(What’s Left of) Our Economy: Manufacturing’s Productivity Leaders Continue to Surprise

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aerospace, aluminum, appliances, Bureau of Labor Statistics, durable goods, labor productivity, manufacturing, non-durable goods, pharmaceuticals, productivity, semiconductors, steel, {What's Left of) Our Economy

One of my favorite sets of U.S. government statistics came out this morning – “Productivity and costs by industry: manufacturing and mining industries.” However boring it sounds, it’s useful because it sheds lots of light on which specific sectors within domestic American manufacturing should be seen as winners and losers or “industries of the future” (presumably the productivity stars) versus smokestack and other allegedly outmoded types of activity (the productivity laggards).

In addition (and this will be covered in an upcoming post), these detailed figures on manufacturing labor productivity (the narrowest of the two types of productivity tracked by the feds, but the measure that comes out on the timeliest basis) go far toward showing whether job loss in manufacturing lately has mainly been due to trade and globalization, or to industry’s improved efficiency. This debate of course has long been near or at the heart of the broader, decades-long debate about the effectiveness of American trade policies.

First let’s look at the overall numbers – which are anything but flattering to manufacturing. According to the Bureau of Labor Statistics (which compiles these data), in 2018, when manufacturing’s labor productivity as a whole rose by 0.80 percent, it fell in absolute terms in 67 out of the 86 sectors examined. That was a worse performance than in 2017. Even though that year, overall manufacturing labor productivity improved by slightly less (0.70 percent), it decreased in 54 of those 86 industries.

Broken down by super-categories, in 2018, in the 51 durable goods industries followed by the Bureau, labor productivity declined in 41. In the non-durables super-sector, labor productivity dropped in 26 of 35 sectors studied. For 2017, the comparable numbers were 34 of 51 and 20 of 35, respectively.

Even more interesting, in my view, are the results for these 86 individual industries. First, the ten best labor productivity performers in 2018 and their annual percentage gains. As you’ll see, the list that isn’t exactly dominated by advanced technology, at least according to the most popular definitions and portrayals. (FYI, “magnetic media” are a fancy name for products like audio tapes and compact disks – which this aging baby boomer is constantly told are hopelessly outdated.)

magnetic media mfg & reproducing:               +9.1 percent

computer & peripherals mfg:                          +7.7 percent

leather/hide tanning & finishing:                    +6.5 percent

grain & oilseed milling:                                  +5.3 percent

miscellaneous textile product mills:               +5.2 percent

turbine & power transmission equip:             +4.6 percent

resin, rubber, & artificial fibers:                    +3.5 percent

cut and sew apparel:                                      +3.2 percent

agricultural chemicals:                                  +2.2 percent

miscellaneous transport equip:                      +2.1 percent

And here’s a list of the 2018’s ten worst labor productivity performers. Most appear to be “lower tech.” But look at aerospace at Number Five! That’s the economy’s biggest trade surplus winner! The huge automotive sector had a terrible labor productivity year, too.

lime & gypsum products:                             -11.8 percent

textile fabric & finishing mills:                    -11.3 percent

motor vehicle bodies & trailers:                  -10.1 percent

sawmills & wood preservation:                    -9.5 percent

aerospace products & parts:                         -8.1 percent

petroleum & coal products:                         -7.8 percent

motor vehicles:                                            -7.6 percent

sugar & confectionary products:                 -7.1 percent (tie)

apparel knitting mills:                                 -7.1 percent (tie)

audio & video equipment:                           -6.9 percent

beverages:                                                    -6.1 percent

Finally, here are some labor productivity numbers for some manufacturing sectors of special interest. Pharmaceuticals seems a logical choice to kick it off, given the role that healthcare and drug-pricing issues have been playing lately in national policy and political debates. Its 2018 labor productivity fall-off indicates that if the industry improved its efficiency, it wouldn’t need such sky-high prices for many of its products to achieve what it considers adequate profitability. 

pharmaceuticals & medicines:                    -3.4 percent

iron & steel mills & ferroalloys:                 -2.4 percent

alumina & aluminum production:               -2.3 percent

household appliances:                                +1.6 percent

The next three sectors have been prominent in trade policy controversies. The two metals sectors faltered on the labor productivity front last year. (In 2017, both produced considerably better results). But if you look at their labor compensation costs (also provided in today’s productivity release), you’ll see that they’ve at least shared many of the benefits of the protective tariffs they’ve received with their workforces.

Such compensation rose by 7.2 percent for iron and steel-makers, and five percent for the aluminum industry. Both increases handily beat the 1.70 percent average for all manufacturing, and the 1.40 percent for durable goods production.

