Source: Wells Fargo Securities, LLC Economics Group
Despite the widely held view that U.S. manufacturing is in decline, the industrial sector remains a vibrant part of the American economy. Regrettably, the same cannot be said for employment in the factory sector. In the late 1970s, blue-collar factory workers represented more than one out of every five workers in the economy; today that portion is less than one out of 10. At its height in June 1979, the manufacturing sector employed 19.5 million Americans; as of March of this year that figure was 11.9 million. As the manufacturing process has become more capital intensive, the centers of manufacturing activity have changed on a regional basis. The states and regions where factory activity comprises a larger share of overall output have shifted. In this report, we consider the evolution of manufacturing since its earliest days, with a particular focus on the transitions that we have seen in the past 30+ years and consider prospects for the factory sector in the future. The reason we still lead the world in industrial production is that throughout our history we have found ways to become more productive. The key to a vibrant manufacturing future, whether considered nationally or regionally, depends on our ability to supply qualified labor capable of excelling in the manufacturing facilities of tomorrow.
The American System: A Quick History of U.S. Manufacturing
Between the late 18th century and the middle part of the 20th century, the United States transitioned from a primarily agrarian economy to the foremost industrial superpower in the world. A number of dynamics helped drive this transition but one key factor was building on the success of the British industrial revolution through the widespread use of interchangeable parts produced by mechanization and carried out through a division of labor often on an assembly line. These features were initially implemented in armories and later adopted by the private sector. In the mid-19th century, the American System of manufacturing embodied these practices and they gradually made their way into other budding new industries. The Lowell system in Massachusetts was an early and famous example of the embrace of the American System by the textile industry.1
From these early days of the 20th century until today, the hallmark of American manufacturing has been an embrace of innovation and technology, which allows greater productivity from each worker. By 1807, Fulton’s steamboat had navigated the Hudson River from New York to Albany and steam began to power machinery in the nation’s factories. By the 1820s, steam was powering land travel as some of the first railroads began to connect factories with markets. In 1869, the completion of the Transcontinental Railroad connected the continent. The telegraph came in the 1840s and the telephone soon followed in the 1870s.
In the 1880s, the light bulb made it possible for factories to stay opened after dark and before long, electricity was powering the activity in the plants through electronic motors. The Germans may have invented the automobile in the 1870s, but it was Henry Ford’s application of the American System with the model T in 1908 that made cars widespread and affordable.
The 20th century saw continued innovation and two World Wars that diminished the capacity of the rest of the world’s industrial powers just as the manufacturing sector in the United States was hitting its stride. The most recent generation has been no less innovative. The Internet has changed many of the ways that the world does business and a whole new category of high-tech manufacturing has emerged and this has helped businesses combine labor and technology more effectively. In fact, the tremendous productivity growth the manufacturing sector has achieved over the past few decades has been driven largely by a more productive combination of labor and capital.2
This wholesale embrace of technology explains how the United States is able to produce so much with relatively few workers.
Employment Versus Output: How to Measure the Factory Sector
Even as the number of manufacturing jobs has fallen roughly 40 percent since 1979, the actual production from our industrial sector has nearly doubled over that period (Figure 1). Despite the widespread perception that American manufacturing is on the decline, the United States remains the world’s largest industrial producer. According to the United Nations, value added in the U.S. manufacturing sector in 2011 totaled $2.3 trillion. The comparable figure in China, the number two producer, was $1.8 trillion.3
Based on recent growth rates, the United States will probably not hold the title for long. However, even when China overtakes the United States in total manufacturing output, it will still have a long way to go to catch up in terms of worker productivity. The roughly 12 million American factory workers crank out roughly the same in terms of industrial output as China, where more than 100 million workers are employed in the factory sector.
The two major themes over the past 30+ years in the factory sector have been 1) the embrace of technology and the pairing of capital and labor to boost productivity, and 2) the migration of manufacturing centers from the traditional “Rust Belt” states to other parts of the country. As we will discover, it is the combination of these factors that have been the cornerstone of the evolution in the U.S. manufacturing sector. There are, in fact, two metrics by which to gauge the evolution of the factory sector. Initially, we wanted to look at this issue through the lens of the labor market and measures of manufacturing density in terms of the share of total employment on a regional basis. Unfortunately, employment data broken out by region and by industry sector over a sufficiently long period of time were not comparable over our time period of study.
