It happened: China has edged out the United States as the world's largest manufacturer.
[Click on the interactive chart below to see data for each year from 1970 to 2010.]
At face value, this news, while certainly no surprise, is unsettling. But it appears to be only part of the story.
For starters, as this article points out, the fact that the U.S. has even remained in the manufacturing race at all while our labor market crumbled speaks to our productivity edge.
And about this productivity...
Economist Paul Markillie believes the world is on the precipice of the third industrial revolution. The first occurred in the 18th century, when machines transformed the textile industry. The second was kicked off with the advent of the assembly line. Each freed up great numbers of people to find more productive, and prosperous, uses of their time.
Markillie says the third is happening now, and it is being ushered in by the digitization of manufacturing. He also believes that the digitization of manufacturing will be just as disruptive and transformative as earlier industrial revolutions. But this one might make us so productive that we could evolve beyond the need for economies of scale to minimize costs.
Imagine a world where something like a car can be made to your own design and desires. The cost to do so now would be astronomical, as entire machines would first have to be built to construct each specified car part. But new technology called 3D printing will one day make total customization possible. It's already making products like fully customized hearing aids possible. 3D printing takes the onus off the machine (which is standardized in 3D printing) and puts it on the software, which can be tweaked any which way at effectively no additional cost. From there, a design is "printed" out, much like a printer can print anything sent to it from a computer onto a piece of paper. [See below for a video further explaining 3D printing.]
In his article, Markillie highlights other innovations in manufacturing that will allow companies to be far more productive and swiftly responsive to the market. But it does beg the question: What does digitization mean for jobs if digitization means more computer-run machines and robots?
This remains to be seen. But like the prior two industrial revolutions, each transformed economies so dramatically that scores of new ideas, opportunities, businesses and careers were born from them. There seems no reason not to expect a similar trajectory this time.
However, the more immediate effect of manufacturing's digitization will be on-shoring: Markillie expects that consequent reduced labor costs will encourage some companies to move their manufacturing back to richer countries, which will make serving nearby markets more productive and efficient.
Back in my twenties, I was "fortunate" to have experienced first-hand the force of nature that was Hurricane Alicia. From within my apartment, it was exciting to watch her hit Houston. And it was quite surprising how quickly she blew through. One minute she was there and a few minutes later she was gone. Soon after, I went out and drove my car around to survey the damage. Of course trees and telephone poles were down everywhere. No stores or restaurants were open, so I soon headed back to the apartment. Thank goodness I did. As it turned out, I wasn't out after Alicia finished her work. I had actually been out in the eye of the storm.
The eye of the storm seems to be where we are economically right now. The stock market came back with a roar after the Federal Reserve's money printing announcement last October. But lately the market seems challenged again. Is it still going up, or is it going down? For a few weeks now, it seems not to know. Are profits rising, or are they starting to fall? One recent perspective showed that if you removed Apple's massive profits and the banks "profits" from reducing their loan loss reserves, most U.S. companies are not growing profits at all.
When we look at the unemployment numbers, the picture isn't much different. The unemployment rate has come down, but mostly because people are dropping out of the employment market, which puts them outside of those counted as unemployed. And considering that the strongest job growth is in the restaurant and social service sectors, our recovery isn't looking so robust. It has been three-and-a-half years since Lehman went bankrupt, and still not a day goes by that our economic woes go unmentioned in the news.
Our economy is holding up only because of massive government fiscal and monetary stimulus. This is not an organic growth economy at all. This is an economy where bank profits are dependent on the Federal Reserve's very accommodating monetary policy. It's an economy where operating company profits benefit greatly from the trillion dollars a year the federal government is spending over what it is taking in. Our economic hurricane has not passed at all. Instead it has been temporarily abated by massive government stimulus in the U.S., Europe, Japan and China. We should all be careful assuming it's a-okay to leave the confines of our secure environment to go out and survey the economic landscape with confidence that the storm has passed.
April 1, 2010...that was the day the lights seem to come back on in the hiring market. Massive support pumped into our financial service industry had forestalled a complete collapse of not just Wall Street, but also of our entire economy. If all the banks are broke, then there's no capital for people to operate a business. So from the tail end of 2008 and through 2009, all sorts of fixes were rolled out to save and stabilize our economic system. And it worked. Then on what seemed like an almost poetic day, April Fools' Day, demand from employers felt substantive once again. As I remarked back then and still occasionally today, "I certainly hope this isn't one big April Fools' joke!"
We are now a full two years past that light switching date. Since then a lot of hiring has occurred, most specifically in the private equity market. Private equity firms are flush with capital and where the money grows, so grows employment. But when you've been through several economic expansions and contractions, euphoria and despair, you learn that nothing remains constant. And you learn especially to start looking over your shoulder after things have been good for an extended period of time.
