Manufacturing in America

American manufacturing has been in the news a lot lately.  The Economist (Hard times, lean firms, Dec 31), the Wall Street Journal (In U.S., a Cheaper Labor Pool, Jan 6), Businesweek (It’s a Man vs. Machine Recovery, Jan 5), and the Atlantic (Making It in America, Jan/Feb — currently not now available on-line) all have had articles on the state of US manufacturing. The articles have delivered some interesting numbers. From the Journal, we have:

U.S. manufacturing labor costs per unit of output in 2010 were 13% below the level of a decade earlier as workers became more productive, according to the U.S. Bureau of Labor Statistics. The U.S. outperformed Germany, where unit labor costs increased 2.3%; Canada, where they rose 18%, and South Korea, up 15%.

The graph at right illustrates the change. There are a couple of issues behind this are worth mentioning. First, changing work rules and greater employee flexibility is part of this. The article highlights labor disputes between US manufacturers and Canadian workers that in some instances have resulted in the closing of Canadian factories. Navistar, for example, closed an Ontario plant in part because its American workers (represented by the UAW) agreed that any of Navistar’s plants should be able to build Navistar’s products.

The second point is that exchange rates matter. The Loonie, in particular, has appreciated against the US dollar and that has made making stuff in the Midwest more attractive. Of course, that advantage is more fleeting that changes in work rules and increases in productivity.

Speaking of productivity, the Economist reports:

After falling in the first half of the year, American labour productivity (output per hour) was 2.3% higher in the third quarter of 2011 than in the same period a year earlier. This was the fastest quarterly rise in 18 months. Manufacturing productivity in that quarter rose by 2.9% compared with a year earlier. America’s productivity growth has been more robust than most other rich countries’—a feat many ascribe to its flexible labour market and a culture of enterprise.

Yet some analysts expect productivity growth to stall soon. Hard-pressed workers are feeling grouchy: workforce surveys report record levels of job dissatisfaction. Many firms have been “starving the organisation to see how it can do with a lower cost structure,” says Carsten Stendevad of Citigroup, a bank. Unless the economy picks up, he predicts that productivity growth will slow in 2012. (He admits, however, that he wrongly predicted the same thing would happen in 2011.)

Further Businessweek adds:

The U.S. produces almost one-quarter more goods and services today than it did in 1999, while using almost precisely the same number of workers. It’s as if $2.5 trillion worth of stuff—the equivalent of the entire U.S. economy circa 1958—materialized out of thin air.

Although businesses haven’t added many people, they’ve certainly bulked up on machines. Spending on equipment and software hit an all-time high in the third quarter of 2011.

So maybe even the US productivity advantage may be in jeopardy. The Businessweek article goes on to note that while US firms have been buying capital equipment it has largely been replacing stuff that has worn out. That is, the financial crisis caused many firms to kick replacing and upgrading equipment down the road. Thus, investment we see now is more treading water than a real increase in capability.

The Businessweek article closes with the following:

One thing that’s different now: Instead of lifting all boats, as it once did, technology is sorting workers into winners and losers. Over the past three decades job growth has been fastest among high- and low-skill jobs, while mid-skill occupations atrophied, according to economists Jaison Abel and Richard Deitz of the Federal Reserve Bank of New York. Although the economy created nearly 50 million new nonfarm positions in that period, technology cut the ranks of some workforce mainstays, such as machine operators, by more than half.

That increasing divide between skilled and unskilled work is the focus of the Atlantic piece, which is really a wonderful read. It focuses on Standard Motor Products, a maker and distributor aftermarket auto parts. The article discusses the pressure the company is under. 40 years ago, no one customer represented more than 1% of the firm’s business. Now their four biggest customers (major chains of auto part stores like Autozone) are 50% of their business and they must respond to pressure to cut prices. That means Standard has to think carefully about what stuff it makes itself and where to make the stuff that it keeps in-house.

Among the things it makes in an American plant are fuel injectors. There are roughly two-step to making these things, precision machining and assembly. The article profiles workers involved in each of these stages. The one running the precision machining equipment spent time at a technical college and has studied math and computer programming. The one doing assembly has no schooling past high school. She has a job because if the firm replaced her with a robot, they wouldn’t earn payback in its targeted two years.