Following Up: Lousy U.S. Auto-Making Productivity and Those GM Layoffs

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automotive, Bureau of Labor Statistics, Detroit automakers, General Motors, GM, Jobs, layoffs, motor vehicles, NAFTA, North American Free Trade Agreement, offshoring, productivity, total factor productivity, Trade, Trump, yoFollowing Up

Yesterday, I posted some data – with a special focus on major victim state Ohio and major victim region Youngstown – providing some badly needed perspective on General Motors newly announced manufacturing jobs layoffs in the United States (along with Canada and other unspecified locations). Today I’d like to follow up with some statistics that shed more light on GM’s decision – and the strengths and weaknesses of the American domestic automobile industry.

There’s no doubt that, as widely noted, many trends and developments are responsible for the new job cuts – which are highly unlikely to be restricted to GM alone. Some of the biggest include changing product mixes (away from smaller vehicles and toward larger vehicles), new technologies (for electric vehicles and self-driving vehicles), and the inevitable waning of the latest “automotive cycle” – that is, a slowdown in auto sales that has been entirely predictable following the sector’s strong recovery from a terrifying downturn during the last recession.

But one industry trend that’s been sorely neglected – and that surely bears heavily on the “Detroit 3” auto companies’ failure to continue producing smaller vehicles profitably at their domestic factories (the plants targeted for closure) – concerns its productivity performance. In a word, it’s been lousy – which supports last week’s post presenting evidence that U.S. metals-using industries like automotive have been using crutches like (foreign government-subsidized and therefore artificially) cheap raw materials, along with massive job and production offshoring, to juice their profits rather than efficiency-enhancing improvements resulting from creating new technologies, investing in new machinery, devising better management techniques, or some combination of these measures.

That post last week featured data showing that the American transportation equipment sector (which of course includes auto manufacturing) has performed relatively well during the current U.S. economic recovery and the previous expansion – though the rate of growth decelerated over that time span. These periods were examined because they were marked by a tremendous increase in American imports of steel over-produced and dumped into the United States by foreign producers, which pushed steel prices way down for reasons having nothing to do with free trade or free markets.

But more detailed statistics make clear that the automotive sector per se lately has fared worse when it comes to total factor productivity – the broadest of two measures of productivity tracked by the Bureau of Labor Statistics, and the productivity measure I examined last week.

During the 2001-2007 American expansion, total factor productivity in the motor vehicles sector actually grew faster than that for transportation equipment overall – 22.70 percent versus 13.38 percent. But from the 2009 start of the current recovery through 2016 (the latest available data), vehicle makers’ total factor productivity advanced by only 2.53 percent – that is, much more slowly than the 9.67 percent improvement registered by transportation equipment overall.

In fact, since achieving a huge (15 percent) snapback in total factor productivity during the recovery’s first year following a deep (12.29 percent) nosedive during the recession, vehicle-makers’ total factor productivity fell by 10.94 percent through 2016. As a result, its total factor productivity hasn’t improved on net since 1989.

Also interesting: Since the U.S. ratification of the North American Free Trade Agreement (NAFTA) in 1993 created a bright green light for automotive production and job offshoring, total factor productivity in American motor vehicle-making is up by only 9.20 percent. That’s a considerably slower rate of progress than for manufacturing overall (20.13 percent), even though automotive trade has figured so heavily in U.S. trade flows with fellow NAFTA signatories Mexico and Canada so far.

I don’t mean to minimize the challenges all automotive manufacturers face given the multi-dimensional crossroads that seems to be arriving rapidly for the sector. What should be glaringly obvious, though, is that they’re unlikely to be met adequately – including producing smaller vehicles profitably, especially if and when oil prices start rising again – with a productivity performance that barely qualifies as second-rate.    

