December 22, 2021 INSIGHTS ON DATA POINTS AND ECONOMIC POLICY
The pairing of outsize aggregate demand, especially for physical goods as opposed to services, with COVID-related shortages and constraints in the global supply chain has driven rapid price inflation for U.S. consumers. While that has caused a good deal of consternation, it is helpful to remember that one segment of the economy has benefited from these same rising prices: domestic manufacturers. The industry has for decades transitioned away from labor as its primary input and towards capital, including machinery, technology and computerization.
Though manufacturers may not be insulated from the problem of higher inflation, many have been able to pass on the additional costs they face from rising input prices and wages to the final consumer while continuing to recover to pre-pandemic levels of output. Last week, the Federal Reserve reported that industrial production from the manufacturing sector grew by 0.7% in November and 4.6% over the year. Those increases may not sound terribly impressive when compared to the recent growth rates of other economic indicators such as retail sales and home prices, but year-over-year increases for industrial production from the manufacturing sector typically ranged from 1% to 2% during pre-pandemic times, when economic output relied heavily on the making of technology products rather than humdrum household goods. These days, rising shipping costs, shipping delays and the constraints faced by producers overseas are helping to make domestic manufacturing a more competitive and sustainable option for the future. Output has been growing for most industries within the manufacturing sector, except for those specifically impacted by unique shortages, such as semiconductors crucial to automobile manufacturing. That is largely due to widespread consumer demand. The $1 trillion infrastructure bill signed in November will be a boon for the production of transportation-related items, as well as items that support spending on broadband and utilities. Already, production of aerospace and transportation products has grown by 12.3% over the year. Aerospace manufacturing, specifically, is recovering from a dreadful 2020, when the abrupt decline in travel caused airlines to cancel orders for new airplanes. Labor-intensive sectors are also beneficiaries of supply chain disruptions faced by factories overseas. For example, domestic production of apparel and leather goods grew by 5.3% over the year. This is an industry that has been downsizing for decades. In just the 2010s, the industry shrank by 27.5%.
The Federal Reserve also reported that manufacturing capacity utilization grew to 77.5% in November, approaching its 20-year high of 79.5% set in 2007. That is to say, manufacturers can increase their production by just over 20% with current factory capitalization before needing to make significant capital investments in order to expand. Manufacturing employment, meanwhile, has been steadily recovering from its 2020 losses. Manufacturers added 31,000 jobs in November, according to the latest release from the Bureau of Labor Statistics, and are just 2% below pre-pandemic levels, compared to a 2.6% deficit for nonfarm employment. This is in large contrast to the previous cycle, January 2010 to February 2020, when manufacturing job gains trailed nonfarm by roughly 6 percentage points. Manufacturing jobs will likely continue to grow, provided more workers can be pulled back into the labor force. Job openings in the manufacturing sector topped 1 million at the end of October, inducing a job openings rate of 7.5% — both being the highest ever recorded in the 20-year series. Firms have had to offer higher wages to attract workers, with average weekly wages up 4.2% in November. Despite that growth, manufacturing jobs as a share of overall employment has been on a long downward slide as automation, technology and outsourcing have largely reduced the need for factory workers. That share seems to have bottomed out at 8.5%, far below its heyday in the 1940s of over 35%. Looking forward, growing coronavirus cases around the world due to the omicron variant could exacerbate ongoing issues in the supply chain and increase the reliance on local production. Already in October, growth in U.S. exports outpaced imports, according to the Census Bureau, causing the trade deficit to decrease from a record-low of $81.4 billion in September to $67.1 billion in October. Exports of goods including industrial supplies, foods, consumer goods and automotive products rose to a new high, while exports of services such as travel and intellectual property were also strong. At the same time, growth of imports eased.