Is the U.S. at peak of industrial production?

Back in 2012, I read an article in the New York Times that stopped me in my tracks. We were still in the midst of the jobless recovery, yet, the Times noted that “…the economy now produces as many goods and services – more, in fact – than it did before the downturn officially began in December 2007. But it does so with almost five million fewer jobs.”

At the time, I called Hal Vandiver, president of F. Hal Vandiver & Associates, who put the statement in the context of the materials handling industry for a column I was writing. “If you look at why manufacturing companies are making money today, it's because they have found more productive ways to deliver the same or more output,” Vandiver said. “That's what our industry is all about.” It struck me then, as it continues to do today, that automation did very well during the downturn, as companies made investments in equipment rather than employees, and is likely to do so in the future, especially if tax breaks create incentives to invest in equipment.

That was driven home to me in a press release I received today from Indiana's Ball State University. Michael Hicks, an economist and the director of Ball State's Center for Business and Economic Research, has become my new favorite writer.

The press released noted that analysis by Hicks suggests that the U.S. economy is at a peak of industrial production. Hicks “found that industrial production index peaked in December 2007, then dropped by roughly 15 percent by the summer of 2009. It took five years to recover to a second peak in 2015. As the world economy dipped in 2015 and 2016, so too did U.S. industrial production. We are back at a record level of industrial output. It's worth noting that total US industrial production is more than twice what it was back in 1979, when employment peaked.”

Hicks adds that other measures tell the same story. “Inflation-adjusted manufacturing GDP will peak in 4th Quarter 2017, both in dollar and quantity index measures,” Hicks says. “Importantly, new data on value-added of manufacturing offers an even more interesting insight into America's manufacturing strength. Value-added is a measure of production that subtracts all the goods used in production. By making this calculation across all US manufacturing, we omit all the spending by factories on imported parts. That number is at a record high right now, a full decade after the start of the Great Recession.”

He further notes that manufacturing employment, which all too many folks think is a good sign of the industry's health, is about 1.5 million less than it was at the start of the Great Recession and about a third lower than at its peak month in 1979.

“While manufacturing employment has gained a full million jobs since the end of the recession,” Hicks says, “that rebound seems to be slowing. Still, the loss of manufacturing employment has been swamped by growth in other sectors. For every job we've lost in manufacturing since December 2007, we've gained six jobs in other sectors. The problem is the new jobs require different skills in different places. Moreover, turnover within manufacturing has had a very uneven effect on workers.”

Hicks also notes that since about 2000, manufacturing jobs held by non-college graduates have declined by almost 45 percent, while manufacturing jobs held by those with a college degree are up almost 17 percent. “That means in net, all the new jobs and almost all the replacement jobs in manufacturing are going to college graduates. That trend also accelerated during the Great Recession.” The press release ends with the observation that “manufacturing in American is doing extremely well and is enjoying record levels of production.”

To me, Hicks' research confirms a couple of things that I have been writing about since 2010, all of which I think are positives for our industry:

The automation solutions that we and our manufacturing automation counterparts are creating are having a significant impact on the economy. In my view, the proliferation of goods-to-person technologies like shuttles and pouch sorters; new technologies like heads up displays, which I'll be writing about in February; and mobile and piece picking robots paint a picture of a very bright future, even if wide-spread adoption of those technologies is still a few years in the future.

The labor market is changing significantly, and it's not just the usual suspects of retiring baby boomers and a shortage of low-skilled workers willing to work as shelf stockers and order pickers. If, as Hicks reports, new manufacturing jobs are going to college graduates rather than those without degrees, our industry has to do a better job of selling itself to ensure that we get our slice of the talent pie.

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