(What’s Left of) Our Economy: The Big Picture Makes NAFTA’s Failure Clear

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auto parts, automotive, exports, inflation-adjusted growth, inflation-adjusted wages, manufacturing, Mexico, motor vehicles, NAFTA, North American Free Trade Agreement, Trade, Trump, {What's Left of) Our Economy

With all the hubbub created by Donald Trump’s recent tweets about U.S.-Mexico trade, the offshoring of automotive production and jobs, and the companies’ reactions, it’s worthwhile to step back from the President-elect’s tweets to look at the bigger picture. It reveals that Mr. Trump could not be more correct that the North American Free Trade Agreement (NAFTA) has been a complete bomb when it comes to boosting American and even North American manufacturing competitiveness. And not so coincidentally, the data make clear that the automotive industry represents NAFTA’s quintessential failure.

Auto-related trade has long been held up as the leading example of how NAFTA could become a win-win for national economies, companies, and workers throughout the regional economic zone. U.S. auto-makers could reap major cost savings by using very low-cost Mexican workers for labor-intensive parts manufacturing, and the higher sales that would result would boost overall production and therefore employment and wages for their more expensive but more skilled American, who would be needed for higher value production.

Indeed, just yesterday, reacting to Ford’s (at least partly Trump-induced) decision to scrap a new factory planned for the San Luis Potosi state, Mexico’s government showed that this rationale remains operative. According to Mexico’s economy ministry:

“The growth of the Ford Motor Company in North America, particularly in Mexico, is a strategy of competitiveness based on global value chains, in which North America competes with other world regions….The jobs generated in Mexico have contributed to keeping manufacturing jobs in the United States that would otherwise have disappeared in the face of Asian competition.”

But the facts say otherwise – emphatically.

Auto-related trade has long comprised much of total U.S.-Mexico merchandise trade. In 2015 (the latest full-year statistics), vehicles and parts represented 32 percent of all American goods imports from its southern neighbor, and parts alone comprised 10 percent of all U.S. goods exports to Mexico. (The Congressional Research Service report from which these numbers are taken makes clear that American vehicle exports were modest.)

And what’s happened to U.S. automotive employment? When NAFTA went into effect, in January, 1994, American vehicle payrolls stood at just over 280,000. Today, even after the recent domestic industry’s strong post-recession bounce back, it’s nearly 24 percent lower. That’s actually better, but only a little, than the the nearly 27.3 percent employment drop for manufacturing overall. Parts employment had held up even better – dropping only by about 19.3 percent.

Of course, job figures throughout manufacturing (and other sectors) are also affected by productivity improvements. At the same time, inflation-adjusted wages for U.S. blue-collar vehicle workers have fallen by just short of 18.7 percent since NAFTA’s inception, and for parts employees by nearly 24.5 percent. That’s actually much worse than the results for manufacturing non-supervisory workers as a whole – whose real wages are up 5.31 percent during this period.

The automotive sector’s performance has been better on the output side. Since January, 1994, according to the Federal Reserve’s industrial production index, constant-dollar manufacturing production has risen by 59.2 percent. Real vehicle production has been somewhat stronger, rising by 64.6 percent, and price-adjusted parts output is up by 78.3 percent.

But despite these gains, since NAFTA came into existence, the global competitiveness of both the U.S. and North American auto industries has worsened, not improved. A 2015 Chicago Federal Reserve report shows that from 1990 to 2014, North America’s share of global vehicle production is actually down: all the way from 31 percent to 19 percent. And within this relatively weaker North American industry, the U.S. vehicle production share has sunk from 78 percent to 67 percent.

As I’ve explained, a main reason for this subpar performance has been a central flaw in NAFTA’s design. Rather than creating a relatively hard trade bloc that would use high tariffs to lure extra-regional companies to produce and innovate within North America in order to sell into that lucrative market, NAFTA’s authors enabled European and Asian firms to keep relying much too heavily on exporting to North America.

Mr. Trump has suggested an interest in reforming NAFTA in order to fix these problems, and however reluctantly, the Mexican and Canadian governments have signaled their willingness to talk. Launching serious negotiations should be one of the new administration’s highest trade policy priorities once the new president takes office.