Manufacturing myths

Back in 1995, right in the middle of a nine-year economic boom, Louis Uchitelle co-authored an absurdly downbeat series of New York Times articles on "The Downsizing of America." That series was full of opinion polls, as though popular illusions could substitute for facts. More recently, there has been hope that scandals at the New York Times might have given new editors at least a casual interest in factual accuracy. Apparently not. A couple of weeks ago, the unrepentant Mr. Uchitelle wrote yet another weirdly apocalyptic piece claiming, that "manufacturing is slowly disappearing in the United States."

Well, here www.napm.org is the National Association of Purchasing Management or Institute for Supply Management website.

If you read about how their index is put together Overview of the Manufacturing ISM Report On Business you'll find it is a diffusion index based on a survey of 400 companies (of late) and it reports a qualitative change from reporting period to reporting period. Their ISM production survey responses goes back to 1948, but they don't publish any summaries or charts over the entire period. Presummably Mr. Reynolds did some analysis but he has not shown his work.

Because the ISM diffusion index is qualitative, i.e. responses are more/same/less than previous period - not once are actual quantitative numbers collected - only the Dept of Commerce does that.

More so, the Dept of Commerce collects the data for all of manufacturing and makes some effort at consistancy. For instance, back in the '40's there was not much of an electronics industry, yet that doesn't prevent Mr. Reynolds from extrapolating it's contributions forward and generalizing to today's economy. Further, if you actually go look at the NAPM/ISM's data, you'll notice they don't break out industries, so Mr. Reynolds could not legitimately conclude electronics contributed half of manufacturing's gains (and note he doesn't qualify gains (gains in what units, dollars? shipments? transactions? - again he doesn't say) from NAPM/ISM data.

I charitably concluded he was getting his info from somewhere else but didn't want to say where.

Further, he argues Yet the National Association of Manufacturers' Web site shows that "manufacturing's share of the U.S. economy, as measured by real GDP, has been stable since the late 1940s....

Well, the NAPM doesn't track or report real GDP data (only the Dept of Commerce, as I linked, does that) or manufacturing's contribution thereof - he's simply mistaken about what the NAPM data is.

Lastly, if you go back far enough (1940's) you can argue statistically just about anything will appear stable over the last 50-60 years. What is insightful about that? Has it been stable over the last 5, 10 15 years is meaningful.

You ask Then what's this: "Yet the National Association of Manufacturers' Web site shows that "manufacturing's share of the U.S. economy, as measured by real GDP, has been stable since the late 1940s.... The overall share remains the same over the business cycle. "?

I'm afraid Mr Reynolds doesn't have a clue, and I can't help him on that point.

Manufacturing Gloom is Manufactured August 28, 2003

http://www.rushlimbaugh.com/home/daily/site_082803/content/stack_c.guest.html

Are Turkmenistan and Cuba the most powerful nations in the world? You'd have to say so to buy these continuing stories on America's loss of manufacturing jobs and manufacturing equaling greatness. Those who talk about companies "decamping" or "exporting jobs" to China and India ignore the facts. Alan Reynolds gives us some great statistics on this, including one that manufacturing actually grew after NAFTA! So much for the "giant sucking sound" predicted by Ross Perot. I was right on NAFTA - as was Bill Clinton whose stand on this issue I supported.

Manufacturing is cyclical. But that didn't stop a New York Times columnist from focusing on the first downturn after NAFTA as if that were the trend. Reynolds' column is headlined "The Hoax of Disappearing Manufacturing," and I urge you to read it for gems such as this: "Increases in productivity from improved machinery and skills are the reason manufacturing employment falls most of the time, as it does in farming, even when output is growing briskly." I know these numbers are hard to follow, but this is an important issue that you must educate yourself on. Besides, when you listen to me read numbers, they're more exciting than most hosts' words.

Listen to Rush...

(...blow apart the myth of America "losing manufacturing jobs" with Reynolds piece)
http://www.rushlimbaugh.com/home/daily/site_082803/content/stack_c.guest.html

Read the Article...

