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U.S. Hits New Peak in Industrial Production

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Lost amid the other good news involving the manufacturing sector is the revelation the United States has reached a new peak in industrial production. Michael Hicks, a Ball State University economist and director of the school’s Center for Business and Economic Research, says the economy reached this new high in December. 

IP initially peaked in 2007, before the economic crisis. IP declined by nearly 15 percent through the trough in 2009. A second peak was reached in 2015, before productivity again dipped. 

“Other measures tell the same story. Inflation-adjusted manufacturing GDP will peak in fourth-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.

The value-added calculation is a measure of production that subtracts all the goods used in the process. By employing this across all U.S. manufacturing, it omits 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,” Hicks says. 

Better yet, Hicks doesn’t see any signs that the trend will be reversing itself soon, nor is there any reason to think there’s a cap to productivity growth. “There’s nothing signaling we’re going to be derailed. There is constant change in demand for goods, but I don’t think there’s anything out there that generally argues that there’s going to be a change,” he says. 

For context, over the past 40 years, the productivity level of the U.S. manufacturing sector has more than doubled, Hicks says. 

In contrast with the IP number, manufacturing employment remains well off its pre-recession peak. Employment in the manufacturing sector is about 1.5 million less than it was at the start of the Great Recession, and a third of the size of the sector in 1979. 

“While manufacturing employment has gained a full million jobs since the end of the recession, 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.”

Interestingly, employment in manufacturing has followed the trends of other businesses. Since 2000, manufacturing jobs held by non-college graduates have fallen by almost 45 percent, while those held by individuals 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,” he says. 

Hicks says there are two primary drivers for the move toward college grads among manufacturing employees. First, many of the jobs held by workers without higher education are most susceptible to automation. Also, today’s manufacturing tasks demand more use of computing and other technical skills, leading employers to seek out more highly educated candidates than in the past. 

Given the overall low levels of unemployment, and the continued need for more workers to fill existing manufacturing jobs, growing companies are going to have to begin looking inward to have a workforce that meets its needs, he says. 

“A lot of firms are going to have to step in and conduct their own training. We see evidence there’s been a decline in business investment in training,” he says. 

The educational system must also do its part, he says. “If a worker shows up to a job and doesn’t know how to weld, that might be something the business needs to address. If the worker can’t read or write or do the math necessary to do the welding, that’s the government’s issue.”

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