Business Week & NAM - The Blind Leading the Blind

So you think manufacturing productivity is way up, do you?  Think again.

Every genius from those employed by the government to the academic community to the professional economists talks big about the radical improvement in manufacturing productivity.  Bring up the fact that manufacturing jobs are disappearing so fast that factory workers should be on the Endangered Species List, and you will hear about productivity.

Said Business Week in The Case of the Missing Jobs, "What's going on here? Why is manufacturing employment, at 14.2 million workers, at its lowest level in more than 50 years while manufacturing output is at an all-time high?"  They pooh-pooh outsourcing as an explanation and state, "Since 2001, with the aid of computers, telecommunications advances, and ever more efficient plant operations, U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour, has soared a dizzying 24%. That's 72% faster than the average productivity advance during America's four most recent recession-recovery cycles dating back to the 1970s. In short: We're making more stuff with fewer people."

That would be great news, if it were true, but it is not even close to reality.  Here is an interesting bit of jibberish from the bowels of the Bureau of Labor Statistics, the generators of the "dizzying 24%" productivity increase Business Week gushes over:

"Conceptually, the impact of offshoring is more pronounced in manufacturing measures than in the business sector measures, provided the domestic manufacturer is purchasing the offshored goods or services as inputs. (As with the business sector, the complete loss of manufacturing production to an importer of finished goods leaves productivity largely unchanged.)  If a domestic computer manufacturer switches from domestic to foreign suppliers of intermediate inputs such as computer memory chips or call center services, real manufacturing sectoral output is unchanged.  Because U.S. jobs are lost (all other things unchanged), labor productivity will rise.  If the U.S. manufacturer switches most of its production to off-shore facilities, labor productivity might rise substantially."

Most people will read that and immediately react with a resounding, "Huh?"  Heaven forbid that our government ever tell us anything understandable.  Let me translate for you, after having gone through it and the rest of the report a bunch of times.

When they calculate productivity and publish these grand statistics, they basically take the output from manufacturing divided by the labor. (Output is a complicated formula, but if you think of it as the profit from manufacturing, you'll have the gist of the logic.  Purists will jump all over me for that gross simplification, but that's a good way to envision what they do.)  The output represents the 'value add', or what the labor created.  If a company lays off half its people, keeping only the final assembly folks, and starts buying all of the parts the laid off people used to make from China or Mexico, the output would stay the same - or even go up - but the labor would be cut in half.  According to the Bureau of Labor Statistics, NAM, Business Week, and every smart guy east of the Allegheny Mountains, that means manufacturing productivity just doubled.  Same output with half the labor.

The BLS rationalization: Yeah, but if the whole plant moves to China we take it out of the arithmetic because that means they are an importer instead of a manufacturer.  Gee, thanks.  From my observations, not many companies are sending the whole factory overseas - they are more likely to be replacing the core manufacturing with offshore components, turning themselves into final assemblers only.

I am no math whiz, but replacing two American workers with one American and a Chinese guy does not double the level of productivity.  It just sends an American worker down a new career path at the Sears Lawn and Garden Center, or peddling life insurance, while the Chinese guy moves his family across town to a better grade shack.  In fact, globally, true productivity probably went down since it is apt to take two or three Chinese guys to replace the American worker.

Jerry Jasinowski, head of NAM's research and education work, says, "One bright ray of light is U.S. manufacturing's tremendous productivity gains.  U.S. manufacturing productivity has surged 24% since the last recession ... Strong productivity growth helps America compete in the global economy and is the key to higher wages and better living standards for U.S. workers."  NAM, of course, is the most ardent defender of outsourcing the manufacturing world has.

Either Jerry reads Business Week, or he skipped the fine print in the BLS report where it says the productivity improvement includes a fair amount of hammering down the wages and living standards of U.S. workers. 

Mr. David Huether, the author whose Business Week article told NAM and the manufacturing outsourcers what they want to hear, also noted the soaring U.S. trade deficit.  We are buying a whole lot more from other countries than we are selling.  You would think that a bright guy like a Business Week writer would see a connection.  Deficits soaring as we are bringing more and more in from elsewhere ... and productivity growth shattering all previous productivity growth records ... hmmm  .... I wonder if there could be a connection, Dave?   

It never occured to Mr. Huether, however, because he in fact works for NAM as their Chief Economist - not Business Week.  I guess Business Week has forsaken objectivity and turned their editorial pages over to the manufacturing outsourcing lobby.  Keep that in mind the next time you look to them for business news.