(Townhall: The hoax of disappearing manufacturing - Alan Reynolds)

The hoax of disappearing manufacturing
Alan Reynolds August 28, 2003
http://www.townhall.com/columnists/alanreynolds/ar20030828.shtml

Back in 1995, right in the middle of a nine-year economic boom, Louis Uchitelle co-authored an absurdly downbeat series of New York Times articles on "The Downsizing of America." That series was full of opinion polls, as though popular illusions could substitute for facts. More recently, there has been hope that scandals at The New York Times might have given new editors at least a casual interest in factual accuracy. Apparently not. A couple of weeks ago, the unrepentant Mr. Uchitelle wrote yet another weirdly apocalyptic piece claiming, "Manufacturing is slowly disappearing in the United States."

If you were hoping for some proof this time, be prepared to be disappointed again. Uchitelle says, "Manufacturing's share of real gross domestic product . . . has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950s. . . . the downward trends are alarming." Similar statistical exercises recently led to an interesting debate between my old friends Bruce Bartlett and Paul Craig Roberts. Yet the National Association of Manufacturers' Web site shows that "manufacturing's share of the U.S. economy, as measured by real GDP, has been stable since the late 1940s.

. . . The overall share remains the same over the business cycle." It is impressive for any private activity to maintain a stable share of GDP, since government spending has risen from about 20 percent of GDP in the early '50s to 30 percent since the '80s. Manufacturing doesn't need protection from foreign countries; it needs protection from domestic governments.

Mr. Uchitelle claims "the essence of a great world power is its edge in producing not services but manufactured products." By that standard, the two greatest world powers are Turkmenistan (with 39.8 percent of GDP attributed to manufacturing in 2000) and Cuba (at 37.2 percent). In China, services have risen from 21.4 percent in 1980 to 33.7 percent by 2002. In Hong Kong, manufacturing declined from 22.4 percent of the economy in 1980 to 5.2 percent in 2001.

Mr. Uchitelle claims "the shrinking manufacturing sector is again a source of public agitation, this time because so many American manufacturers are decamping to China and India." Don't editors check the facts? U.S. direct investment in other countries was worth more than $1.5 trillion last year, according to the July Survey of Current Business. Europe accounts for 52.3 percent of American investment abroad, Mexico for 3.8 percent, and China for seven-tenths of one percent. Any "decamping" to India is statistically invisible.

It helps to keep in mind a few simple points. First, manufacturing is extremely cyclical. The manufacturing component of the U.S. industrial production index fell by 5.5 percent a year in 1974-75, then rose by 6.6 percent a year for the next four years. In 1980-82, manufacturing fell by 3.1 percent annually for three years, then rose by 4.8 percent a year for six years. Manufacturing then dropped 2 percent in 1991. What happened next?

While Mr. Uchitelle first began whining about manufacturing being "downsized," it actually grew by 5.3 percent a year from 1992 through 2000. Manufacturing then fell 4.1 percent in 2001 (the bottom of his "trend") but rose at a 6.1 percent pace during the first three quarters of last year. What has been unusual about U.S. manufacturing was not the inevitable recession in 2001 but the unusually long and strong expansion for the preceding eight years. About half of the unusually strong gains came from the manufacture of high tech equipment, which is a lot more valuable than T-shirts.

The cyclical ups and downs of manufacturing are international, by the way, not national. Manufacturing started falling in August 2000 in Japan and Korea, followed by the U.S. a month later. When manufacturing falls, so do imports.

Increases in productivity from improved machinery and skills are the reason manufacturing employment falls most of the time, as it does in farming, even when output is growing briskly. From 1990 to 2000, manufacturing employment fell by 0.4 percent a year in the U.S., by 1.8 percent a year in Japan, and by 2.5 percent a year in Germany.

Efforts to stir up "public agitation" about China are based on lies. China accounts for only 18 percent of our imports of merchandise. Chinese imports seem bigger because they are concentrated in clothing and consumer goods, which are far more visible than more costly industrial supplies and equipment. Apparel accounts for only about 6 percent of U.S. imports, industrial supplies and equipment for 55 percent. Major industrial countries supply almost 48 percent of U.S. imports of manufactured goods, while all newly industrialized Asian countries account for 9.3 percent.

