Loss of Manufacturing Jobs Prevents Normal Recovery

Manufacturing is in intensive care in America. New data shows manufacturing productivity still falling and unit labor costs are still rising. In my experience, the opposite always happens in a recession – you get lean and mean. The productivity trend since 2000 has not been good anyway, but since the recession began things have gotten worse.

The rules of the game are manufacturers must compete internationally. All domestic manufacturers – even those who do not export – must compete with international manufacturers as they are given access to the American market. To survive, manufacturers must reduce costs.

click to enlarge images

So, bye, bye American manufacturing. The handwriting is on the wall while this trend continues. And the only way to reverse this cost trend involves deflationary measures – force real labor rates down. The efficiency issues are far more alarming. In my experience, this has always been caused by management either through lack of automation / investment, poor work procedures, and/or lack of control.

The giant sucking sound you heard during this recession was manufacturing jobs flying eastward. I personally do not think many manufacturing jobs will return during recovery. There is less and less of an advantage to manufacturing in America.

• Labor in Asia has more and more English language skills and education.
• The Asian governments are willing to provide incentives to companies which relocate including access to government loans.
• Repatriation of profits to America is becoming easier and easier.
• Less paperwork and less taxes.
• Shipping from the Far East is now so quick it now is rivaling domestic shipping lead times.
• Asian work ethic is at least as good as domestic labor force.

My concern about the departure of manufacturing jobs to Asia has to do with the employment multipliers. All jobs are not created equal. According to one study, every 100 jobs in durable manufacturing support 372 jobs in other industries, while every 100 jobs in business services supports 164 jobs elsewhere in the economy. We are losing good jobs which will stimulate the economy (and we are left with the shit jobs).

The Institute for Supply Management (ISM) released the April 2009 report on business. You select the headline you like:

• Economic activity in the manufacturing sector failed to grow in April for the 15th consecutive month, and the overall economy contracted for the seventh consecutive month.
• The decline in the manufacturing sector continues to moderate. After six consecutive months below the 40-percent mark, the PMI, driven by the New Orders Index at 47.2 percent, shows a significant improvement.

The release was accompanied with the following statement:

The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (37 percent) corresponds to a 1.3 percent decrease in real gross domestic product (GDP). In addition, if the PMI for April (40.1 percent) is annualized, it corresponds to a 0.3 percent decrease in real GDP annually.

Based on the 1Q 2009 GDP numbers released last week, manufacturing's drag on the economy exceeded -7.5% (see my comments last week week on GDP) - and not the -1.3% ISM says is indicative of past relationships. This is probably another indicator of a new normal. However, this survey does not meet the test for representative sampling techniques, and its results should not be relied upon as a free standing litmus test of manufacturing trends in America.

For those who are waiting for Goldilocks to appear – good luck. I do not buy that America's shift from a manufacturing based economy to a service based one will achieve full employment (since 2000 it has not). Data is not supporting the economists' position that employment is self healing.

We need to reinvent our manufacturing base.

Additional Economic Events from this Past Week

Probably the biggest event of the week was the release of the Stress Test results of the the largest banks in the banking system. As the largest banks are too big to fail (which translates to me that the bond and stockholders are exempt from loss), I considered the test to be a measuring stick on the relative strength and weaknesses of the major banks. So from the report itself, here is the “relative” bank health chart with Amex the strongest and GMAC the weakest.

But the most interesting chart in this stress test report was a historical perspective of bank losses. The stress test boys claim the estimated loan loss rates under the more adverse scenario are very high by historical standards. The two‐year cumulative loss rate on total loans equals 9.1% in the more adverse scenario. I tried to think of a hole in this assertion but I could not.

As the economy is the consumers, we all look to retail sales as a litmus test of consumer sentiment. Same-store sales rose +0.7% in April 2009 but this increase was attributed to Easter – and not any change in consumers' current downtrodden spending habits. March's consumer credit outstanding decreased by -$11.1 billion, following a downward revised decrease in the prior month (-$8.1B). On a year-over-year basis, total consumer credit outstanding grew just +0.1 percent in March, the slowest pace since September 1992 (-0.1%). Consumer credit growth has slowed dramatically with consumers using credit cards at the slowest pace on record (dating back to 1968).