Cognizant of the fact that our real comparative advantage as a global player is our productivity and high output, we look instead at a measure of manufacturing output density. While this method helps identify how industrial production has shifted from one part of the country to other areas, our research on trends in the labor market tell us that the approach toward employment needs to evolve as well.4
Our history has taught us that being early adopters of labor-saving technology is important, but just as critical is an educated and intelligent blue-collar workforce. The future of manufacturing in the United States depends upon it, and the regions that attract workers with specialized skills and nurture those skills with educational programs will be most successful.
The Evolution of Manufacturing Across the United States
The first step in understanding how manufacturing has evolved and migrated throughout the United States is to derive a measure of manufacturing density or concentration. As described in the preceding section, measuring manufacturing density based on employment dynamics alone would be problematic. Thus, we constructed a location quotient index value based on manufacturing output across states relative to overall U.S. manufacturing activity.5
An index value near one means that a state has a manufacturing output concentration equal to that of the United States as a whole. An index value greater than one means a state has a concentration of manufacturing greater than that of the United States, while an index value below one represents a lower concentration of manufacturing relative to the United States. The results of our analysis are presented in the four maps below.
Beginning in the 1980s manufacturing was heavily concentrated in what are known today as the “Rust Belt” states, which include states in the mid-west and north east along with parts of the upper south. Over the course of each decade, overall manufacturing activity gradually migrated to the western United States, as can be seen in the 2000s. The effects of the great recession on manufacturing output can also be seen in the reduction in the number of states that have a high concentration of manufacturing.
The regional migration of manufacturing is, at least in part, a function of the type of goods manufactured within the United States. Beginning in the 1980s the technological revolution and, in turn, the emergence of technology manufacturing in Silicon Valley helped support the expansion of manufacturing into the western part of the country. Today, we can see that those states with the highest concentrations of manufacturing are states with large durable goods manufacturing such as automobile and auto parts production like Michigan and Indiana and states with a large amount of computer and technology production facilities such as California and Texas. Of the states today with high manufacturing concentrations, nearly all specialize in manufacturing that is more capital intensive rather than labor intensive given the need to remain globally competitive. In other words, today’s manufacturing states are globally competitive due to the fact that there are larger amounts of technology in the production process as opposed to labor. This added efficiency per worker has changed the composition of what is manufactured within the United States today.
Beyond the regional manufacturing migration over time, there has been a marked downshift in the pace of growth in manufacturing output over the past couple of decades. Figure 2 shows the rate of manufacturing output growth in the 1990s for each major census division. Figure 3 shows the convergence in the growth rates across census divisions that occurred from 2000-2010. While on the surface the slower pace of manufacturing output growth appears concerning, the reality is that the downshift is consistent with economic theory.6
In general, as investments in capital increase, the rate of growth in output decreases. Thus, we expect to see slower rates of economic growth in the 2000s over the 1990s, as manufacturing has grown more capital intensive and less labor intensive. Furthermore, as technology increases the result is also higher levels of total output, which can also be seen in the data above.7
The result of increased capital along with significant improvements in manufacturing technologies between the two decades has led to a higher overall level of manufacturing output even though the rate of output growth has slowed. This trend is observed in the graphs above through the migration of the bubbles to the top left of the graph over the two decades.
Implications for the Future of U.S. Manufacturing
The increased intensity of capital and the rapid adoption of new manufacturing technology observed over the past few decades across the United States provide some insight into the future of U.S. manufacturing. The higher utilization of capital implies that there is less need for labor in future manufacturing facilities, while the rapid adoption of manufacturing technologies has increased the skill requirements for the factory workers of tomorrow. As we discussed above, the shift to more technologically advanced and capital intensive factories has been and will continue to be necessary for the United States to maintain global competitiveness.
Given the ongoing evolution within the U.S. manufacturing sector, the future success of a state or region in attracting and maintaining its manufacturing base depends on its ability to supply qualified labor that is capable of operating in the new manufacturing facilities of tomorrow. In other words, today’s trend of re-tooling factories to increase automation has increased the need to re-tool the skill set of tomorrow’s factory workers. As we have documented before, there is strong evidence to suggest that current skill sets within the U.S. manufacturing sector are inadequate to keep up with the changing face of manufacturing.8
Therefore, the future of U.S. manufacturing rests on our ability as a nation to adapt our workforce training programs to better meet the needs of the manufacturers of tomorrow.