Tag: U.S. economy

OM in the News: U.S. Manufacturing Isn’t Doing So Bad After All

A mid-20th-century IBM typewriter factory

A common perception is that the U.S. “doesn’t make anything anymore.” According to this narrative, the country is a former manufacturing titan brought low by the forces of globalization that have left the rusting hulks of once‐​humming factories in its wake.  But The Wall Street Journal (April 2, 2024), quotes a recent Cato Institute study that U.S. manufacturing accounts for a larger share of global output than Japan, Germany, South Korea and India combined.

It appears that America’s productivity is far ahead, too. In 2019, the value added by the average American manufacturing worker was $141,000, exceeding second-place South Korea by more than $44,000 a worker and China by more than $120,000.

Global markets reflect this strength. Between 2002 and 2021, U.S. manufacturing exports more than doubled, with sales second only to China, which dominated low-end production. America’s success is thanks to its ability to move from low-tech, less-productive sectors to higher-value ones such as computers, pharmaceuticals, medical and scientific instruments, aerospace, and electrical machinery. (The U.S. even understates its performance because its definition of manufacturing is old. Software, for example, now accounts for about half the value of a new car).

 American manufacturing is productive, requiring fewer workers. Consider the much-protected steel industry. U.S. steel output increased 8% between 1980 and 2017, despite a workforce 1/4 its prior size. America isn’t the only country moving to higher-productivity manufacturing with fewer workers. From 1976 to 2016, manufacturing employment fell by 1/2 in Germany and 2/3 in Australia.

The U.S. has adapted to huge economic transitions before. In 1900, some 40% of Americans toiled in agriculture. Today farmers account for 1- 2% of workers, but they grow much more food. Between 1948 and 2017, U.S. agricultural output tripled while the number of hours worked plunged 80%.

The U.S. economy’s evolution from agriculture to manufacturing and now to services, a topic we discuss in Chapter 1, reflects changes in what Americans buy. Today, that means spending on healthcare, entertainment, sophisticated equipment and education. Commercial services now account for a quarter of all exports, with computers, research and development, and health activities in the forefront.

The 21st-century economy, including modern manufacturing, will depend on innovation in AI, quantum computing and other technologies.

Classroom discussion questions:

  1. Explain the 2 models by which productivity is measured.
  2. What are the main strengths of U.S. manufacturing?

OM in the News: The U.S. Productivity Picture–Good or Bad?

“Perhaps 2018 will be the year productivity finally begins to pick up,” writes The Wall Street Journal (Dec.12, 2017). Technologies such as speech recognition, online chatbots and machine learning are being quickly adopted, capital spending is up, and tight labor markets give companies an incentive to find better ways of working. But productivity defies forecasters, who have wrongly predicted an uptick in productivity for over a decade. The real story is how little anyone really understands about what moves productivity, even though as we write in Chapter 1: “Only through increases in productivity can the standard of living improve.”

The basics are in Equation (1-1): Labor productivity is real economic output divided by the numbers of hours worked. How many gingerbread lattes can each Starbucks barista churn out per hour? Give them a better machine or better training and the productivity rises. Economists say it is years of weak corporate investment, a dire education system, an aging workforce, and a shift from high-productivity manufacturing to low-productivity service sector that have made productivity worse.

The first half of the 1990s had a “productivity paradox” of technological change being highly visible, but not showing up in the economic data. Just as with the past decade’s development of smartphones, apps, financial technology and machine learning, it took time for laptops and PCs to increase output. It happened suddenly, with productivity leaping 2.5% in 1996 and growing that fast on average over the next decade.

So a big problem for forecasters is that technological change comes in unpredictable waves. In the long run productivity is all about innovation. But productivity did leap 3% in the 3rd quarter of this year, and while quarterly data are volatile, it is plausible that a productivity pickup is coming soon. A lesson many economists take from the past 10 years is that productivity has permanently slowed. Perhaps a better lesson is just that it is hard to forecast.

Classroom discussion questions:
1. Why is the productivity rate important to ordinary people around the world?

2. Why is productivity important to operations managers?

 

OM in the News: The Productivity Challenge

productivityWhat better way to start the fall semester but with a discussion of the importance of productivity (see Chapter 1, pages 13-18). There we write: “only through increases in productivity can the standard of living improve.” For well over a century, the U.S. has been able to increase productivity at about 2.5% per year, meaning U.S. wealth doubled every 30 years. But in the past decade, the news is not good. As The Wall Street Journal’s (Aug. 10, 2016) front page headline declares: “Productivity Fall Imperils Growth.”