The four week moving average of mortgage loan application volume decreased 6% and increased 63% compared with the same week one year earlier. The refinance share of mortgage activity decreased slightly to 74.4% of applications. The average interest rate for 30-year fixed-rate mortgages decreased slightly to 4.79%.

Initial unemployment claims had a slight decrease for the week ending 02 May with the four week weekly moving average of 623,500 claims. It is good news that the 4 week average is holding steady, and has been ever so slightly trending down over the last month.

Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9%. Since the recession began in December 2007, 5.7 million jobs have been lost. Overall, private sector employment fell by 611,000 which is the real indicator (not the 539,000 headline number). The U-6 unemployment rate (includes all unemployed including those who have given up looking for a job and those underemployed) now stands at 15.8%. The marketeers are reacting positively to this “less bad” data. Yes, things are getting less worse – but I want to see several more months of data before any euphoria sets in.

My show and tell out of the BLS employment report is the following table which breaks down the (un)employment by industry. Management, business, professional, and financial occupations have unemployment rate of 4%. This is why most professionals do not see the effects of unemployment as it is not prevalent in their peer group. This is a blue collar recession.

Filing for Bankruptcy: none. Bank failures this week: Westsound Bank (Bremerton, WA)

Economic Indicators Published this Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said:

The level of the WLI is fast approaching a six-month high, making it increasingly likely that the U.S. recession will end this summer.

Lakshman Achuthan (the head of ECRI) believes the recoil of our economic drop is similar to throwing a ball to the floor – with the recoil being 80% of the downward energy. His opinion is that GDP will not be positive until 4Q 2009. This is also my opinion.

As you can tell from the tone of this article, I have reservations on the speed and magnitude of a recovery. My problem is mostly about where the new jobs (green shoots) will sprout. I doubt the manufacturing sector will recover to its past levels. And then we have the issue of debt. I do see a bounce up (as we will have overrun the bottom and there will be a release of pent-up demand), but I envision a plateau with a sluggish economy until the debit and bad assets are unwound.

However, it is obvious that the Fed has built deep trenches to contain the damage to the banking sector. We need to examine and prosecute those who got us here, as well as rethinking our systems so that history will not repeat a third time. The bad news is that to cure the system, the Fed has swallowed poisons which will be a restraint to a real recovery.

If you would like a summary of all government financial indicators, click here.

Disclosures: long MMFs, PYEMX, EWZ, TIP

Comments

[Ricard:]

Great article(s), at least the portion dealing with the title.

Your assessment that manufacturing jobs are much more important in building a solid economy is well taken. I do have a question regarding your chart about the economic 'multiplier' effect. What's the multiplier for high-tech? I've read articles describing how, since it is light-manufacturing, not as many jobs are created through logistics and other services that cater towards bulk, but I do wonder if that has changed in the recent past.

I ask because I believe the only way that any developed economy can stay ahead of emerging economies is if it tunes its economy towards high-margin and highly specialized aspects of the economy, namely cutting-edge technology, whether it be semis, biotech, renewable energy, or what have you. It requires a substantial human capital investment by the workforce. However, it seems Asia has us beat in this regard as well, which does not bode well for the American advantage going forward.

May 10 06:34 AM

[LilBob:]

As far as labor unit costs being on the rise in US manufacturing that's largely because most of the manufacturing that remains in this country is of the high-tech variety and cannot be done by your typical Detroit-style factory worker. A significant portion of the manufacturing jobs that remain in the US (and Canada) are for surgical items, medical imaging equipment, and automation control systems, these are items that have very high costs and are assembled by highly trained technicians and supervised by enormous quality control staffs. (Would you really want to go into surgery knowing the surgical robot being used was imported from China because the Hospital could get it cheaper than a DaVinci robot?) The traditional notion of America as a manufacturer of consumer goods is long past. About the only consumer items that are still made in this country are very high-end products that cost thousands of dollars-like Stickley or Harden furniture.

The real challenge right now for manufacturing is figuring out how to partner with American educators to develop a stable work-force of young workers who can work in those high-tech plants manufacturing multi-million dollar pieces of machinery.

May 10 06:57 AM

[Tom Armistead:]

Steven, I agree that uncompetitive manufacturing means the US recovery will be slow, but question whether lower wages for labor is the only solution.