The level of value-added per Chinese worker in 1999 was only 8 percent of U.S. productivity, according to the International Labor Organization (ILO). It takes a dozen Chinese manufacturing workers to match one American. The ILO says real wages in Chinese manufacturing industries rose 80 percent from 1990 to 1999, or 8.9 percent a year. Roughly comparable figures for productivity show slower gains of 6.8 percent. That means Chinese unit labor costs are rising much faster than in the U.S. -- a trend that ultimately caused a loss of 15 percent of South Korean manufacturing jobs in the '90s (when U.S. manufacturers shed only 3 percent).

Unfortunately, it looks as though indefensible assertions about the alleged long-term disappearance of U.S. manufacturing are going to become a familiar political complaint over the coming year (as well as a promising source of special interest campaign funds). This rerun of the old "downsizing" story will again bore us with many more efforts by bumbling business writers and their slumbering editors to trump up some sort of "public agitation." If the rhetoric gets too annoying, ask the authors for a few facts. They just hate that.

©2003 Creators Syndicate

Ok then, www.nam.org website this time....sheesh!

Well, obviously you can see for yourself the page you posted does not go back to the 1940's nor is it "real GDP share" data. It appears to be a weighted index based in 1997.

I did scrounge around their website. Most of what they list appears to be perhaps available to members only as many of the links describe what a report is but does not provide the report itself.

There is one at Expansion Healthier Than the 1960s - EXECUTIVE SUMMARY but it is an old report at least pre-Y2K and does contain at least one factual error:

We anticipate that when the new data on output in manufacturing is released, it will show that over 30 percent of growth in GDP since 1992 was accounted for by manufacturing activity.

This is simply false as the BEA data shows Mfg GDP share from 1992 to 1999 is a 6.4% drop:

6.4% drop = 17.1 - 16.0 / 17.1 x 100

NAM website also has a report at The State of Manufacturing in the 1990s wherein they have a pie chart as follows:

Which also shows Mfg GDP growth share at 22% from 1991 to 1998, but they seem to argue sofware at 4% (because it related to manufactured hardware) should be included as manufacturing output (raising it to 26%). But that's like arguing gasoline should be part of automotive - silly. Regardless again as per the BEA data, Mfg's share of GDP shrank:

6.3% drop = 17.4 - 16.3 / 17.4 x 100

Their own executive summary reports a 30% share growth Mfg contribution and the pie chart reports 22% for basically the same period. They have quite a discrepancy in their own data.

From NAMs Quick Facts:

- Manufacturing's Share of the Economy has been constant over time.
                                1947-2000* 1997-2000 2001    2002
Manufacturing Share of Real GDP    17.3      17.1    16.2    16.1
Source: Commerce Department
*Data prior to 1987 are from NAM estimates based on historic GDP data

But these are percentage calculations based on chained data which are invalid as I explained above.

It is also interesting to note from the same quick facts:

Employment Situation (source: U.S. Department of Labor)
- Total nonfarm payroll employment declined 44,000 in July 03 to 129,870,000.
- Manufacturing employment declined 71,000 in July 03 to 14,612,000*.
- Manufacturing workers accounted for 11.3 percent of the workforce in July 03.
- The unemployment rate in July 03 was 6.2 percent.
- After peaking at 17.3 million in July 2000, manufacturing employment has fallen by 2.7
million over 36 consecutive months.*
- Since July 2000, employment other non-manufacturing sectors of the economy has risen
by 623,000 through July to 115,258,000.

While Mr. Uchitelle first began whining about manufacturing being "downsized," it actually grew by 5.3 percent a year from 1992 through 2000. Manufacturing then fell 4.1 percent in 2001 (the bottom of his "trend") but rose at a 6.1 percent pace during the first three quarters of last year.

Well actually from NAM's own 'QuickFacts' again (wherein they cite BEA data) Mfg dropped not 4.1% but 7.4% and not 6.1% but only .6% in Nov '02 to Jun '03:

During the 18 months between June 2000 and December 2001, manufacturing production
declined 7.4 percent.
- The 2000-2001 manufacturing recession was the second longest in the past 50 years (the
1982 manufacturing recession spanned 19 months.)
- From November 2001 to June 2003, manufacturing production edged up just 0.6 percent.
This is the slowest initial 19-month recovery since the Federal Reserve began tracking
monthly manufacturing production in 1919.

