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Business AN EIGHTH DISTRICT PERSPECTIVE FALL 1986 Eighth District Manufacturing: Beyond Employment Trends There is a general view that manufacturing is an ailing industry. This perception of manufacturing performance is based largely on reductions in manufacturing employment and the industry’s declining share of total employment. These downward trends have been cited as evidence of the “deindustrialization” of the United States and have led to the call for trade barriers to protect domestic manufacturing industries. Employment, however, is only one measure of the economic performance of a specific industry. If a reduction in the level of labor input is accomplished while maintaining a given output level, greater productivity per worker is achieved, indicating positive industry performance rather than weakness. Therefore, in order to evaluate manufacturing performance, it is necessary to consider the changes in manufacturing output as well as changes in the number of workers employed. In this article, estimates of District output are compared with employment trends in evaluating the manufacturing performance of the region. Employment Trends Chart 1 MANUFACTURING EMPLOYMENT AS A PERCENT OF NONFARM EMPLOYMENT in the labor force. A relative decline, however, may occur at the same time an industry is expanding (only at a slower rate than other sectors). Therefore, an economy may readjust to an industry’s smaller share of total employment by devoting fewer resources to it in future years. An absolute decline in the number of manufacturing workers is likely to entail a more difficult shift of workers to other sectors of the economy because the size of the industry’s work force actually is shrink ing. In both the District and the nation, manufacturing employ ment has fallen from 1979 levels (chart 2). Employment and output data provide divergent views of the District manufacturing sector.1 Because manufacturing employment, both in the District as well as in the nation, has grown more slowly than employment in the overall economy since the early 1970s, manufacturing employment as a proportion of total nonagricultural employment has Output Trends declined. Chart 1 shows that manufacturing’s share of Recognizing that employment as an indicator of economic nonfarm employment has been higher in the District than performance is limited by its inability to measure labor in the nation and that both shares have declined at similar rates. In 1972, D istrict m anufacturing productivity leads one naturally to seek a accounted for 29.3 percent of the work force. m easure of output for m anufacturing. By 1985, the manufacturing share declined Unfortunately, output measures by sector are to 23.3 percent in the District. not readily available on a regional basis. M a n u fa c tu rin g ’s declining share of Because of this, estimates of District gross THE employment reduces its relative importance output were computed. These estimates were FEDERAL RESERVE calculated by multiplying the District’s share BANK of of national earnings in various industries by ST. lXMJIS 'Data from Arkansas, Kentucky, Missouri and Tennessee are GNP originating in those industries. The used to represent the Eighth District. accuracy of these preliminary estimates rests FALL 1986 FEDERAL RESERVE BANK OF ST. LOUIS Chart 3 REAL MANUFACTURING OUTPUT Chart 2 MANUFACTURING EMPLOYMENT 1972 73 74 75 76 77 78 79 80 81 82 83 1984 Chart 4 REAL MANUFACTURING OUTPUT AS A PERCENT OF NONFARM GROSS PRODUCT 1972 73 74 75 76 77 78 79 80 81 82 83 84 1985 on the assumption that the ratio of output to earnings in each sector is the same in the District and the nation. To correct for deviations from this assumption for manufacturing sectors, preliminary estimates were modified using state and national value-added data and payroll data from the U.S. Commerce Department’s Census o f Manufacturing and Annual Survey o f Manufacturing. Output data present a substantially different picture of District manufacturing performance. W hile District employment in manufacturing has not grown, the value of District manufacturing output, when corrected for inflation, has increased substantially since 1972 (chart 3) and grew slightly faster than the average nonfarm industry. As the chart shows, the District’s manufacturing sector grew at a similar rate as the nation’s. The District produced between 6.6 and 6.9 percent of the nation’s manufacturing output each year. The proportion of the District’s nonagricultural real gross product contributed by manufacturing since 1972 is displayed in chart 4. Unlike the trends in manufacturing’s share of total employment, no steady decline is apparent. Rather, the manufacturing output share shows long-run stability, fluctuating around the mean of 26.5 percent. This trend mirrors a national trend: manufacturing’s share of real GNP has exhibited long-run stability since the 1940s. The ability of manufacturing to produce a constant share of output with a declining proportion of