U.S. MANUFACTURING

I covered this topic eight years ago (http://econlives.blogspot.com/2015/11/) and, given the goverment's industrial policies emphasizing support for manufacturing,  it is now a good time to revisit it. My argument then was that the idea that reshoring manufacturing would bring back jobs was misleading.  Production and shipments were increasing but the number of jobs was mostly declining, even though jobs may have increased in a few short periods.

The recent push towards manufacturing has resulted in a surge in the construction of manufacturing structures. In the seven-year period between 2015 and 2021, spending for manufacturing construction averaged $77 billion annually. Spending jumped to $117 billion last year, and is currently running at over $206 billion. That is, more than twice the two years ago pace. Historically, manufacturing was 7% of all private construction but this year it has nearly doubled to 13% of the total.  

All of this construction should lead to increases in manufacturing output and employment. Although the extent to which employment will increase is unclear. It depends on, among other factors, on the specific manufacturing industry where construction is taking place, and on how capital intensive is the investment effort. 

The chart below shows manufacturing employment back to 1939, where we have indicated a few economic events or government policies impacting the manufacturing sector. We must keep in mind that their effect on employment is not immediate, but takes some time to work itself through the economy. For example, the signing of the NAFTA agreement on January 1994 did not result in the "giant sucking sound" of jobs lost to Mexico, predicted by Ross Perot during his failed presidential campaign. Manufacturing jobs continued to rise for at least another four years until the "dot com" recession around the turn of the century drove manufacturing employment and production down.

Economic recessions do show a clear impact typically with a contemporaneous decline in employment. This is partly because changes in employment are one of the key factors used to define an economic recession.

Manufacturing employment drops during recessions, sometimes very dramatically. For the twelve recessions covered in the chart above, manufacturing employment fell at twice the rate of overall private jobs. For the period covered in the chart, private jobs fell an average 4.5% in recessions, but manufacturing dropped a larger 8.5%. In only one recession, the "Covid" one early in 2020, we find manufacturing employment falling less than overall employment. 

Looking back at the Great Recession, that is between December 2007 through June 2009, we find that the number of manufacturing jobs fell by over two million, or a 15% drop in under two years. The decline in manufacturing jobs was more than twice the drop in private sector employment overall, which saw a 6.5% reduction during the recession. 

But since mid-2009, when the recession was officially over, manufacturing jobs have increased by 1.2 million. That is, today there are 10.5% more jobs than were back at the bottom of the recession. Despite these gains employment is still a long way from the pre-recession, December 2007 level of 13.7 million jobs- that is 786 thousand more jobs than today.

Looking at a shorter time period, shown by the chart above, we see in the left panel the trend in number of manufacturing jobs since January 2010. Employment rose roughly one percent annually until reaching a high of 12.8 million in January 2019. It declined slowly for the following twelve months until February 2020 when the government-mandated Covid shutdown caused a collapse in manufacturing employment, bringing it down to 11.41 million. Note employment is lower than in Feb/Mar of 2010 at the bottom of the 2007-09 recession.

The economy rebounded sharply when the economy opened up around June 2020. While manufacturing employment rose just 0.1% monthly between 2010 and 2019, the monthly increase between April 2020 and December of last year jumped to 0.4%. By the end of last year it exceeded pre-pandemic level, but growth has stagnated this year, as can be seen in the right panel of the chart above. Growth flattened and, in fact, we can visually appreciate a modest declining trend. The surge in employment ended at the beginning of this year.

Manufacturing continues to lose ground

Even though manufacturing employment has generally increased since 2010, ignoring the sharp drop during Covid, the sector has lost ground compared to total employment.

While manufacturing jobs accounted for one in three of all U.S jobs, 32.3%, in 1948, it has steadily fallen over the last 70 years to one in twelve jobs (8.3%) today. The chart to the right illustrates the secular decline in the manufacturing sector's share of all jobs. Compared to the private sector, that is excluding government employment, the decline is more pronounced, falling from 37% of 1948 jobs, to the current 9.7%.

The services sector has gained importance, with service jobs replacing all the goods-producing ones. Among all goods-producing industries manufacturing posts the biggest declines. Its share all  jobs fell 24% over the last 75 years. This decline is much greater than most other sectors, the next highest drop is the Federal Government whose employment share is currently only 2.3% lower than in 1948, and Information down 2.0%. 

Within services, Professional & Business Services has gained the most. Currently, it accounts for 23.0 million jobs, that is 14.6% of total employment. This sector represented 6.5% of all jobs back in 1948 and it currently is holds the largest number of jobs, even exceeding government employment which had the most workers until February 2022.