So I apologize for my erroneously quoting NAPM/ISM data, but the NAM compuations I assume Mr. Reynolds relies upon are invalid for real chained data, and they rely upon their own estimates for pre-1987 data (which they haven't published to the public) and the percentage Mfg share of GDP growths they do claim conflict with what the BEA data shows as actual contractions, so again it is not clear how Mr. Reynolds or the NAM did their analysis.

Again if he had shown the facts underlying his analysis, he might have a case to make, but I doubt it.

Alan Reynolds is a senior fellow with the Cato Institute.

Frankly, the 'fellows' at the Cato Institute have never worked a day in their lives, and are the worst of the Ivory Tower shills for the vampires sucking the industrial life out of the country.

It would be interesting to see a financial breakdown on the principal donors to this organization. It might prove informative to see if their are explicit links to Chinese 'businessmen' and other agents-of-influence. Cato was NOTHING back in the 80's, when all the greatest victories were won. The Heritage Foundation, Hoover Foundation, and American Enterprise Institute were our key think-tanks which were the intellectual bulwark against the communists and their intellectual proxies. Unfortunately, it appears that Heritage has lost focus and is either drifting or has been partially co-opted.

Cato hit-pieces typically do stress a completely and irrationally distorted view of the world.

E.g., Some engineering associates of mine at Boeing are truly alarmed at the sucking sound they hear...not for themselves...but for the country's aerospace manufacturing capability. It is truly being devastated. The 767 retrofit as a airborne tanker to replace the KC-135's is, in fact, a subsidy, a emergency lifeline, to try and keep Boeing alive in the face of the subsidized AirBus competition. The engineers are frightened that even this will not be enough, and that Boeing management is throwing too much assembly to China. Training our next enemy. And throwing too much assembly to Japan...possibly our biggest commercial peer competitor.

The labor rolls at Boeing are collapsing down another 50,000 skilled laborers, and it is not yet being addressed as a truly national crisis. Studies done show that unless the U.S. government intervenes to stop the foreign-subsidy attacks, Boeing will likely cease domestic commercial aircraft production altogether in just ten years...with catastrophic effects on the U.S. industrial base. And it is likely a permanent reversal, due to the 'intellectual capital base' that is eroding...the very seed-corn of our technology, e.g.,:

At the same time, the study authors document a major decrease in the number of scientist and engineer positions in the U.S. aerospace industry, which plummeted by 800 per cent from 1970 to 2000. More cuts are anticipated, they say."

Interesting how Cato's rose-colored prognostications NEVER talk about the aerospace industry, isn't it? I honestly can't trust any of Cato's work product. Clearly agenda-driven, and from all signs...an enemy of the Republic.

Recognizing my limits on ability to focus on this now, I wrote Allen Reynolds last week and asked his assistance. It was generous of him to reply yesterday. I’ve only skimmed it thus far, but I’ll post his email:

STARTS HERE:

Here is a graph from NAM:

http://www.nam.org/tertiary.asp?TrackID=&CategoryID=680&DocumentID=1432

It is followed by this text:

Manufacturing’s share of the U.S. economy, as measured by real Gross Domestic Product (GDP*), has been stable since the late 1940s. During this time, the ratio of manufactured output to GDP has primarily been between 20 percent and 23 percent. During expansions, manufacturing grows more rapidly than GDP; during recessions, it contracts more rapidly. The overall share remains the same over the business cycle.

The reason for manufacturing’s stability is that there is a synergy between manufacturing and other sectors. Manufacturing generates most of the economy’s productivity and technology, while other sectors such as services generate the largest share of new employment.

The productivity generated by manufacturing raises the wages of workers employed in all sectors. The productivity enhancements generated in manufacturing boost activity in other sectors. As these sectors become more successful, they, in turn, create more demand for manufactured goods and its high-paying jobs.

Here is a newer table:

http://www.nam.org/Docs/IEA/26333_NAMQuickfacts.pdf?DocTypeID=9&TrackID=&Param=@CategoryID=433@TPT=NAM+QuickFacts

And here is Bruce Bartlett’s column, though without the graph (that was in Wash Times)

http://www.ncpa.org/edo/bb/2003/bb082503.html

Unlike Bruce, I am NOT saying manufacturing is not hurting. That always happens before recessions officially begin and for a year or two after they end. I’m just saying it’s cyclical not some ominous long-term trend. And it isn’t related to imports. Imports have risen since March (as have stocks) because industry is picking up, therefore needing more imported materials (oil, copper…) and parts (the stuff that goes into computers).