American manufacturing has legacy costs - witness the Detroit three with their obligations to retirees who earned their benefits at a time when car making was far more labor intensive than it is now. Many companies have ongoing pollution costs going back to practices that were discontinued decades ago. Very possibly the assets that support much of our industrial capacity are obsolete, no match for Chinese facilities that have sprung up overnight, using modern technology.

The Chinese have had the advantage of starting from scratch without legacy costs. At some point the US will have to write down obsolete assets, pay off or otherwise terminate legacy obligations, and rebuild using state of the art technology. When this is done, well-educated and trained workers will be able to earn enough to buy houses and cars and send their kids to school without working 60 hour weeks.

May 10 07:29 AM

[abetterplace:]

Not being a union man, I fail to understand what's wrong with working 60 hours a week.Laziness did not propel this country to the greatest one in the world.

May 10 07:47 AM

[john s. gordon:]

well in the 1800's we had a 6 day workweek & a 12 hour workday. that's 72 hrs. that's called wearing out your workers & tossing them in the scrap heap. no wonder we had so much immigration from europe in 1890-1913, replacements had to arrive continuously. back to that again?
> jack

May 10 08:27 AM

[Leftfield:]

When will our "service" economy come up with real answers? We pay plenty of suits high prices for this. We end up with goldilocks scenarios, green shoots, carbon caps and mark to magic. I've always been self-employed, a good tutorial to real-world thinking. I cannot decree reality and the price I think I should get. No one does anything for me. To keep up the unreality of the shift to "service" (try to get some), the suits have altered reality for a long long time. We now have the "solutions" of DC and Wall St., the worst offenders, that have the Fed (THE prime offender) swallowing poisons, as the article states. They won't swallow it; it is obvious that WE will. We need to get back to work, and that means, if we must work for less, we need less crazy overhead and new chimeras like carbon caps (taxing the air) by these same offenders.

May 10 08:34 AM

[Momintn:]

What has our government done to stop these jobs from going overseas? This problem didn't occur yesterday. We have known about it for years. The sad fact of the matter, besides jobs and national security risks, is that we consumers lose our own rights to buy products made here. And with the costs of shipping, I haven't noticed any savings on anything. Just more risks for me with warning labels for lead and secret ingredients in the food we eat. Our government is a complete joke and I'm sure China is laughing all the way to the bank.

May 10 10:01 AM

[notsosmart:]

of the 100 largest entitiies in the world,52 are countries & 48 are corps.big business now runs the world.the bottom line is the only thing that counts.the powers dont care about the future of the american middle class.they dont care about any class but their own.sadly,nobody can do anything about it.so all the charts,graphs,opnions etc. on this site & all over are nice entertainment as are the silly talking heads on tv,but big business will run it as they see fit.see how the fixed pension is gone & the 401k will be seen as the scam it is as soon as more & more corps. stop their contributions. its not too bad as long as the beer swillers fill the stadiums & cheer the million $ druggies.you will know its crunch time when the seats are empty.

May 10 10:58 AM

[Prudent Man...:]

The World Economy has shrunk, the U.S.'s piece of the action has shrunken even more with increasing debt, and look for lower wages as we don't make anything that others can't make cheaper and better.

Time for a wake up call and adaption to the new economic realities.

May 10 11:49 AM

[john s. gordon:]

momint -

don't forget the cheap chinese plasterboard that gives off hydrogen sulfide in humid weather & poisons the indoor air people breathe.
> jack

May 10 11:53 AM

[Valley Boy:]

Perhaps it is time to allow the state governments instead of the
feds to decide on the amount of hours in a work week. Back
in the boom times, a few states had such tight labor markets
that a 60-hour week might have seemed reasonable. Some other states had lagging economies with slack labor markets whereby a 35-hour work week would seem reasonable.


On May 10 07:47 AM abetterplace wrote:

> Not being a union man, I fail to understand what's wrong with working
> 60 hours a week.Laziness did not propel this country to the greatest
> one in the world.

May 10 12:13 PM

[Tom E.:]

The answer is not cheaper labor or longer working hours, it is more automation, rigorous enforcement of real free trade and an absolute end to currency manipulation.

