I was intrigued by Art Shipman using an apparent decline in capacity utilization to point out the possibility of a coming recession. It is quite clear that every recession is accompanied by a sharp decline in capacity utilization. However, not every decline (even fairly large declines) in capacity utilization results in an "official" recession. Capacity utilization as a measure relies upon "capacity" to produce, and the "utilization" of that capacity. But folklore would have it that the Industrial capacity of the US has been declining. Is that really so?
So I looked at the time series on Fred for US Industrial Production. This is posted below.
This does not look like declining industrial production to me. So what gives? If one digs deeper, one finds out that this is an index based on the dollar value of the US industrial production. So now if we were to divide this series by the CPI, we get a more interesting graph shown below
This however, does not take into account the rise in the US population. So if we divide the series by the population index, we get the following very interesting graph
This shows very clearly, that US industrial capacity peaked in 1968, went back up till 1973, declined sharply till 1975, rose a bit till 1978, declined sharply till 1982 and then remained declining at a slow rate ever since.
1968, likely is the end of the continental US oil production, 1973, the OPEC oil shock, and 1978 the Iran oil crisis. An interesting set of likely causation to the end of US industrial might?
The Decline of American Industry in one maybe two graphs
Submitted by Clonal Antibody via email
I understand that the Finance, Insurance and Real Estate sectors have captured and increasing share of national income over these same decades, up to a fairly significant fraction, 20-30%? How might this be related to this decline in manufacturing capacity per person. The decline certainly agrees with the fact that more of what I purchase is made overseas than it was 30 years ago.
ReplyDeleteGreat charts. I need to learn more about FRED so I can make charts like that !
ReplyDeleteThanks much to Clonal for sharing !
Art Shipman's original blogpost here -
ReplyDeleteNow, about that impending recession...
James,
ReplyDeleteThe 1970's oil shocks caused a large increase in the price of US manufactured goods. The logical result of this on part of business was to look for alternate ways to reduce manufacturing cost. This reduction in cost came at the expense of the US labor market, and not at the expense of the capital owners, or the financial intermediaries. This led to a great shift in power from labor to the FIRE sector. The real wages in the US have been stagnant from the early 1980's -- this is because service jobs, which are the only ones to be had are poor paymasters.
The only way out of this mess appears to me to be some of the solutions offered by MMT economists, and also solutions offered by Marxist economists like Richard Wolff and Michael Hudson.
Clonal, interesting stuff. Could you provide a link to the info about the industrial production index?
ReplyDeleteI don't doubt you, but I'm utterly baffled that the industrial production index wouldn't be based on inflation adjusted figures.
Other factors that may have contributed to the decline of American industry:
ReplyDelete-- Japanese motor vehicles were more fuel efficient and better made. The decline of the unionized American auto industry was a really big deal for the American middle class.
-- American companies were poorly managed, IMHO
-- lack of protection from unfair competition, still true today
-- post WWII exports to war-ravaged Europe were not sustainable, as Europe rebuilt its own industry. See FRED chart showing nice bump in balance of trade after WWII
http://research.stlouisfed.org/fred2/series/M07047USM144NNBR
-- increasing income inequality, the rich spend a good chunk of their money on property and on financial assets instead of consumer goods.
No doubt the 70's oil shock hurt us, but remember that Japanese industry did well in that time period, even though they were far more dependent on imported oil than we were.
It's easier for a small country like Japan or Germany to sustain an export economy than it is for a big country like the US. And even Japan and Germany's export boom eventually came to an end.
Agree with Clonal that post-Keynesian economics offers partial solutions, particularly increasing aggregate demand to maintain full employment.
Even MMT does not fully address the human suffering and loss of income associated with the closing of plants and loss of good paying technical jobs. Trading a a $60K skilled manufacturing job for an $8/hr manual labor JG job is an insult.
Long term we need to recognize that export economies are not realistic, that government needs to run a large enough deficit to generate sufficient aggregate demand at home.
Personally I think we need to go back to the drawing board on free trade, to level the playing field with regard to wages, regulations, and subsidies, and to guarantee that workers who lose their jobs due to plant closures will be provided with an alternative career with similar pay and work.
Edmund,
ReplyDeletemy mistake. The Industrial production index is a real index. So my conclusion of declining Industrial might was wrong.
I will be updating the post with my corrected (perhaps inciteful) interpretations
These plots, as is, miss the real point, and fails to answer better questions;
ReplyDelete1) are we accomplishing more with less raw materials & absolute physical production?
(e.g., are we more mobile, even though cars weigh less ? & last longer? Fewer phonographs & phone booths, more cell phones? etc, etc)
2) regardless of whether we're producing more or less in absolute terms ... is our Output Gap expanding, stuck, or shrinking?
(Could we all be using free public transport & WiFi hotspots, linking more people more of the time, between more places? etc, etc, etc; Please do NOT fixate on these token examples - use your own & extrapolate.)