Household appliances – which include tariff-ed large household laundry machines) – turned in the opposite performance. Labor productivity was up at a relatively strong pace. But labor compensation was off by 2.20 percent. (Even more unusual, its labor productivity fell in 2017, while labor compensation surged.)

Finally, let’s examine the semiconductor sector, since it’s commonly described as a main “building block” of the entire high tech portion of the American economy. In 2018, its labor productivity fell (by 1.20 percent) – and for the third straight year. But here, labor compensation was way up (by 5.60 percent).

Intellectually honest economists will admit that measuring productivity is one of their most challenging tasks. But it’s also inescapable.  And the new detailed manufacturing labor productivity data make clear that identifying the nation’s most and least valuable and promising manufacturing industries remains just as challenging. 

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(What’s Left of) Our Economy: Private Sector Employment Increasingly Depends on Public Spending

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defense manufacturing, healthcare, innovation, Jobs, medical equipment, non-farm jobs, pharmaceuticals, private sector, productivity, subsidized private sector, {What's Left of) Our Economy

If you’re a real data geek, you’re giddy over the prospect of a new year not just (or even mainly!) because great parties or possibly new beginnings are on the way. You’re (maybe mainly!) giddy because you’ll soon be getting full-year economic statistics!

This morning, as reported in this morning’s post, we got a big batch – from the Labor Department in the form of its release on the American employment scene for December. The numbers will be revised at least twice more, but they’re a decent marker, and certainly didn’t disappoint in terms of at least one important development I’ve been following – the burgeoning importance of job-creation in parts of the economy that are commonly defined as “private sector,” but that depend heavily on government spending.

As I’ve written repeatedly, drawing this distinction isn’t important because government spending is either good or bad. It’s important because in terms of generating sustainable prosperity, innovation and productivity growth are crucial. The lion’s share of both still comes from the private sector, and ultimately from the market forces that in turn overwhelmingly shape it. If ever more hiring is taking place in parts of the economy (notably healthcare services) reliant on the budgetary decisions of relatively un-innovative, un-productive politicians, America’s economic prospects could be dimmer than widely thought. And that’s precisely one of the main messages being sent by the new jobs report and the January-December figures.

For the record, Labor Department preliminarily estimated that 59,000 net new jobs were created in this subsidized private sector in December. That’s a little over a fifth of all the hiring gains on month attributed to the entire non-farm sector (Labor’s American employment universe), and a slightly larger percentage of increased employment in the private sector as conventionally defined.

But much more revealing are the full-year 2015 numbers and how they compare with those of other recent years. From last January through December, non-farm jobs on net rose by 2.650 million, and employment in the conventional private sector rose by 2.551 million. (Government hiring accounted for the rest.) The subsidized private sector gained 655,000 net new jobs – 24.72 percent of the total new jobs and 25.68 percent of the conventional private sector jobs.

It’s clear that something special is going on in the subsidized private sector just from looking at its share of employment on a stand-still basis. As of December, it accounted for 15.62 percent of all non-farm jobs and 18.45 percent of all conventional private sector jobs – considerably lower than its share of employment gains.

And indeed, the subsidized private sector’s role in total hiring has grown dramatically. In 2014, it generated 15.66 percent of the increase in non-farm employment and 16.04 percent of the improvement in conventionally defined private sector employment. In 2013, those figures were just 13.57 percent and 13.21 percent, respectively. In other words, in terms of total employment advances, the subsidized private sector’s role has jumped by 82.17 percent, and in terms of conventional private sector job-creation, it’s up by 94.40 percent – a near doubling.

As a result, job-creation in that part of the private sector that doesn’t benefit from major government largesse hasn’t been firing on nearly as many cylinders are often portrayed. Rather than creating 96.26 percent of all of 2015’s net new jobs, it was only responsible for 71.55 percent. Moreover, the gap has been widening. In 2014, the “real” private sector accounted for 81.96 percent of overall employment, not the 97.63 percent indicated by the standard classification. In 2013, the Labor Department actually reported that private sector job creation exceeded total job creation because government employment shrank. But more accurately defined, the private sector’s share of new jobs was just 89.11 percent.

And the farther back you go, the more impressive the subsidized private sector’s employment performance looks and the less impressive its market-driven counterpart appears. Since the recovery technically began, in mid-2009, the total non-farm economy has created 12.298 million jobs. If the private sector is conventionally defined, it’s accounted for even more net new jobs: 12.873 million. But strip out the 2.836 million private sector jobs in subsidized industries, and that number falls to 10.037 million – or 81.61 percent of total hiring.