Wages in Manufacturing Jobs

A key claim of the government's industrial policy is that it supports investments in manufacturing with the promise of "high-paying" jobs. However, "high-paying" depends on which specific industry within manufacturing sector gets the support. Also, whether the emphasis is on all workers or just production workers.

Overall, manufacturing jobs post an average hourly wage of $32.87, that is 12% higher than average for all private sector workers. However, all production and nonsupervisory workers, that is "blue collar" workers, have an hourly wage of $27.87 or 9% below the average for all private business workers.

The chart below displays data for "all workers" in a number of industries in manufacturing, with the vertical axis displaying the average hourly wage, and the number of jobs change since 2010 along the horizontal axis.  Each circle is a manufacturing industry with the area of the circle reflecting the number of jobs- bigger circles indicate greater employment. Note that we duplicate some of the data in the chart. That is, some circles reflect industries that may be included in other circles. Such is the case for Aircraft, shown at the top of the chart, which is included in the Aerospace circle shown immediately below.

We can see there are many industries within manufacturing whose wages are below the national average. There is no clear pattern and very low correlation between industry size and average wage, or employment change and average wage. We are as likely to see a large industry, i.e. a bigger circle, with high or low wages. Nonetheless, it's clear that the more technical industries, e.g. Computers, demand higher wages than more prosaic industries such as Food or Apparel. 

We said above that there is a wide range in manufacturing wages among the individual segments or industries. They range from a low average wage of $23.21 an hour for Animal Slaughter, or $23.36 for Seafood Processing. Note that the data exclude benefits or any other payments outside the stated hourly wage.

At the high end of the range we find workers in Aircraft manufacturing earn an average of $53.28 an hour. Manufacturing of Semiconductors & Electronic Components command $46.49 an hour, and manufacturing workers in instruments for Navigation, Measurement and Control make an average $45.28 an hour. 

In the chart below we show the range in hourly wages of the major industry groups within manufacturing. Note that the manufacturing groups shown include several industries. For instance, Transportation Equipment with an average wage of $38.06 includes Aircraft Manufacturing with an average $53.28, Motor Vehicles ($38.26), Vehicle Parts ($29.41) among others. 

Government support of manufacturing thus has a different impact on which sector or industry is chosen. Even picking a sector that currently pays relatively high wages, such as Motor Vehicles contains several industries feeding it with lower than average wages. Manufacturing industries feeding it include Vehicle Body Work with $29.54 hourly wage, Vehicle Parts with $29.41, and Vehicle Electric Equipment manufacturers with a $28.00 hourly wage. 

Smaller Houses

 Newly built houses are getting smaller and smaller. Single family houses started in the third quarter of this year were 2,430 square feet, average size. This is 82 sq. ft. smaller than a year ago. For multifamily units the average size also fell, to 1,032 square feet which is 55 sq. ft. less than the same quarter last year. This is according to the latest housing starts data release from the U.S. Census Bureau.

The decline in house size, on top of the drop in the number of houses started this year, implies smaller demand for construction products going into residential sector. Year to date through October 153 thousand fewer houses were started than in the same period last year. Fewer houses combined with the reduction in house size translates into a loss of 10.9 million square feet of floor space so far this year (approximately). 7.7 million is from single family houses and 3.2 million in multifamily housing units. 

House size has been falling for at least ten years in both single and multi family houses. Single family houses were largest in 2013, when their average size was 2,701 square feet, 271 square feet or 10% larger than today. 

The median size of houses has also fallen during the same period. The median for single family houses was 2,221 sq. ft. in the third quarter, also 10% less than its peak size of 2,491 sq. ft. in 2013.

The decline in the size of multifamily housing units has been falling longer. Peak size was reached back in 2007 when the average multi unit measured 1,342 square feet. That is, multifamily units were 310 sq. ft. bigger that year.

One reason explaining larger multifamily houses around 2007 is that a greater number of units were built to be sold as condominium houses. Condominium multifamily units are typically larger than rental units. For instance, in 2007 four in ten of the units (40%) were destined as condominiums- 60% were built for rent. In contrast, virtually all the units built last year (97%) were rentals. 

Regionally, we find that the Northeast has the biggest new single family homes. The average size in this region in the third quarter of this year was 2,562 square feet, although it declined by 6.9% or 189 sq. ft. from last year. This year's sharp drop brings the average size in this region closer to what it was in 2018.

The average size in the other three regions also fell, although by smaller percentages than in the Northeast Their average size also has declined over the last ten years. 

The second largest reduction in size was in the South region, with a 4% drop to 2.473 sq. ft. in the third quarter. The South region also boasts the second largest new single family houses.

The West region's single family houses are the third biggest of all four regions, with an average of 2,395 sq. ft. Also they had the smallest drop in size last year, new houses are just 1.2% smaller than a year ago.