May 10 01:43 PM

[Alamo:]

Supporting and paying atteention to the legislative progress that US Rep. Dan Boren (D-OK)'s HR 1835 makes after its introduction on April 1 could help the bleak situation described in the article.

HR 1835 is the NAT GAS Act that materially supports a national transition to natural gas as CNG for transportation fuel. Implementing the infrastrustural changes such a transition would/will require will create millions of American jobs that likely will be singularly American. No outsourcing, or little if any, will be involved. Such a monumental shift will change things up considerably, effectively and positively.and indoing so put millions of Americans back to work.

May 10 04:12 PM

[Steve Hughes:]

Steve: I have 2 Q's

What % of manufacturing cost is labor?

What % of manufacturing labor is unionized?

I suspect that I know what these answers will reveal: that as long as labor, particularly union labor, is a disproportionate % of manufacturing cost, we will continue to see the manufacturing industries flight to offshore locations where a cheaper workforce will do the work.

It's not rocket science here. If one who formerly profited handsomely from high unskilled labor wages doesn't like the new norm, then they might consider spending some of their "squirrelled-away-nuts" on some re-education. Sounds fair to me.

May 10 06:03 PM

[MfgCrunch:]

Steven:

A great and insightful piece, spot-on. This is a must-read for anyone who cares about mfg in this country, the engine of prosperity. Let's hope some folks in the Administration and the Congress read it, too. Before anyone takes any action in Washington, they should ask themselves the question, "Will this make it easier or harder for our mfrs to compete?" If they just did that, the rest would be easy.

May 10 10:07 PM

[Dirk McCoy:]

Last number I knew was that 65,000 China manufacturers had closed last year, so this downturn has hit everywhere. China lost more manufacturing jobs than the US in the last ten years as well due to productivity improvements.

We used to think that there would be lots of service technician jobs to support all the automation. Now, the automation is so reliable the service technician jobs aren't growing as fast as anticipated. Going forward, perhaps we need to ask ourselves- in the George Jetson future of "push a button and your dinner appears"- what do people do for work?

May 10 10:53 PM

[Mad Hedge F...:]

And it will get worse. Let’s say we spend our $2 trillion and get a couple of quarters of weak 2% type growth. Then once the effects of the stimulus wear off, we slip back into recession, setting up a classic “W” type recession. Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody get’s wonderful new mass transit and alternative energy infrastructure. But with $4 trillion in spending packed into two years inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $3,000, and silver to $50. Ben Bernanke’s replacement has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 20%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $200. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 14.5%, and credit default swaps are at lofty levels. The risk of Armageddon is still out there. Just thought you’d like to know. Pass the Ambien.

May 10 11:07 PM

[proxyjoe:]

gold goes ballistic to $3,000, and silver to $50.
---

and I get rich and retire WAHOO! Move out to the lake and fish every day. Yeah! thats the ticket.

May 11 01:40 AM

[Living4Divi...:]

I agree with your assessment about china's lower legacy costs - with one caveat - china is polluting like there is no tomorrow.

there other thing china has in its favor is cheap labor.


On May 10 07:29 AM Tom Armistead wrote:

> Steven, I agree that uncompetitive manufacturing means the US recovery
> will be slow, but question whether lower wages for labor is the only
> solution.
>
> American manufacturing has legacy costs - witness the Detroit three
> with their obligations to retirees who earned their benefits at a
> time when car making was far more labor intensive than it is now.
> Many companies have ongoing pollution costs going back to practices
> that were discontinued decades ago. Very possibly the assets that
> support much of our industrial capacity are obsolete, no match for
> Chinese facilities that have sprung up overnight, using modern technology.
>
>
> The Chinese have had the advantage of starting from scratch without
> legacy costs. At some point the US will have to write down obsolete
> assets, pay off or otherwise terminate legacy obligations, and rebuild
> using state of the art technology. When this is done, well-educated
> and trained workers will be able to earn enough to buy houses and
> cars and send their kids to school without working 60 hour weeks.
>
>

May 13 11:06 PM

[john s. gordon:]

communist governments always pollute - look at what the russians did to lake baikal with their pulp mill waste. look at all the russian design nuclear reactors with no containment. high emissions are always cheaper than good design practices, until the final reckoning has to be paid by future generations of humans.
> jack

May 14 05:38 PM