A Closer Look at Manufacturing

If there’s any state that understands manufacturing, it has to be Indiana .  There’s no other state in the country where the production of goods has a bigger slice of the economic pie than ours.  That was true thirty years ago, and it is true today.  Yet in that time span, many things about the economy, especially the manufacturing economy, have changed.  And if the rhetoric of political campaigns is any guide, our knowledge base may be due for a little tune-up.

That is especially true as we move away from a painful recession that has hit the manufacturing sector harder than most.  That’s not unusual as recessions go, of course.  But this one has been different.  The temporary layoffs of the 1970’s downturns, subject to call-back by original employers when the economy rebounded, have largely disappeared.  Today’s furloughed worker has to change employers, change locations, or even change occupations to find new employment.  And many older workers have simply left the labor market altogether.

But the issues in manufacturing go beyond the recession.  The structural changes that have caused such upheaval in communities across Indiana date back to the late 1990’s.  Rising demand created by the booming economy of that time helped prop up employment

Some perspective is in order, however.  Manufacturing industries have been shrinking their payrolls for a long time.  In the 34 years since 1970, U.S. manufacturing employment has shrunk 21 times, for an average annual decline of 0.9 percent per year.  Simply put, manufacturing industries have not been a contributor to employment growth in more than a generation.

What manufacturing companies do has changed a lot over that time as well.  Increasingly, they have become service providers, both to themselves, in areas like engineering, marketing, finance, and research and development, and to their customers.  The ratio of production to non-production workers in manufacturing has fallen drastically since the 1950’s. 

Many of those non-production tasks have been farmed out to other companies, whose payrolls show up in the government reports as services industry employment.  That phenomenon has spread in recent years to even production activities, thanks to the booming temporary help industry.  The bottom line is that the employment

 footprint of manufacturing is larger than the industry job totals themselves indicate.

That’s happened at the same time as manufacturing output has virtually doubled.  Rising factory productivity, of course, has enabled companies to produce more with less.  As an economy, we continue to spend about 18 percent of our incomes on manufactured goods today, just as we did decades ago.

But productivity gains are a bit more complicated than that.  It turns out that the industries within manufacturing with the strongest productivity gains – semiconductors and computing equipment – have also had job gains, while those with more sluggish increases have cut payrolls drastically.  Thus overall productivity improvements reflect the different mix of what we are producing, and not simply continuous improvements under every roof.

Since 1998, thanks to a more liberalized trade environment and the dramatic industrialization of Asia , the transformational process has gathered steam, affecting non-production and production related activities alike.  Can Indiana ’s manufacturers thrive in this new environment?  Thousands of households and communities are waiting to find out.

Patrick M. Barkey