The smallest single family houses are built in the Midwest region, with an average of 2,237 sq. ft. this year. The size of new homes in this region has also been declining for a decade now, ending with a 2.4% drop last year.

Similar to the regional trend in the size of single family houses, we find that multifamily housing units in all four regions have become smaller for more than a decade now. Further, with the exception of the Midwest region where houses this year are actually larger than a year ago, the size of multifamily houses fell last year in the other three regions.

The size of multifamily houses in the Northeast region saw the biggest drop this year, with a 10% decline bringing the average size to just 853 square feet. The South and Midwest regions had similar declines, of 8.1% and 8.2% each, respectively. The average unit size is also very similar with units in the South region measuring 1091 sq. ft. on average. This is slightly higher than the 1,056 square feet in the Midwest region. 

Housing units in the West region measure currently 995 sq. ft. on average, just 5.3% smaller than a year ago. 

Construction Markets

• Total construction is up modestly 0.4% in September but a more robust 8.7% from last year.
• The bulk of the gain from last year originates in the nonresidential sector, which is up 19% while residential construction fell by 2.1% since September of last year.
• The principal growth drivers overall are Manufacturing buildings, up 62%, Education buildings, up 19%, Power buildings, up 16%, and Health Facilities, up 15%. 
• Construction of manufacturing buildings rose $76 billion over the last year, accounting for nearly half (48%) of the increase in total construction. 

The U.S. construction market remains relatively strong overall, although signs of weakness are beginning to show up. Spending for all types of projects, public and private, rose 0.4% in September reaching just under two trillion dollars ($1.997 trillion annual rate). September marks the ninth consecutive month when spending for construction projects increased- bringing spending to a level 8.7% higher than the same month a year ago. In real terms, that is adjusting for inflation, spending is 5.5% above last year. 

Spending across the two major major segments, i.e. public and private construction, rose in September (see left panel of chart below). Total private construction is 0.4% higher than the previous month reaching $1,556 billion (that is $1.6 trillion) in September. Private construction accounts for 78% of the U.S. market and is 6.9% higher than last year.  

Public construction also rose in September, coincidentally by a similar 0.4% but to a smaller $441 billion. It is 8.7% higher than the same month last year and currently accounts for slightly over one-fifth of the market (22%.) September also marks all-time spending highs for both private and public construction.

Private construction has grown by nearly four times over the last thirty years. The data in the charts, which begin in January 1993, indicates cumulative growth of 352%; that is from $344 billion back in early 1993 to the 1,556 billion this year. 

Public spending for construction projects has also increased but at a smaller magnitude, rising by 287% over the same period. That is current spending of $441 billion is nearly three times the $113 billion in early 1993. 

An alternative segmentation of the data is the most common division between Residential and Nonresidential projects, shown in the right panel in the chart above. Both follow similar patterns although nonresidential lags residential by more than two years, reflecting the fact that it takes longer to initiate and complete nonresidential projects.  

Earlier this century, around the 2008-09 recession, residential peaked in January 2006 with $681 billion spent, while nonresidential peaked more than two years later in October 2008 reaching $719 billion. Both of them bottomed around 2012 and have risen sharply since then. 

The Fed's policies maintained over the last ten years or so had driven mortgage rates to levels below 5%- we had not seen rates below 5% since at least the early 1970s. Such low rates encouraged construction of both residential and nonresidential projects. Although the recent increases have not impacted nonresidential construction yet, their impact on residential is already evident as the chart above shows.

Residential Construction

• The residential market remains relatively strong, driven primarily by construction of multifamily housing units.
• Although it is expected that multifamily construction will ease in the near future as the record number of multifamily units currently under construction are completed. There are currently over a million units under construction, equivalent to roughly two years' demand.
• Single family housing continues to fall.

The bulk of residential construction today emanates from the private sector. Residential buildings publicly funded are just around one percent of the total, except for a short period around the 2008-09 recession when public residential construction rose to about 5% of the total. Currently, public spending for residential construction lingers around ten billion dollars, a small figure in relation to the $882 billion overall residential market. 

Thus here we concentrate on the private sector, which represents the bulk of the residential sector.

Residential construction data from the Department of Commerce estimates is available for three different segments: new single family housing, new multifamily housing and expenditures by homeowners for remodeling. Combined these three segments are generating $872 billion annually, but adding the pubic sector the total rises to $882 billion. 

The increase in construction over the last few months originates from greater activity in both single and multifamily housing. Although new single family housing had been falling since early last year, it reversed course in May of this year but it barely reaches a similar level it had in November last year. That is, single family construction is running at slightly over four hundred billion ($402 billion annual rate, shown in the chart below). Single family rose 1.3% in September but it remains 5.9% below a year ago.

