Structural Change in Manufacturing Mark Schweitzer Federal Reserve Bank of Cleveland

1. Structural Change in Manufacturing Mark Schweitzer Federal Reserve Bank of Cleveland April 27, 2004

2. Outline • The current situation and the business cycle • Look inside manufacturing productivity growth • Where are the workers going?

3. The Current Employment Situation

4. MANUFACTURING: SHARE OF EMPLOYMENT Percent of total employment Note: Shading indicates periods of economic contraction.

5. MANUFACTURING: LEVEL OF EMPLOYMENT Millions of workers Note: Shading indicates periods of economic contraction.

6. BUSINESS CYCLE PATTERN: MANUFACTURING EMPLOYMENT Percent change from previous peak Total Change from March 2001: -2,621,000 Average range Average 2001- Months from previous peak

7. MANUFACTURING GROWTH FROM PREVIOUS PEAK (March’01 to Feb’04) Share of employment (percentage) Overall manufacturing growth: -15.5% Growth rate from the previous peak

8. MANUFACTURING GROWTH (Aug’03 to Feb’04) Share of employment (percentage) Overall manufacturing growth Aug’03 to Feb’04: -0.7% Growth rate

9. Fourth District Beigebook • Manufacturing has experienced a profound scaling back over the last 5 years • Employment reduced sharply • Capital spending held very low • Turned around only over the past few months • Manufacturers outlook • Cautious about the future • Employment gains likely to be limited • Productivity growth continuing

10. Looking Inside the Productivity Machine

11. Manufacturing Nonfarm business sector MANUFACTURING PRODUCTIVITY Annual percent change Note: Shading indicates periods of economic contraction.

12. BLS INDUSTRYPRODUCTIVITY PROGRAM • The Bureau of Labor Statistics produces annual measures of productivity by detailed industry • Manufacturing Industries • Data provide nearly complete coverage • 4-digit NAICS industries (e.g., basic chemicals or industrial machinery) • Services Industries • Data provide coverage of about half of the service sector • 4-digit NAICS industries (e.g., full service restaurants or automotive repair and maintenance) • The industries for which data are available are the ones with the most reliable productivity measures

13. PRODUCTIVITY GROWTH 1990-1995 Percent of employment Mean is 3.7% Manufacturing Iron and steel mills Computer and peripheral eqpt. Semiconductor eqpt. Ship and boat building Growth rate (annual average)

14. PRODUCTIVITY GROWTH 1990-1995 Percent of employment Manufacturing Mean is 2.4% Services Mean is 3.7% Grocery stores Commercial equipment Specialty food stores Growth rate (annual average)

15. PRODUCTIVITY GROWTH 1996-2001 Percent of employment Manufacturing Mean is 3.7% Computer and peripheral eqpt. Semiconductor eqpt. Apparel knitting mills Growth rate (annual average)

16. PRODUCTIVITY GROWTH 1996-2001 Percent of employment Manufacturing Mean is 2.7% Services Mean is 3.7% Advertising agencies Wholesale chemicals Electronics and appliance stores Growth rate (annual average)

17. CORRELATION BETWEEN PRODUCTIVITY AND OUTPUT

18. CORRELATION BETWEEN PRODUCTIVITY AND EMPLOYMENT

19. Where Have the Workers Gone?

20. Average Average range BUSINESS CYCLE PATTERN: NONFARM EMPLOYMENT Percent change from previous peak 2001- Months from previous peak

21. BUSINESS CYCLE PATTERN: UNEMPLOYMENT RATE Change from previous peak Average Average range 2001 - Months from previous peak

22. UNEMPLOYMENT RATE Percent Manufacturing Total

23. Fraction of Manufacturing Workers Employed Next Year Percent

24. Annual Flows of Former Manufacturing Workers Percent

25. Conclusions • The decline in employment in the latest recession has been unusually large and has abated little • Manufacturing productivity has risen substantially • However the correlation with employment growth is weak • Manufacturing workers continued to flow out of employment through 2003 • Job losers have largely joined the unemployed

26. Structural Change in Manufacturing Mark Schweitzer Federal Reserve Bank of Cleveland April 27, 2004