For now, employment demand in our corporate finance and private investing world seems to be holding pretty steady. I guess we can thank the Fed for keeping interest rates so low that institutional investors must seek out higher rates of returns to match up with their pension or insurance actuarial tables. As capital is driven to seek higher rates of return in the alternative investing world, we remain busy finding people to work with that capital.
Now that the investing market seems to have rediscovered the perpetually sustaining energy industry (nothing works without energy), Houston's economy and employment market continue to benefit. Outside of Houston, it appears that employment demand is holding steady and will continue to do so as long as the powers that be can keep our economic train on the tracks - an effort more challenging than we likely can really grasp.
"Ask not what your country can do for you, ask what you can do for your country."
- John F. Kennedy
Building on this famous quote from JFK on a personal level, I've often observed in my life that the more goodwill I earn, the more money I seem to make. A "me, me, me" orientation isn't going to earn you many friends, nor is it going to create much value for those around you. At the end of the day, everything we do, every one of our actions leads to an outcome. If our orientation is too selfish, then that outcome isn't likely to be very fulfilling. If it's selfless, the return is positive. Service to others builds relationships, and it's relationships that eventually come back to reward you.
We can't expect a direct tit for tat return on the goodwill we create. If you do someone a favor, that favor won't necessarily be returned by that specific person. Life doesn't always work that way. The goodwill we create just goes into the big punchbowl of what people think about us and tell other people about us. And what people tell other people about us eventually leads to the outcome of our actions.
The world isn't perfect. Nice guys don't always finish first. But then which really nice guy cares about always being first? Life is about the experience. The results will be just fine if you always remember to pay it forward.
Nonfarm payroll employment rose by 115,000 in April, and the unemployment rate was little changed at 8.1%. The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 5.1 million in April. These individuals made up 41.3% of the unemployed. The civilian labor force participation rate declined in April to 63.6%, while the employment-population ratio, at 58.4%, changed little.
Manufacturing sector productivity rose 5.9 percent in the first quarter of 2012, as output grew 10.8 percent and hours worked increased 4.6 percent. These increases in productivity and output were the largest since the second quarter of 2010. However, total Nonfarm business sector labor productivity decreased at a 0.5 percent annual rate during the first quarter of 2012, suggesting that services are dragging down overall Nonfarm business sector productivity.
For the 12-month period ending March 2012, compensation costs increased 1.9% for civilian workers, 2.1% for private industry workers, and 1.5% for state and local government workers. Wages and salaries increased 1.7% for civilian workers, 1.9% for private industry workers, and 1.0% for state and local government workers.
Chart of the Month: Manufacturing Employment, 1970 - 2011
We know manufacturing employment has taken a significant hit in our country over the last few years, but it does appear to have picked up recently. We were curious to see by how much. From 2008 to 2009, we lost about 6 million jobs in the manufacturing sector. We lost another million from 2009 to 2010. But in 2011, we saw a small rebound, adding nearly 1.5 million manufacturing jobs.
Minus recessionary dips, overall manufacturing jobs have been steadily gaining since 1970, in large part, boosted by growing global demand.
Lisa Harouni, co-founder of a 3D printing software company, explains the extraordinary technology behind and disruptive power of 3D printing. She explains how the ability to produce "bespoke products en masse" could eradicate the cost-reducing need for economies and scale, consequently revolutionizing the manufacturing of almost any product you could imagine - from buildings to medical implants. As the technology behind 3D printers improves, the machines are getting smaller, some even small enough to sit on a desk. Might there be a day where we each have 3D printers of our own at home?
With the widespread introduction of computers in 1980s, discussion about the obsolescence of secretaries was du jour. But instead of their demise, secretaries were able to exploit computers to make themselves more productive and free up time for more complicated tasks, while also increasing their earning power. Secretaries not only survived the computer, they became more indispensable to companies. Many probably also gained new skills and then leveraged them to reach for jobs higher on the ladder.
Might a similar trajectory play out for blue-collar manufacturing workers, especially as manufacturing digitization becomes more common? Automation and technology have been slowly chipping away at factory jobs for decades. But automation and technology have also been creating new manufacturing jobs - just in front of computers, not on the plant floor. (It's true that these jobs require different skill sets, and how easily displaced factory floor workers can transition to desk jobs remains to be seen.)
As the weak global economy and exciting leaps in new manufacturing technology impel more automation, manufacturing will complete a massive shift in labor. And some believe this shift will cause many plant laborers to develop higher-level skills while also improving their earning power. Meanwhile, manufacturing might just again take center economic stage.
The following chart shows a dramatic upswing in manufacturing productivity since 1947.