 

Multifamily construction, on the other hand, paints a more rosy picture. Construction of multifamily housing units has been increasing for at least a year now. However, the construction pace has been slowing down gradually, in September construction actually fell, albeit by a negligible one-tenth of one percent (0.1%). Spending on multifamily houses reached $136 billion in September, the highest amount ever recorded for this sector. 

We'd anticipate further declines in multifamily construction. The increases in mortgage rates, which have reached nearly eight percent recently and are one percent and a half higher than the beginning of the year, are forcing builders and developers to slow down construction. Further, the huge number of multifamily units currently under construction, which currently exceeds one million units, is putting pressure on builders when these units are completed and put on the market.  

Homeowner remodeling spending has also fallen recently- it fell in seven of the last twelve months. Spending in September was $334 billion, 5.4% lower than a year ago. Higher mortgage rates have made remodeling projects more expensive naturally.

Nonresidential Construction Sector

Overall nonresidential construction has been rising more or less steadily since 2011, to reach $1.11 trillion in September of this year (at annual rate.) Spending dropped modestly by 5.4%, in the aftermath of the Covid pandemic, between January 2020 and June 2021. But it recovered strongly since then by rising 33%     in the last year and a half. The growth pace has been slowing the last few months, however, as can be seen in the "Monthly Changes" graph in the chart below. Compared to September of last year, nonresidential construction is 8.7% higher.

Currently, the biggest contributor to nonresidential construction is manufacturing, shown by the red line in the chart below, which shows major nonresidential construction types as percent of the nonresidential total. Historically, construction of manufacturing buildings represented under 10% of total nonresidential market, except for a few years around 2015 when it briefly exceeded 10%. But the emphasis by Federal government policies to support a shift towards electric automobiles has boosted manufacturing construction to nearly 18% of the nonresidential sector. 

 Data Source: U.S. Department of Commerce

States' Unemployment Claims

Last week’s  unemployment claims were unchanged from the previous week, although they are still about 5% higher than a year ago. For all practical purposes claims have remained relatively flat over the last year reflecting, no doubt, the reluctance of businesses to lay off workers given the difficulty of finding persons to fill positions. Job openings are still elevated with a total of 9.61 million in August, yet they are 2.4 million fewer than a year ago when openings total was 12.0 million. Relative to the number of persons unemployed, the number of openings translates into 1.5 jobs available per unemployed person.

Despite no change in the number of U.S. claims this past week we find large differences among the fifty states. Changes over the last year in the number of claims at the state level range between a high in Virginia, where claims are 55% above their level early October 2022, to a low in Florida, where claims this year are 55% lower than last year. 

The map to the right provides a geographic overview of changes in claims from last year. The red family of states indicates that claims this year are higher than in 2022; that is the employment situation in those states has worsened. Virginia, shown in gray leads states with highest increase in claims relative to last year. Second highest, in bright red, is New Hampshire with 50% more claims, followed by Hawaii which posts 45% more.

Visual inspection of the map suggests a greater preponderance of states with higher claims in the middle section of the country, as well as the Northwest region. Three states in the latter have higher claims - Montana, 19% higher, Washington, +21%, and Idaho +20%.

Conversely, the green family of states in the map indicates states with fewer claims than in October of 2022. Florida leads with the biggest improvement, as stated above, with claims this year slightly less than half their level last year- 55% below. Other improving states are Massachusetts which is down 42%, Indiana down 29% and Louisiana 17% lower. Note that improving states are generally among both coasts.

An alternative way to analyze the relative performance of states is to compare each state's number of claims to its total employment. That is, take the ratio of claims to employment and multiply by 1000, to convert the number into an easier to understand metric.  

We find that at the national level with last week's 209,000 claims, against the 156.9 million persons employed, there are roughly 1.33 claims for every thousand persons employed. A lower ratio mean the state's employment performance is better, and conversely.

The map displays the latest ratio for all 50 states; the states in the family of reds post the relatively worst performance. States colored in the family of green indicate better performance. 

The ratio ranges from a low of 0.33 in Virginia and 0.34 in South Dakota, to a high of 2.44 in Hawaii and 2.43 in Alaska. The median of all 50 states happens to be 1.0 and the average ratio is 1.22.

In the map, the two states in white, Wyoming and Nevada, have a ratio the same as the nation or roughly 1.33 claims per thousand workers employed.

 Although one may be tempted to conclude that this metric captures the political divide between "blue" and "red" states, we can't conclude this without deeper analysis of the data. Yes, twelve of the thirteen states with higher than average ratio (red family) are all typically classified as leaning Democratic. At the same time, several states in the green family can be classified also as leaning Democratic. E.g., Virginia, Massachusetts, Rhode Island on the Northeast, or New Mexico and Colorado in the West.