Dave - you asked, "What's going on here? Why is manufacturing employment, at 14.2 million workers, at its lowest level in more than 50 years while manufacturing output is at an all-time high?" I'll tell you. What's going on here is that, instead of becoming leaner, more productive manufacturers, we are laying everybody off and shipping the work to China.  Just read the report, buddy.

Note:  Outsourcing also has a 'Darwinian effect' on artificially inflating productivity numbers.  The more poorly managed a manufacturing operation is, the less profitable it is, the more likely it is to be outsourced.  Inversely, better managed plants are more profitable, more productive and less likely to be outsourced.  As the least productive manufacturing operations leave the U.S., even though the remaining plants may be no more or less productive than they were before, the numbers reflect a productivity increase.

For example, when Delphi closes 21 American plants, but Toyota stays the same, it will look as if American productivity shot up.  On average, that may be true, but averages are not always accurate measures of things. If you have your head in the freezer and your feet in the oven, you should feel pretty good, on average.  The truth is that America will be creating less wealth, fewer jobs and will be even more dependent on foreign manufacturing.

The popular notion is that American manufacturing is still very healthy because advanced technologies and the wonders of the information age have created productivity gains that more than offset the loss due to outsourcing.  There is not a shred of empirical data to support that notion.  It is, in fact, hogwash.

There is no economic substitute for good manufacturing management - and that means lean manufacturing.

Comments

[ed]

Nothing beats good management period.
Unfortunately, we have accountants running the show.

[Nathan]

You're right... the definition of "productivity" doesn't correctly account for subs moved overseas but then completed in the U.S.. However it is also incorrect to imply that China (etc) added jobs "taken" from the U.S.. Productivity growth is real, and is global, and can actually have even more of an impact in rapidly developing countries. A little known fact is that China has also lost manufacturing jobs every year for the past ten... while we know it increased production output. And their productivity numbers have the opposite problem as in the U.S... they often don't correctly account for non-final assemblies that were completed elsewhere. More data is also at:

http://business.clemson.edu/cit/Documents/Mfg%20Employment%20Working%20Paper%20draft%208%202005.pdf

[Bill Waddell]

I'm sure productivity growth is real - just nowhere near the ridiculously high numbers put out by BLS and cited in all of the business press. There is little reason to think the actual productivity growth rate is much different than it has been for the last several decades.

China has, in fact, added quite a few jobs taken from the U.S. They have also lost even more jobs to even cheaper labor places like Viet Nam as the endless pursuit of cheap labor trots around the globe

[John Hunter]

Worldwide manufacturing jobs are down sharply. Worldwide manufacturing output is up. Those two fact remove any explanation of shifting work from one country to another as the explanation (without some further explanation anyway). I wrote about the working paper by William Ward, Clemson University discussing some of these issues on Friday: Manufacturing Jobs Data: USA and China.

My understanding of the data from the paper is that: 10-20% of manufacturing jobs disappeared worldwide from 1995 to 2002. China lost between 17% and 34%; the US lost 11.4%.

I have been writing and reading about the economic data on manufacturing for several months now and while I agree with the epilogue of his paper where he says we need better data based on the data we do have I think it is accurate to say most of the job loss is due to productivity gains (and then the markets decision to use the resources freed up in other ways [services...] rather than adding even more goods that could be produced - conceptually the market could have made another decision, to keep the same number of people in manufacturing and just get even more manufactured goods but that isn't what has happened).

Having said that the issues are fairly complicated and the data provides at best coarse measurements which do not provide exactly the information we would like to make conclusions. There is quite a bit of leeway for interpretation. This is an area I plan to continue to investigate. I find this area interesting and I think the evidence needs to be studied and presented more clearly to aid in everyone's understanding of the actual state of affairs.

[Bill Waddell]

I am sure Mr. Ward at Clemson is a fine guy with good intentions, but his report says that 100% - as in ALL - manufacturing jobs lost since 2000 are due to productivity improvements - none to outsourcing.

By their own admission, the BSL says that anytime a component is purchased from outside the US instead of made here, the labor savings is included in the productivity data.

For the Clemson study to be viewed as anything more than a theory in progress, there would have to be no components shifted from the U.S. overseas since 1999.

The real problem is that Mr. Ward built his study on the assumption that the BSL productivity data really was about productivity. He did not look at the outsourcing element at all.

His arguement seems to be that, since the outsourced jobs cannot be found in China, they must not exist - it must have been productivity instead of outsourcing.

