U.S. Employment - An Overview
In 1947, 87% of all non-farm jobs were in the private sector. Today, that share has fallen to 83%: while Federal employment has grown slowly, state and local government employment has grown rapidly. There has also been a dramatic change in the shares of people producing goods and providing services. Goods employment has barely changed since 1947, while service-sector employment has grown at a compound annual rate of 2.29%. That means the service share has grown to 86% of total non-farm jobs while the goods production share has fallen from 40% to only 14%.
Table 1. - Changing Structure of U.S. Employment, 1947 - 2011
(click to enlarge)
Source: US Bureau of Labor Statistics
Private Sector Employment
In the private sector (Table 2), employment in all Service sector categories has grown. The education sector has seen the most rapid growth followed by health, retail trade and wholesale trade. It is notable that all Manufacturing sector categories have lost jobs, with motor vehicles, computers and machinery losing the most. In 1947, there were more than a million workers making cars compared with only 717,000 today. And yet, even though manufacturing has been falling, it remains the third-largest private sector employer.
Table 2. - Private Sector Employment Changes, 1947-2012
Computer and electronic products
Motor vehicles and parts
Mining and logging
Source: US Bureau of Labor Statistics
The last two columns of Table 2 indicate how badly employment was hit by the global recession. Motor vehicle production lost the most followed by construction, primarily real estate. While the automotive sector has recovered somewhat, construction employment is still way down. Healthcare and education appear to be recession-proof.
Productivity and Outsourcing
In an earlier piece, I argued that productivity gains and not outsourcing of jobs to foreign lands was the primary reason for declining jobs in manufacturing. A very interesting study from the McKinsey Global Institute came to the same conclusion: "…overall in the United States, trade and outsourcing explain only about 20 percent of the 5.8 million manufacturing jobs lost during the 2000-10 period; more than two-thirds of job losses can be attributed to continued productivity growth, which has been outpacing demand growth for the past decade."
What sort of productivity gains are we talking about? Data from the U.S. Bureau of Labor Statistics indicate that output per labor hour in manufacturing has grown at a compounded rate of 4.79% since 1947. Reliable data on making autos does not go back that far, but suppose it did. It would mean that if 10 workers could assemble 10 cars per day in 1947, they could assemble 78 autos today!
Productivity gains have been slightly higher in non-durable goods than in durable goods. And anyone who has seen the Unwrapped TV show knows why. The mechanization in food production is amazing!
One other point on labor costs and U.S. competitiveness: labor costs are not nearly as important as they used to be: the labor cost share in manufacturing has fallen from 55.8% in 1947 to only 27% in 2011.
McKinsey concludes: "Companies must look beyond the simple math of labor-cost arbitrage to consider total factor performance across the full range of factor inputs and other forces that determine what it costs to build and sell products-including labor, transportation, leadership talent, materials and components, energy, capital, regulation, and trade policy."
In short, it does not matter if it is autos or candy-making, the assembly line in manufacturing has been fundamentally changed. In 1947, you saw people on the assembly line engaged in rote work: adding hoods, doors, etc. to autos. Today, most rote work is done by machines. The laborers are viewing computer monitors to insure machines are doing what they used to do by hand. We now need skilled workers for manufacturing. McKinsey finds: "Manufacturing is increasingly high-tech, from the factory floor to the back offices where big data experts will be analyzing trillions of bytes of data from machinery, products in the field, and consumers. The global supply of high-skill workers is not keeping up with demand and the McKinsey Global Institute projects a potential shortage of more than 40 million high-skill workers by 2020."
With the increasingly hi-tech nature of manufacturing, experts from other fields must be brought in. I was struck by this working in real estate development in China 10 years back. It used to be that buildings were "manufactured" by architects (design) and builders (construction). Today, building engineers are in charge. And this change will become increasingly important as energy saving and other environmental considerations grow in importance.
McKinsey documents this point: "Manufacturing companies rely on a multitude of service providers to produce their goods. These include telecom and travel services to connect workers in global production networks, logistics providers, banks, and IT service providers. We estimate that 4.7 million U.S. service-sector jobs depend on business from manufacturers. If we count those and one million primary resources jobs related to manufacturing (e.g., iron ore mining), total manufacturing-related employment in the United States would be 17.2 million, versus 11.5 million in official data in 2010. Including outsourced services, we find that services jobs in U.S. manufacturing-related employment now exceed production jobs - 8.9 million in services versus 7.3 million in production."
McKinsey is right: and it is therefore time to rethink standard industrial classifications….
Conclusions and Investment Implications
If you are a long-term investor, safe bets include food, energy and housing. Why? Because a growing global population needs all three. It is also apparent that the four largest emerging market countries (China, India, Indonesia, and Brazil) have something in common: a middle class growing in both size and income will increasingly want at least Western-branded manufactured products.
So there is a growing demand for manufactured products and U.S. manufacturers are becoming more competitive. This suggests that investments in U.S. manufacturing equities should work, at least for the next five years. Possibilities include: ETFs with broad coverage such as iShares Dow Jones US Industrials (IYJ) and individual manufacturers such as General Electric (GE), United Technologies (UTX), Caterpillar (CAT) and Deere (DE).
Note: The Bureau of Labor Statistics only collects productivity changes in auto production going back to 1987. But for that period, auto-making productivity gains are even greater than in manufacturing overall.