In 1950, the average American factory employee produced, in today's dollar, $19,500 worth of output. This number doubled by 1976, and doubled again 27 years later. Then in 13 years, that number doubled again reaching $152,800 by 2010, indicating a massive acceleration in worker productivity. While this incredible boom in productivity signals fewer workers are needed to produce more, this author argues that it also signals a healthy and vital industry, and one that can provide more goods at a lower cost to more people. No doubt, the situation where innovation drives up productivity and quality of life for consumers at the expense of human labor is a highly complex issue, with a broad range of conflicting pros and cons.
Cheaper labor abroad isn't the only thing that drove outsourcing. Lower tax rates abroad, foreign government subsidies, the increasing sophistication of international supply chains and abundance of workers have also helped push jobs overseas. Now there's lots of election-time talk about the government's role in incentivizing companies to on-shore more manufacturing jobs at home. It's a controversial aim for many reasons. Many leaders in manufacturing think the U.S. is better served to focus on innovation and technology, and that off-shoring can mean a critical competitive advantage. With some manufacturing jobs now coming home, a trend that some think will only continue, what might be the possible unintended consequences? How far should the government go?
While consumption and confidence continue to lag at home, a rising middle class in developing countries appears to be offsetting our domestic weaknesses and providing a healthy boost to our exports. Here in the U.S., international markets are proving to be a boon, with American exports increasing 34% in two years. Companies large and small are seeing a rise in demand from other countries, for everything from beer to professional services, as consumer needs in emerging markets grow more sophisticated and broad. Innovation-driven productivity and lower labor costs have, in part, enabled increased output. Wage increases in China mean their cheap labor advantage is eroding (and that consumption is on the rise in China). All of this is allowing the U.S. to regain some competitive foothold.
The Institute for Supply Management recently released a report with many positive manufacturing-related numbers. Its manufacturing index rose to 54.8 in April, up from March and the highest point since June 2011. New orders have jumped to their highest level in a year, and manufacturing employment is at a 10-month high. Factories have been particularly integral to manufacturing employment; factory jobs have been expanding for 33 straight months, and they accounted for 13% of all new jobs created in the U.S. last year. Positive manufacturing news has also caused thedollar to rise against most major currencies.
With factory and durable goods orders down (just two of the many data points that factor into the overall manufacturing index), but manufacturing employment up, industrial data is downright confusing. The good: Exports are slated to be higher for April. Whether or not this persists might depend on the viability of Europe's demand for our goods, which typically accounts for 20% of all exports. The bad: Transportation orders, which arguably lead economic trends, took a steep 12.6% drop in March. The ugly: Inventories are at a record high.
The economy might be naturally taking some pressure off the immigration debate: Immigration from Mexico into the U.S. has practically stopped. America is no longer viewed as the land of opportunity for many Mexicans, but rather the land of unemployment, hostile immigration laws, and a swath of long-term economic and political challenges. Quality of life improvements in Mexico might also mean that this trend has staying power. Wages are on the rise in Mexico, and education standards are improving. Increased border patrol and escalating drug cartel violence (which some believe are related) have made border crossing riskier, contributing to a lucrative and dangerous loan-sharking business for potential immigrants to raise the money to pay transport fees. Many from south of the border now view the trip as one not worth taking.
We have Ford Motor Co. to thank for determining that the 40-hour workweek is the sweet spot for employee productivity. We have a workaholic culture to thank for pulling us into 50-, 60- and 70-hour workweeks, despite plenty of evidence that shows working another 20 hours a week only marginally improves productivity and only for a few weeks. After that, burn out begins to destroy productivity and erode competitiveness. Arguably, it seems the most productive companies might be those where it is not only acceptable, but also encouraged to leave work every night at a reasonable hour. And such practices often need to be preached from the top down.
Based on interviews with some of the most successful CEOs in the world, this author distilled their management secrets to eight common core beliefs. For example, he's observed that an average boss views his company as a machine and its employees as cogs best managed through control. Extraordinary bosses view companies as a collection of hopes and dreams, and see their role motivating through inspiration and higher purpose. Read on for more practices of extraordinary leaders.
"By failing to prepare, you are preparing to fail," and "To succeed, jump as quickly at opportunities as you do at conclusions" are just two of 14 pithy, yet astute tips from a man who knew a thing or two about getting things done.
"Meetings are indispensable when you don't want to do anything," quipped economist John Kenneth Galbraith. A recent study found that the average American worker actually works only about three days per week, the rest of the time was found to be wasted, with meetings being the primary culprit. Furthermore, brain research has shown that meetings, particularly ones that drag on, can drain our cognitive resources. As meetings drag on, our cognitive engagement weakens and we become more prone to bad decisions. Managers would be wise to consider a meeting strategy that avoids productivity pitfalls, like keeping decision making outside of meetings, and never calling meetings for purely informational purposes.
Thanks for reading The Leyendecker View. We hope you find these perspectives unique, insightful and valuable.
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