Another way to look at the situation: During the recovery, total non-farm employment is up by 9.39 percent and private sector jobs conventionally defined have grown by 11.88 percent. But without the subsidized private sector’s jobs boom, the private sector increase falls to 11.30 percent. The growth rate of subsidized private sector jobs? Much faster, at 14.52 percent.

And here’s how all these new subsidized private sector jobs have changed the U.S. employment landscape. At the start of the last recession, in December, 2007, this portion of the economy accounted for 13.63 percent of all American non-farm jobs. By the time the recovery began, in June, 2009, its employment share was up to 14.92 percent. And last month, it hit that aforementioned 15.62 percent level.

Conversely, the real private sector stood at 70.19 percent of the non-farm workforce when the recession struck. It share fell to 67.84 percent by the time the recovery began eighteen months later, and at the end of last year, had recovered to only 69.02 percent – below pre-recession levels.

In fact, however, the subsidized private sector’s share of the American employment is surely greater than indicated above. For shouldn’t we include all the employees of the pharmaceutical and medical equipment industries? Along with defense manufacturers? Data for the former aren’t hard to track down but figures for the latter can be pretty elusive – and aren’t officially kept by Washington.

For all the problems associated with a public sector-dominated employment scene, it’s surely better for Americans who can work to hold some kind of job than none. But just as subsidized economic growth is no substitute for the real thing, subsidized employment looks like a poor candidate for delivering the living standards and healthy economy the nation still so urgently needs.

(What’s Left of) Our Economy: A Drug Pricing Dilemma with Global Roots

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drug prices, Fortune 500, healthcare, Hillary Clinton, Marcia Angell, pharmaceuticals, price controls, Washington Post, {What's Left of) Our Economy

No one should underestimate the difficulty of fixing what’s still wrong with America’s healthcare system, so the following post shouldn’t be interpreted as saying that critics of drug companies’ pricing practices are emphatically wrong to be upset about hyper-expensive medicines – especially when they can be life savers.

But they should be more mindful of some of the long-term dangers of proposals they’ve been championing with unusual vigor these days (along with Democratic presidential candidate Hillary Clinton and other political leaders) for government curbs on drug prices. And they should be especially wary of tackling drug prices without addressing the problem’s global origins.

This international angle could have an especially important impact on how price controls might affect drug discovery and the overall pace of medical progress. Specifically, I’ve never heard an adequate answer to the question of how, in a world where most countries impose price controls, drug companies can finance adequate research and development unless they can count on a big profit center someplace – the role that even their critics admit is played by the American market.

In a recent Washington Post article, Marcia Angell – a former editor in chief of the prestigious New England Journal of Medicine – responds that the pharmaceutical industry is plenty profitable. In fact, she claims, “Pharmaceutical manufacturers are consistently among the most profitable companies.” Trouble is, her evidence yields a mixed picture at best of the industry’s financial fortunes.

Angell’s case rests on Fortune magazine’s well known rankings of America’s 500 largest companies. Interestingly, when measured by revenues (the magazine’s headline ranking) only 11 of these giants are in pharmaceuticals, with Johnson & Johnson being the largest (at number 37), followed by Pfizer (56) and Merck (71). No other drug companies crack the Fortune 100.

Looking at profitability in standstill terms, pharmaceutical firms do considerably better. Thirteen of them make the top 500 by this gauge, and not only are five of them in the top 100, but these are all in the top 50 (in order, Johnson & Johnson, Gilead, Merck, Pfizer, and Amgen). Unfortunately, in our free market system, even profitability doesn’t translate into guaranteed future success, and when it comes to profit growth, the drug sector lags notably.

Of the 500 leaders in this Fortune category, only three pharmaceutical companies ranked in the top 100 profit growers over the last year (Gilead, Merck, and Alexion), and only Gilead stood in the top 50. Gigantic Johnson & Johnson, revealingly, was only number 305 on the profit growth list. And among the ten biggest pharma firms in absolute terms, Pfizer, Amgen, AbbVie, Lilly, and Bristol-Myers Squibb all were left off the list of 500 fastest corporate profit growers altogether.

Moreover, these figures all reflect the fact that American pharmaceutical companies are able to exploit this nation’s lack of drug price controls. Imagine how they’d perform if they lacked any significant U.S.-style national profit center?

