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Protectionist rhetoric heats up in lock-step with the Presidential election race, particularly as the candidates make their way through the Rust Belt. Fears that the declines in manufacturing employment in America portend economic doom are nothing new. That globalization and the increased reach of foreign trade have contributed relatively little to the loss of American manufacturing jobs seems to have done nothing to mollify protectionist sentiment. As we pointed out in an earlier commentary, roughly 300,000 jobs are lost each year due to globalization and the relocation of American manufacturing to international locations. But over 2.4 million jobs are destroyed each month due to factors other than globalization. Thus, the short-term economic costs of globalization due to job loss amount to little more than one percent of the overall job losses in America each year.
The U.S. continues to produce the largest share of world manufacturing output despite the fact that manufacturing employment as a share of overall employment has fallen steadily since World War II. The chart below shows that manufacturing’s share of employment peaked at 39 percent during World War II, and in February 2008, dipped below 10 percent for the first time in modern history.
How can this be? Remarkable increases in American productivity due to technology, capital investment (in no small part because we run merchandise trade deficits), and entrepreneurialism mean that “America” can produce far more goods today with far fewer people than at any point in its history. To wit, American manufacturing output reached an all time high last year, as did revenues, profits and worker compensation.
The second chart, below, shows that real manufacturing output has increased in lockstep with the decline in employment. During this time of manufacturing’s “decline” real per-capita income has increased over four-fold. Both this escalation of living standards and the hollowing out of manufacturing employment began long before both the enactment of NAFTA in 1994 of the last time the U.S. ran a trade surplus in 1975.
Rapid technologoical advancements and the accumulation of capital from both home and abroad mean that American factories are churning out more goods than ever. And the goods produced by U.S. factories are not the mere "trinkets and baubles" the punditry condemns Americans for consuming from Chinese factories, but rather the medicines, food products, transportation equipment and other myriad goods that require the expertise of a highly-skilled workforce to produce.
Thankfully, our children will not have to work long hours on an assembly line to produce the goods that Americans desire. The incredible productivity of our manufacturing sector has freed up the ultimate resource - millions of people - to pursue careers and vocations that did not exist a mere generation ago. And the freeing of these incredible resources is sure to bring new goods and services (and related careers) that are unimaginable to our current generation. Let us hope that bad policy does not prevent the creation of such widespread opportunity in order to preserve the political and economic interests of the few.
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In general, countries trade both goods and services among themselves. When an American consumer buys a bicycle made in China – this is part of merchandize (goods) trade. This particular transaction would represent a merchandize export for China and a merchandize import for U.S. And if there were no offsetting merchandize export from U.S. to China, this transaction would generate a merchandize trade deficit for U.S.
Besides goods, countries also trade services. For example, when a company in China hires consultants from Merrill Lynch to provide advice on an investment project, this represents export of financial services from the point of view of U.S. and import of financial services from the point of view of China.
Overall trade balance of United States takes into account both the trade in goods and the trade in services. The overall U.S. trade balance has been in deficit for many years, i.e. the total imports of goods AND services exceeded the total export of goods AND services. But if we look at the trade in goods separately from the trade in services, a different picture emerges. U.S. has had a deficit in the trade in goods (called merchandize trade) for a long time. But U.S. has a trade SURPLUS in services, even now. For example, in 2008, the overall trade balance of U.S. had a deficit of about $696 billion. This included a deficit in the merchandize trade of $840 billion and a surplus in the trade in services of $144 billion.
1975 was the last year in which U.S. ran a merchandize trade surplus, i.e. U.S. exported more goods than it imported. In every year since 1975, U.S. imported more goods than it exported. At the same time, before and after 1975, U.S. exported more services than it imported. Back in 1970s, the trade in services constituted only a small fraction of all trade. But over time the volume of the trade in services has been rising. U.S. normally runs a trade surplus in services, and this surplus has been generally rising for the last 20 years.
I hope this clarifies the issue of merchandize trade balance for you.
Polina Vlasenko
-- Incorrect assessment. If "careers and vocations" do not outnumber the resource that are displaced, those resource cannot live, because living a life carries a cost. From that perspective, higher productivity is the grave digger of its own people.
For a full description of how such an index is constructed, please consult the Federal Reserve Board of Governors site at: http://www.federalreserve.gov/Releases/g17/ip_notes.htm. Most simply, it is desirable to use an index in order to agrgegate the contributions from all of the underlying manufacturing industries and attributing proper weights into a meaningful single statistic.The specific method for doing this is not set in stone.
For example, if there were only two manufacturing industries, widgets and wheels, and widgets expanded by 8 percent one year and wheels declined by 2 percent in the next year, what happened to overall industrial output? The purpose of creating an index is to guide us to an accurate picture, which depends in large part on how large each underlying sector is.
The index itself has no units.
The significance of 2002=100 is nothing more than an arbitrary normalization of the index level. Changes from year to year can be viewed as percentage changes in how much is produced. So if the value of the index in 2002 is 100 and it is, say, 102.5 a year later, then industrial output increased by 2.5 percent over that time (in real terms).
I have two questions the Index of Manufacturing Output. Hopefully, they're not stupid ones: What are the units used here to measure output? And what's the significance of (2002 = 100)in the heading?
Overall, that was very enlightening. Thank you.