the work force was influenced by greater-than-average gains in labor productivity. This above-average growth of manufacturing productivity conflicts with the perception of the manufacturing sector as an inefficient industry. Summary In summary, greater-than-average productivity growth in District manufacturing has allowed the sector to produce a generally constant share of the region’s total output with a falling proportion of its work force. The employment and output trends based on absolute changes in manufacturing show a similar effect of productivity increases, allowing increasing output with approximately the same number of workers. Although some segments of manufacturing have contracted sharply since 1972, the overall trends point to the stability and increased efficiency of the manufacturing sector, not its decline. —Thomas B. Mandelbaum Business—An Eighth District Perspective is a quarterly summary of business conditions in the area served by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official positions of the Federal Reserve System. 2 FALL 1986 FEDERAL RESERVE BANK OF ST. LOUIS EIGHTH DISTRICT BUSINESS DATA Rates of Change1 Current Quarter G en e ra l B usiness In d e x e s 2 A rka n sa s K e n tu cky M isso u ri T e n n e sse e P ayro ll E m p lo y m e n t U n ite d S ta te s D is tric t A rka n sa s L ittle R ock K e n tu c k y L o u isville M isso u ri St. Louis T e n n e sse e M e m p h is M a n u fa c tu rin g E m p lo y m e n t U n ite d S tates D istrict A rka n sa s K e n tu cky M isso u ri T e n n e sse e P erso n al In co m e U n ite d S ta te s D is tric t A rka n sa s K e n tu cky M isso u ri T e n n e sse e R etail S a le s 3 U n ite d S tates A rka n sa s K e n tu c k y M isso u ri T e n n e sse e 1985 -1 .5 % 7.7 -3 .7 6.9 0 .8 % 1.4 2.5 2.6 2 .6 % 4.4 4.4 5.1 1 1 .8 % 4.7 9.7 4.6 2 .9 % 2.3 1.3 1.3 3.1 2.9 1.6 1.4 3.1 2.5 4 .5 % 3.8 4.5 3.6 4.0 4.1 3.3 4.3 3.8 4 .6 3 .5 % 3.3 5.5 17.6 1.2 6.8 3.0 3.6 4.2 4.3 -1 .2 % -2 .1 -1 .7 -2 .0 -1 .3 -3 .0 3 .2 % 2.9 3.2 4 .7 3.0 1.8 4 .4 % 6.4 8.4 5.8 5.1 7.0 5 .2 % 4.1 2.7 2.3 5.0 5.1 9 .8 % 10.0 11.5 10.2 9.5 9.8 7 .7 % 7.0 6.9 4.8 7.9 7.5 5 .6 % 2.2 12.6 1.9 7.8 7 .3 % 2.4 0.2 9.1 10.9 1 1 .4 % 11.2 8.3 9.8 14.2 11/1986 1.8 % 0.8 -0 .8 -0 .9 -0 .2 2.8 1.8 -1 .3 0.9 -2 .0 11/1986 - 2 .7 % -3 .4 -1 .4 -3 .2 -6 .0 -2 .2 1/1986 4 .5 % 6.4 8.9 5.8 5.6 6.5 11/1986 4 .8 % 4.8 13.6 -4 .4 16.5 Prices1 District Employment1 K ey In d u s trie s F a b rica te d M etal P ro d u cts E le ctrica l and E le c tro n ic E q u ip m e n t N o n e le c tric a l M a c h in e ry T ra n s p o rta tio n E q u ip m e n t Food and K in d re d P ro d u cts T e x tile and A p p a re l P rin tin g and P u b lis h in g C h e m ic a ls and A llie d P ro d u cts C o n s tru c tio n 1983 1984 11/1986 Current Quarter Current Year C urrent Q uarter Current Year 11/1986 11/1985 - 11/1986 11/1986 11/1985 - 11/1986 - 0 .4 % -6 .5 -0 .2 4.9 4.5 -4 .9 2.5 -3 .3 16.3 0 .1 % 1.3 1.6 3.2 0.6 0.3 2.0 -7 .0 2.8 0 .2 % 1.3 1.5 2.5 0.9 0.3 3 .7 -1 .5 -0 .3 5 .2 % -9 .2 4.7 3.8 11.4 -0 .2 -1 .2 -1 .4 55.6 3 EIGHTH DISTRICT BUSINESS DATA U n e m p lo y m e n t R ate U n ite d S tates D is tric t A rka n sa s L ittle R ock K e n tu cky L o u isville M isso u ri St. Louis T e n n e sse e M e m p h is C o n s tru c tio n C o n tra c ts 4 (m illio n s o f d o lla rs ) Current Quarter Previous Quarter Average 1985 Average 1984 11/1986 1/1986 7 .2 % 7.6 8.7 6.6 9.6 7.3 5.7 6.5 7.8 6.6 7 .1 % 7.9 8.3 6.2 10.6 8.1 5.8 6.7 7.9 6.8 7 .2 % 7.9 8.6 6.5 9.0 7.9 6.7 7.4 8.0 6.5 7 .5 % 8.4 8.9 7.1 9.5 8.6 7.2 8.1 8.5 7.2 Current Quarter Previous Quarter Same Period 1985 Same Period 1984 11/1986 1/1986 11/1985 11/1984 $482.1 54.1 105.8 145.5 176.7 $526.1 72.3 107.7 176.2 169.9 $4 5 5 .0 64.1 98 .0 115.4 177.5 $5 6 1 .5 80 .2 110.4 107.5 2 0 0 .4 $350.8 31.9 69.5 124.3 125.1 $350.1 37 .3 72 .2 143.9 9 6 .7 $3 4 6 .8 37.9 8 6 .7 123.8 9 8 .4 $ 3 4 6 .3 43.0 71.2 114.2 117.9 R e s id e n tia l C o n s tru c tio n D is tric t A rka n sa s K e n tu cky M isso u ri T e n n e sse e N o n re s id e n tia l C o n s tru c tio n D is tric t A rka n sa s K e n tu cky M isso u ri T e n n e sse e NOTE: With the exception of employment and prices in key industries, all data are seasonally adjusted. Data for Arkansas, Kentucky, Missouri and Tennessee are used to represent the District. 1 All growth rates are compounded annual rates of change. The 1983, 1984 and 1985 growth rates compare the fourth quarter of the year listed with the fourth quarter of the previous year. 2Although each index is a comprehensive measure of economic activity, the Arkansas and Missouri indexes, computed by Southwestern Bell, are not strictly comparable to the Kentucky and Tennessee indexes, which are computed by South Central Bell. 3Sources: Arkansas from Southwestern Bell, Kentucky from the Kentucky Revenue Department, Missouri and Tennessee from the U.S. Department of Commerce. 4Excludes nonbuilding construction. Source: F. W. Dodge Construction Potentials, proprietary data provided by special permission.