Tuesday, May 17, 2011

Manufacturing Recovery: an Update

Mike Mandel is not convinced that US manufacturing is really doing particularly well:
There’s been a lot of happy talk recently about the revival of U.S. manufacturing. ...Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense, is an essential part of the U.S. economy, and any good news would be welcome.

Unfortunately, the latest figures do not back up the cheerful rhetoric.
He cites and presents two pieces of data. First, he shows that recent revisions to the figures on factory shipments in 2009 indicate that manufacturing output fell by more than initially belived during that year. Second, he shows that US imports of goods have risen rapidly over the past year.

But neither of these observations really tell us anything about whether US manufacturing is recovering unusually strongly. Yes, it now seems that the downturn in manufacturing was even more severe in 2009 than the data had initially suggested. But that is a different issue from whether manufacturing has done surprisingly well since then.

And it is equally true that US imports have risen by a lot lately. But that also tells us very little about how US manufacturing is doing, because (a) a huge chunk of US imports are petroleum, which has nothing to do with manufacturing, and (b) it makes no sense to look at imports without also looking at exports. A better way to use trade data to gain insight into how US manufacturing is doing is to look at the overall trade balance (exports minus imports) for non-petroleum goods. Looking only at imports is a little like trying to tell how well someone is doing by tallying up their expenses without looking at their income.

As I've argued before, US manufacturing has done far better during this recovery than what we've grown used to seeing over the past 30 years. The fact is that that real output of the US's factories has climbed at a surprising rate over the past two years. The following chart compares the recovery of US manufacturing output (measured by the FRB's Industrial Production series) in the wake of the most recent recession compared to the two previous recessions. (Update: the chart now incorporates today's data release for April 2011, which undoubtedly reflects some effects of the earthquake in Japan.)

Yes, it's true that the 2008-09 recession hit US manufacturing extremely hard. But it's also true that it has bounced back much better than from the previous two recessions. It's all relative, of course -- but I do think that it's okay to feel cautiously optimistic about US manufacturing performance given what we've seen over the past year or two.

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