In his Economic View piece in last Sunday’s New York Times, Exporting Expertise, If Not Much Else, Daniel Altman mixes fact and fiction to create a distorted view of modern manufacturing that needs to be corrected.
First, Mr. Altman correctly states that “You can look at the economy in two ways: by production, or by people. And the two aren’t always the same” due in large part to productivity growth. He then goes on to say that this is clear when you look at the long-term trend of the decline in manufacturing. But long term decline in what: production or employment?
Mr. Altman attempts to explain whether manufacturers have become more productive by comparing changes in manufacturing’s share of national employment to its share of the economy. While this methodology has some major flaws that I will describe below, some of Mr. Altman’s assertions simply are not correct. For instance, he claims that manufacturers of nondurable products (like pharmaceuticals, food products and plastics) have not increased productivity enough to offset quality and price changes since their 9 percentage point drop in employment has been eclipsed by their 10 percentage point drop in their share of the economy since 1965.
In reality, nondurable manufacturing’s share of GDP has fallen from 10 percent in 1965 to 5 percent in 2004 (latest year available) — a 5 percent drop, not a 10 percent drop! So, what does this tell us about productivity? Well not too much actually. Productivity measures the output generated by a worker over a given period of time, such as an hour. As workers become more productive, through the use of technology for instance, the amount of output generated per-hour increases. To get an accurate measurement, the Labor Department adjusts the output measure in its productivity estimate for inflation, so that changes in output actually measure changes in the quantity of output, not just changes in prices.
This is at the heart of where Mr. Altman misses the mark. By comparing manufacturing’s share of nominal GDP, he is not taking into account the fact that prices have increased at a much slower rate in manufacturing than in the economy as a whole. This distorts his assertion that productivity growth has not increased significantly. In fact, since the first quarter of 1965, nondurable manufacturing productivity growth has increased 167% — nearly a third faster than overall business productivity growth during that time.
Mr. Altman’s faulty analysis continues. He then claims that “The story for durable goods is more troubling. Half of the decline in production has been a legacy of the last recession: sales went down, and they have stayed down”. If by “production” he is using durable manufacturing’s share of GDP, well in 1965 it was 16%. In 2000, prior to the recession, it was 9%. In 2004, it was 7%. So the bulk of durable goods falling share of GDP (80% the drop) occurred before the 2001 recession.
Just as inaccurate is his assertion that there has been no recovery in the durable goods manufacturing since the recession. In fact, after durable goods production fell by nearly 8% in 2001, it grew at a modest 3.9% pace in 2002 and 2003 before accelerating to 7% growth in both 2004 and 2005. By the 4th quarter of 2005, durable production was 14% above its pre-recessionary peak in the 3rd quarter of 2000. Sales staying down? Hardly.
Now, it is true the the current manufacturing recovery got off to a very slow start and has thus not kept pace with previous upturns. Moreover, manufacturers face significant challenges both at home and abroad that need to be addressed for manufacturing to become more competitive internationally. However, Mr. Altman’s analysis of the current state of manufacturing misses the mark.