This longest slide in worker productivity since the late 1970s is haunting the U.S. economy’s long-term prospects. Productivity in the 2nd quarter was down 0.4% from a year earlier, the first annual decline in 3 years. That was a further step down from already tepid average annual productivity growth of 1.3% in 2007 through 2015, itself just half the pace seen in 2000 through 2007, and the trend shows little sign of reversing. Productivity has slowed dramatically since the information technology-fueled boom of the late 1990s, when strong productivity gains translated into robust growth for household incomes and the overall economy.

Adds Fed Chair Janet Yellen: “the outlook for productivity growth is a key uncertainty for the U.S. economy and a very difficult question that has divided the economics profession. Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars. Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.”

Throughout our text we examine how to improve productivity through operations management.

Classroom discussion questions:

  1. Why is productivity important to OM managers?
  2. What can be done to raise productivity levels in a company? In a country?

OM in the News: Will Manufacturing Jobs Ever Return?

The production line of a lamp factory in China. Despite efforts to revive manufacturing in the U.S., economists say the chances of a recovery are slim, and developing countries face extra challenges as industry fades.
A lamp factory in China. Developing countries face extra challenges as manufacturing jobs fade.

Half a century ago, harvesting California’s 2.2 million tons of tomatoes required 45,000 workers. In the 1960s, though, scientists at U. California-Davis developed an oblong tomato that lent itself to being machine-picked. César Chavez’s United Farm Workers union was furious and made stopping mechanization its No. 1  priority. In 1980, the Carter administration declared that the federal government would no longer finance research that could lead to the “replacing of an adequate and willing work force with machines.” The freeze on research may have slowed the mechanization of California’s harvests, but 20 years later, only 5,000 workers were employed to pick a 12-million-ton crop of tomatoes.

In America’s factories, jobs are disappearing, too. Despite political rhetoric, though, the problem is not mainly globalization. Manufacturing jobs are on the decline in factories around the world, reports The New York Times (April 27, 2016). “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount,” says Joseph Stiglitz, Columbia U.’s Nobel economist.

Will America be able to produce a manufacturing renaissance at home? “The likelihood that we will get a manufacturing recovery is close to nil,” says Stiglitz. Over the course of the 20th century, farm employment in the U.S. dropped to 2% of the work force from 41%, even as output soared. Since 1950, manufacturing’s share has shrunk from 24% to 8.5% of jobs–and is still in decline. But the shrinking of manufacturing employment is global–and a worldwide zero-sum game. Japan’s long stagnation is a consequence of a decades-long development strategy that left it overly dependent on manufacturing. What options does the U.S have? Health care, education and clean energy, to name a few.

I highly recommend you read this thoughtful article. It is a great piece to share with students as you cover Chapter 1.

Classroom discussion questions:

  1. Why are manufacturing jobs important to any nation?
  2. What is keeping the U.S. from regaining millions of factory jobs?

OM in the News: Why Manufacturing Still Counts in the U.S.

manufacturing“The U.S. economy,” writes The Wall Street Journal (Jan.14, 2015), “is dominated by service work but manufacturing matters because it includes many middle-class jobs.” The Bureau of Labor Statistics estimates that employers in manufacturing, mining and construction pay an average of $36.37 an hour in wages and benefits, compared with $31.46 paid by stores, restaurants and other service companies. The U.S. lost more than 6 million manufacturing jobs between 1998 and 2010, largely to low-cost countries. Since then, the number of U.S. factory jobs has recovered nearly 7% to 12.2 million, compared with about 17.5 million in 1998.

Manufacturing creates demand for supplies and raw materials, as well as such services as delivery and machinery repair. Every $1 of sales by U.S. manufacturers yields $1.37 of output in other parts of the economy. A dollar of retail sales adds 64 cents. Expanding U.S. manufacturing allows the country to export more and rely less on imports. (The U.S. has run trade deficits every year since 1976). Manufacturing also is a source of innovation. It accounted for 83% of R&D conducted by businesses in 2013.

More U.S. companies would shift production from abroad if they analyzed the costs of overseas production to include such things as the shuttling of executives abroad and holding large inventories as a hedge against supply disruptions, says the Reshoring Initiative. But Harvard Prof. Willy Shih is less optimistic. “China has really captured the whole electronic supply chain,” he said, “and that is unlikely to return to the U.S. Instead of trying to make established products in the U.S., we’re going to have to focus on next-generation technologies” in, for example, advanced pharmaceuticals.

Some of the hurdles are practical. The U.S. needs to rebuild its supplier base, as well as invest in more efficient manufacturing equipment. The average age of industrial equipment in the U.S. has passed 10 years old, the highest since 1938. This article is a good way to start off the new semester as it brings current OM issues to the fore.

Classroom discussion questions:

1. What factors work against the U.S. regaining the millions of manufacturing jobs that were lost?

2. Why is manufacturing so important?