That’s not to say that the drug companies’ behavior is beyond reproach and, like others, Angell makes an excellent point by noting that they’re the beneficiaries of major public subsidies in the form of government-sponsored basic research, as well as the larger boost their products enjoy from government support for health care in general. These payments ensure that drug companies’ markets are much larger than they would be if Americans paid the full costs out of their own pockets. So there’s clearly a basis for some claw-back here. Moreover, Clinton makes a promising suggestion when she proposes rescinding the federal tax credit for pharmaceutical company advertising and replacing it with a tax credit for R&D.

But that’s a long way from saying, as Clinton and Angell also propose, that Washington should tell pharmaceutical companies how much they should spend on research (versus other priorities), or how much they should charge for their products once the above subsidies are taken into account. And in my view, weakening drug industry patents even further would backfire much worse.

For the fundamental global issue faced by the pharmaceutical industry would remain: The rest of the world receives many of the benefits of America’s pharmaceutical innovation, but lets the American taxpayer and the American consumer pay most of the costs. (And let’s not forget future generations of Americans, who will have to repay the debts racked up by government borrowing to finance current health care spending.) Unless this international free-riding is ended, expect Washington to continue struggling with the challenge of restraining drug costs without crimping the drug discovery pipeline.

(What’s Left of) Our Economy: Expect Imports to Keep Preventing Lift-Off

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consumer spending, consumers, demographics, Employment Cost Index, health care, imports, manufacturing, medical equipment, National Institutes of Health, personal income, pharmaceuticals, recovery, retirement, savings, subsidies, Trade, Trade Deficits, wages, {What's Left of) Our Economy

Three new government reports have put the spotlight back on American consumers, and especially on whether they can quicken a U.S. recovery that continues to disappoint the conventional wisdom (though not me!). I’m no expert on consumer trends. But I do feel confident that whatever new vigor American shoppers start showing will provide only a limited growth boost – because so much of what they buy will continue to come from abroad.  As a result, this spending will generate more production and job creation overseas than at home.

The three reports I’m talking about were:

(a) yesterday’s preliminary reading on first quarter gross domestic product, which showed the economy slogging along at a pathetic 0.25 percent real annual rate;

(b) today’s reading on first quarter employment costs, which showed a decent (at least by recent standards) gain in wages and salaries (numbers that aren’t adjusted for inflation); and

(c) today’s report on March consumer spending and incomes, which showed the former up and the latter flat month-to-month. That made for the first monthly fall in the personal savings rate since November.

These results all reinforce a picture of the economy that’s gained traction in recent months – of workers doing somewhat better after years of stagnant, at best, incomes, and in fact getting a nice filip from falling energy prices but remaining cautious shoppers nonetheless. As a result, most analysts foresee a solid increase in spending and therefore growth for the rest of the year, as Americans open their wallets wide again.

As ever, though, and especially in recent years, the fly in the lift-off ointment is imports, whose scale and robust growth has greatly weakened the longstanding relationship between what Americans consume and how fast the economy grows. For despite the endless talk of the United States being a “consumer-driven economy,” it’s production that fuels GDP growth, not shopping.

As I wrote yesterday, the trade shortfall has grown fast enough to take a big bite out of growth since the last recession ended, in the middle of 2009. But yet another news item today helps illustrate how the process works. It’s a Fiscal Times piece claiming that fully 20 percent of U.S. household spending now goes to health care services and medicines – up from six percent in 1960. According to another calculation, that works out to more than $8,000 for every man, woman, and child in the country.

Since most health care spending winds up on the services side, that’s actually good news as far as growth itself is concerned, since nearly all of these services are supplied domestically. Yet when it comes to health care products, it’s another story entirely – as can be demonstrated by looking at trade balances in these sectors.

In a phrase, they’ve worsened greatly since 2000. In fact, a $9.71 billion deficit more than quadrupled to $46.78 billion by the end of last year. Some health care-related products have excelled – e.g., surgical and medical equipment and laboratory instruments, which improved on smallish surpluses. But others, often thought to be among the nation’s technological and industrial crown jewels, have fallen flat on their faces – notably electro-medical equipment. At the beginning of the millennium, America ran a $1.21 billion trade surplus in devices like CAT-scan and MRI machines. But by 2014, this trade had turned into a $2.03 billion deficit. And the 800-pound gorilla in the health care manufacturing category is the pharmaceutical sector, which saw a $955 million trade shortfall balloon to $31.52 million during this period.

Even worse, demand for all these health care products is heavily subsidized by government. And the nation wouldn’t even boast a world-class pharmaceutical industry without the research and development performed by the federal government’s National Institutes of Health. So increasingly, Americans’ tax dollars are being used to create and expand markets for products supplied by foreign factories and workers, and in many cases to create products themselves whose manufacture is offshored by U.S.-owned firms.

