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WHAT IS THE FUTURE
ST. LOUIS MANUFACTURING?
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By Bryan Bezold
RCGA Director of Research and Chief Economist
During the spring, the economic recovery finally reached labor markets, with both U.S. and St. Louis June employment levels about one percent above last year. Although this leaves both U.S. and
St. Louis employment below their 2000 peaks, we can take some comfort from the fact we’re growing again.
Like other economic expansions, this recovery illustrates how our economy is changing. Business cycles and recessions are inevitable, and during downturns we see employment declines in almost every industry. During the subsequent recoveries, many of those industries rebound. Some industries, however, fail to recover. These industries are said to be in structural decline, meaning that the changing nature of the economy has put them at a permanent disadvantage.
The manufacturing industry bore the brunt of the 2001 recession. But while other industries, such as construction, professional services, and financial activities, have posted solid job gains in 2004, manufacturing employment has not grown substantially. Does this mean that U.S. manufacturing is in a long term decline due to issues that go beyond the 2001 recession? Or is the performance more reflective of the nature of manufacturing?
The answer is perhaps a bit of both. Manufacturing is indeed a smaller share of St. Louis’s (and the nation’s) base than in past years, and manufacturing employment in
St. Louis has declined during periods when overall employment in St. Louis has increased. That suggests that structural changes in the U.S. and St. Louis economies are partly to blame for the declining number of manufacturing jobs. The two most obvious candidates are increased global competition, and productivity innovations that allow firms to produce more output with less labor.
Although structural forces may depress manufacturing employment, that doesn't mean the sector is doomed. For a variety of reasons, manufacturing will continue to be an important part of the economy. The nature of manufacturing in the United States, though, has a lot to do with productivity.
In order too see this clearly, it is helpful to look at a measure of manufacturing output, rather than employment. Ernest Goss, an economy professor at Creighton University, working with the local chapter of the Institute for Supply Management (ISM), provides such a measurement in the form of the purchasing managers index (PMI). Together, Goss and ISM survey local manufacturing firms about their current production, new orders, and other factors. The results are combined into a numerical scale from 0 to 100, with a score above 50 indicating expansion.
Judging by the PMI, the manufacturing sector is holding up quite nicely. The St. Louis index has been over 50 for more than 18 months, indicating that manufacturing output has been expanding over that same period. The subcomponent of the PMI that measures new orders soared to 80 in March, and as late as June was a very strong 70. That tells us local manufacturers are continuing to see increased demand for their products. They are producing more, and are receiving an accelerating flow of new orders—hardly a declining sector of the economy.
That brings us back to productivity. Manufacturers everywhere have become more competitive by producing more goods with less labor. This idea is not always well received, since it costs jobs. But in the long run, productivity enhancements allow real incomes to rise. The income growth outpaces the employment declines (as described in a previous economic update), and the income growth supports employment growth in other industries.
Recent economic research suggests even more benefits from increased productivity. In the long run, businesses that improve their productivity more rapidly may not be the industries that lose the most workers.
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