Manufacturing in Gross DOMESTIC product does not count imported components, just value-added. The Fed’s industrial production index (mfg is about 85% of that) is likewise just domestic output. A lot of the long and strong rise of manufacturing in the 90s -- and subsequent fall -- was high tech equipment – chips, computers, telecom. It’s coming back. Naturally, as we move toward higher-valued products, we get out of black and white TVs (Mitsubishi big screens are made here) and inexpensive clothing (though we make high fashion and do very well in fabrics as a whole). Japan did the same years ago, and North Korea and Hong Kong more recently. We used to use a lot more workers in farming too, but the fact that we don’t use so many today is good news not bad. We’re still the farm king.

Alan

-----Original Message-----
From: Bill Carson [mailto:removed]
Sent: Monday, September 01, 2003 7:59 AM
To: Alan Reynolds
Subject: Data for Manufacturing Myths.

Dear Mr Reynalds,

My name is Bill Carson, and I'm attempting to defend your Manufacturing Myths article on Free Republic. I'm unable to locate the source data on the NAM web site for some of your claims. Specifically:

"While Mr. Uchitelle first began whining about manufacturing being "downsized," it actually grew by 5.3 percent a year from 1992 through 2000. Manufacturing then fell 4.1 percent in 2001 (the bottom of his "trend") but rose at a 6.1 percent pace during the first three quarters of last year."

I'm also unable to see a refernce to the 1940s manufacturing percent of GDP that you mentioned. Can you please guide me to the source. It would be much appreciated.

Also, if you're interested, here is the FR debate thread on this topic: http://www.freerepublic.com/focus/f-news/973636/posts

Thank you,

Bill Carson

Charitably, Mr. Reynolds is not paying attention to the criticism or your questions:

Here is the NAM graph he cited. Note that it runs from 1947 thru 1998, a 50 year period. The numerical 'stability' (primarily been between 20 percent and 23 percent ) is a statistical artifact of having chosen a 50 year period and relative to GDP (which is a much larger number). Stability is what you see from about 1947 thru 1955. Thereafter the swings gets longer and larger.

Noting that the graph in fact is not stable (relative to GDP) he and Bartlett argue Manufacturing is "cyclical". It is no more cyclical than most other segments and the downturns coincide with recessions, but they didn't plot the downturn for the 2001 recession or since then. Now why is that?

Further, that graph and the NAM Quick Facts he cited (which are the exact same I cited in my post #30) both rely on the same invalid use of chained dollar data, which I previously explained in my post #20. Mr Reynolds is either not paying attention to the issues or and doesn't understand the issues and is in over his head. I will elaborate on my points in post #20:

What you see with chained dollar series data is essentially the quantity of units produced (widgets if a good, else transactions or time worked if a service) times the 1996 dollar price per unit, usually expressed in millions or billions of dollars computed horizontally for each sector. The series (the horizontal data trailing back before 1996 and forward from 1996) is computed using formulas that remove price changes relative to the base year (1996). Each sector (textiles, paper, automotive, electonics, etc) has a different formula (or parameters) that is unique to the nature of that sector's business. That's why the chained dollar series is not additive. Meaning, if you add the items for all sectors from a given column, you will not get the number at the top of the column because they weren't intended to total up, and why you can't compute a percentage share of total GDP for any given component from chained dollar data. That is the main drawback of chained dollar data and why the BEA writes the cautionary note that it is "not additive". It essentially is 'correct' only as the formulas were constructed for those sectors portrayed in any given table; hence the need to go to other tables for GDP share percentages - which tables the BEA provides.
So what good is chained dollar data? Well, it's useful to express in dollars the actual productive output of a sector independent of price changes and inflation/deflation. For example, if a university educates 1000 students in 1990 at $100/student (total $100K) and educates 1000 students in 2000 at $1000/student (total $1M), you might erroneously conclude the university had a tenfold increase in output (degreed graduates) if you looked at just the dollars charged. Likewise, the opposite error can be made if considering the output of computer manufacturing without factoring out the decreasing charges for electronics equipment. So the idea of chained dollar data is to show how much was actually produced, regardless of how its prices and inflation or deflation may have changed. Look specifically at textiles, paper and tobbaco to see marked absolute declines and electronics equipment for marked absolute growth.
Specific to manufacturing, one must also keep in mind that the electronics equipment sector was added to manufacturing in 1996. Electronics contributed almost nothing in the 50's thru the 70's and exploded in the 80's and 90's. So electronics contributes a distorted 'health' to the latter decade of manufacturing, whereas manufacturing stood on its heavy industry strength in previous decades. Also specific to manufacturing, it should be noted that key sectors are not included in the current chained dollar series data, such as aerospace.
So why does the real GDP chained dollar data show manufacturing increasing steadily from 1987 to 1999? Well if you note it didn't during recession years '90-'92, and won't for '01-'02, possibly '03 as well. Further, recall healthy sectors like electronics have been added while unhealthy ones like aerospace have been left out. Some sectors have increased overall and some have decreased overall. Also declining prices due to global competiton are not shown - remember the purpose of chained dollar series is to remove price fluctuations as an effect - and prices have generally declined in manufacturing whereas by contrast they've generally increased in services (think tuition, lawyers, banking/mortgage fees, etc.). It is also true that productivity has increased; robotics and automation have helped to produce more with fewer workers.
So even though the manufacturing base we do have may have produced more widgets (according to real GDP chained dollar data) , that does not mean that widget prices were profitable, or that widget-making workers kept their jobs, or that we've not lost widget companies. Nor does it give a good comparison to the rest of the economy, i.e. if the economy overall shrank, than one would expect manufacturing to shrink and vice versa. That's why the BEA provides the GDP share by industry tables.
As per Gross Domestic Product by Industry in Current Dollars As a Percentage of Gross Domestic Product, Manufacturing's percentage contribution to total GDP has declined about 27% from 1988 to 2001.

A lot of the long and strong rise of manufacturing in the 90s -- and subsequent fall -- was high tech equipment - chips, computers, telecom. It's coming back

LOL! The rise yes, but not the fall. Coming back? Electronics never left. That's one major contributing component that has not declined and continues to support manufacturing. From the BEA's Real Gross Domestic Product by Industry in Chained (1996) Dollars I have extracted the manufacturing Real GDP in chained 1996 dollars for 1987 through 2001, along with the electronic equipment portion of manufacturing:

 Line                                                        1987     1988     1989     1990     1991     1992     1993
 1        Gross domestic product......................... 6,113.3  6,368.4  6,591.8  6,707.9  6,676.4  6,880.0  7,062.6 

12      Manufacturing.................................... 1,046.3  1,120.2  1,111.6  1,102.3  1,066.3  1,085.0  1,122.9  

20          Electronic and other electric equipment......    54.0     60.8     66.4     68.6     72.7     73.3     85.0  


 Line                                                        1994     1995     1996     1997     1998     1999     2000     2001
 1        Gross domestic product......................... 7,347.7  7,543.8  7,813.2  8,159.5  8,508.9  8,859.0  9,191.4  9,214.5

12      Manufacturing.................................... 1,206.0  1,284.7  1,316.0  1,387.2  1,444.3  1,513.9  1,585.4  1,490.3 

20          Electronic and other electric equipment......   103.3    128.7    153.2    182.2    210.8    249.2    311.8    335.2

Reading horizontally (not computing a percentage vertically) note that Electronics continued growth (in quanitity of units if charged at 1996 prices). No decline.

And as Paul Ross note in his post #31 above, aircraft manufacturing has been ignored. True the government breaks it out separately, but you can bet if there was happy story to tell, Reynolds and Bartlett would tell it - but there isn't. It's inclusion would drag the Mfg stats down further. Perhaps Paul will post a link to the thread he posted on Aircraft manufacturing's decline?

Bruce Bartlett again. (sigh) Bartlett's mathematically invalid cheerleading is what started this mess. It has been debunked here at The Truly Good Shape of U.S. Manufacturing post#32 wherein Mr. Bartlett tried to rebut the criticism he received from Mr. Roberts who likewise refutted his analysis here at Trade nothink.

The analysis done by Bartlett and Reynolds is invalid and devoid of substance.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.