I don't know how the world looks from the cubicles at the BSL or the ivy covered halls of Clemson, but out here in the manufacturing world, container ships full of components are pouring in from Asia every day. Trucks are backed up as you are reading this at the border crossings from Mexico bringing in components.

Regardless of the implied logic of the theorists, a big - I mean BIG - portion of what folks call 'productivity' is outsourcing.

I would suggest that the economic experts from BSL and Clemson spend a day or two hanging around the port at Long Beach, and the border crossing at Laredo and explain how the components coming into the U.S. are not significant.

Go look at that reality and you will agree that it makes a whole lot more sense to assume ALL of the job loss is due to outsourcing except for productivity gains that can be proven; instead of assuming it is ALL productivity unless someone can prove outsourcing.

[rdc]

One of the most important tenets of lean is to go to Gemba and watch what is going on.I see the lack of this as one of the major problems from the data raised in the articles from both sources. Bill.. I think your idea of going to the inbound crossings and watching the movement and volume would give everyone a better understanding of what is really happening. It's hard to see from an office.

[Nobody Special]

Interesting. US News & World Report states that 20,000 new foreign-owned factories open each year in China. That's about 2 per hour. If China is losing manufacturing jobs at the rate specified in the Clemson research, who is staffing these new plants? Are they importing workers now, too?

[John Hunter]

> who is staffing these new plants?

Either people that left other plants or new manufacturing workers. The total number can easily decrease if the number of reductions at exsiting plants exceeds new hires at new plants.

> Are they importing workers now, too?

No.

[John Hunter]

I think to some extent we are making this more difficult than it needs to be. Either we agree with the stated data that total world manufacturing output is increasing and total world manufacturing employment is decreasing. If we don't agree with that ok, what data do we use to make the case?

If we do agree then it is a fact (by definition) that productivity gain is the reason for job losses worldwide and output gains worldwide. Then you look at the USA and say well like the world, the USA is increasing output and reducing jobs. It makes sense to me to then say yeah productivity gains is the best macro explanation. But I agree more and better (for this question) data would be helpful (and allow much more accurate data on how many fewer jobs are required to produce the increased number of good and then how many jobs would have remained if decisions to move manufacturing that had been done in the USA to another country).

There is no question manufacturing that was done in the USA 10 years ago has been moved elsewhere. My guess is that many of these decisions are bad management decisions where intelligent, knowledgeable lean manufacturing experts would improve the management of the US plant and the company would be better off than moving production overseas.

Even if the USA are losing jobs to productivity gains (like everywhere in the world) we also are losing jobs when decisions are made to manufacture something elsewhere. And China is surely decreasing the loses in manufacturing jobs they have (due to increased productivity) through decisions made to manufacture items there that were manufactured elsewhere previously.

Is it a problem for the economy that we keep unloading ships with good and returning them empty? Yes. It would be possible for this to balance in other ways (paying for good with services: insurance, banking, accounting, medical care...) but that is not happening now and the USA is selling off assets (bonds, land, buildings, stocks...) to pay for consuming products from abroad. It would be much better if the number of ships were reduced and those that did come returned with goods in exchange for those goods received (for manufacturing employment in the USA).

[Bill Waddell]

Given that the official U.S. government data on productivity growth versus outsourcing is so muddy, I would be wary of the data coming from China. I doubt they really know how many people they really have living there, let alone what they do for a living. All of the data I have seen is based on estimates and extrapolations, so I would recommend taking Chinese manufacturing data with a ton of salt.

Regardless, it seems reasonable to assume that China is on a very steep productivity improvemnt curve. As they become more technically capable and capital pours in, they have moved from a manufacturing base built almost exclusively on hand work to one that is more machine based, and the great productivity improvements the West saw decades ago is taking hold in China.

Finally, as I have noted before, the companies that went to China for cheap labor are more than willing to leave China for cheaper labor. Look into Viet Nam - and the outpouring of work from China.

It seems to add up to the same thing - China is probably losing manufacturing jobs - exactly how many is probably kind of sketchy - and how much of it is due to productivity and how much of it is to moving the work to a cheaper place is anybody's guess.

[Bill Waddell]

I would suggest that those who cannot seem to find the outsourced U.S. jobs in China read "Manufacturing Employment and Compensation in China" by Judith Baxter of the Beijing Javelin Investment Consulting Company. It is a report commissioned by the U.S. Department of Labor, Bureau of Labor Statistics. Ms. Baxter is the former head of the International Progmas Center at the U.S. Census Bureau.

The report can be found at:

http://www.bls.gov/fls/chinareport.pdf

Guess what? She found the jobs that Clemson University is missing.