To add insult to this injury, thanks to a combination of those government subsidies and an aging population (in many foreign countries, too), health care is among the most promising future manufacturing growth markets. If the vast majority of these products were made in America, the employment, wages, and output would stay in the United States, and fuel more growth that’s healthy. On top of a recovery that’s faster and more sustainable, the resulting health care manufacturing boom could take some of the expected economic and financial sting out of the nation’s looming demographic crisis.

But because of Washington’s indifference to where goods are produced, and widespread ignorance over what really fuels prosperity, much of this golden opportunity will be squandered, and health care will be yet another sector where America’s spending bucks keep generating less and less vital growth bang.

(What’s Left of) Our Economy: Against Government and Off the Deep End

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basic research, drug discovery, FBN, Fox Business Network, government, Heritage Foundation, libertarians, National Institutes of Health, NIH, pharmaceuticals, Stephen Moore, Stuart Varney, {What's Left of) Our Economy

I really hate the growing tendency across the political spectrum to label ideological opponents as “stupid,” or something similar, but all too often, the shoe really does fit – as the Fox Business Network helpfully reminded us yesterday.

Fox Business anchor Stuart Varney decided to get worked up over a statement by Massachusetts Senator Elizabeth Warren arguing that “Drug companies make great contributions but so do taxpayers….In other words, we built those medical innovations together.” His objection? Warren’s position shows that she’s “a collectivist. She’s saying there’s no such thing as individual liberty and the pursuit of ideas on an individual basis. No, we’re collectivists.” And ostensibly for confirmation, he interviewed Heritage Foundation Chief Economist Stephen Moore. You decide who came off worse.

Was it Varney, who seemed totally incapable of processing Warren’s acknowledgment that “Drug companies make great contributions” to medical innovation? I’m not sure how else to explain his accusation that her position revealed that “Senator Warren is a collectivist. She’s saying there’s no such thing as individual liberty and the pursuit of ideas on an individual basis. No, we’re collectivists.”

Or did Moore give his mindless libertarianism more than a good run for its money? He responded that “It tells you a lot about the modern day Democratic Party that a nutcase like Elizabeth Warren is in first or second place in the early polling for these Democratic primaries. I mean, Elizabeth Warren is a member of the Sandinista wing of the Democratic party, right? She doesn’t believe in the free enterprise system.”

But since Varney is simply a journalist and, according to recent decades’ standards, doesn’t need to know what he’s talking about, I give the ignorance award here to Moore. The Heritage maven actually acknowledged that “the NIH [National Institute of Health] does participate in” the drug discovery process. But, he explained, “they do the basic research. The real blockbusters are developed by private pharmaceutical companies and bio-engineering companies that do incredible work.”

Moore’s clear implication: The basic research performed by NIH is not “incredible work.” Or at least not nearly so incredible. Apparently he has managed to climb the conservative think tank career ladder – and the Wall Street Journal editorial page ladder before – without learning that without enough basic research, the blockbuster flow, and those similar breakthroughs in other fields, dries up.

At one point, though, Moore suggested a less laughable argument. As he put it, “It costs sometimes a half a billion dollars in investment capital – private investment capital, Stewart – to develop these drugs. And for then Elizabeth Warren to come along and say oh, by the way, you know, if you hit a winner, we’re going to take the profits away from you – I think that’s not just bad economics. This is even more important, Stewart. It’s terrible for our our health, because if you delay or disrupt the development of these new drugs, you’re basically, you know, a death sentence for people who have Alzheimers or cancer or heart disease or others.”

Moore continued: “…If you tax something, you get less of it. It’s a very simple economic message. And by the way, the research that goes into these drugs – when I mention it costs half a billion dollars to bring a new drug to market, you know only one out of ten of these even succeeds. So the amount of risk capital that goes into these is gigantic. If you don’t give those investors a return, we’re not going to get any more medical progress in this country.”

In other words, Moore’s great fear is that the Warren (and presumably many other) Democrats so hate the private sector and so idolize government that they want to tax the vitality out of the American pharmaceutical industry to finance the (marginally important) NIH. Stripped of unconscionable exaggeration, it seems as if Moore is at least advancing a reasonable proposition here – that the U.S. political system hasn’t yet found the right tax policy balance between adequately fostering private sector medical innovation and adequately funding the kind of basic medical-related research that’s almost never undertaken by free enterprise.

If that’s the case, though, why didn’t Moore say so openly? Because he’s totally desperate to get TV time from a government-hating know-nothing like Stuart Varney?