No. of Recommendations: 2
This article gives much information about manufacturing productivity in the U.S. and several other countries. The data quoted shows U.S. manufacturing productivity peaked around 2011.
This information relates to comments Jim has made about the possible flattening or dropping of profits as a percent of sales in the future. The article discusses several possible reasons for the flattening and why it has also flattened in oher countries.
If this is true, this is another indicator for the possibility of equities being flat-lined or decreasing over the next decade. No productivity + higher wages equals lower profits. Lower profits equals lower equity valuations.
https://www.noahpinion.blog/p/why-has-us-manufactu...Uwharrie
No. of Recommendations: 11
One possible partial explanation, picking up on his note #4: there were only so many quick gains to be had in the modern era.
Manufacturing productivity (output per hour worked) has indeed risen much more slowly than overall output per hour worked in the US economy since around 2011. But if you look at a longer data series, manufacturing productivity growth blew the doors off total economy productivity growth 1987-2011.
A speculation...the productivity boom just hit manufacturing sooner than elsewhere in the economy. Perhaps computers, telecoms and other automation are great increasers of productivity, but they were put to work in manufacturing before other industries found a way to take advantage of them. Maybe manufacturing was the low hanging fruit. Somewhat consistent with this is that productivity growth in manufacturing has also slowed in other regions in the last 10-15 years (UK, EU, Japan, Canada), so it's not a US-specific trend. So the only thing that needs explanation in the US is not the slowdown, but why the slowdown in the US has been more pronounced than in other countries...a much smaller mystery, though perhaps more mysterious.
In addition to the things mentioned in the article you linked, here are some other explanations that have been floated, cribbed from the Economist, addressing the US-specific more pronounced effect:
* America is known to have laxer antitrust enforcement than its peers; perhaps scrutiny was especially needed in the manufacturing sector.
* Maybe American manufacturing was more advanced when robots arrived on the scene, so had less to gain.
* Because America’s software and internet sectors have been so lucrative, talent has been diverted away from older industries.
As an aside---
I'm leery of a lot of figures related to US capital investment trends, including machinery and robotics. If a US firm builds a factory inexpensively which requires a lot of staff to run, that's one baseline with modest capex and low labour productivity--let's assume the marginal cost of subwidgets is $100 each. If they build a highly automated factory in the US, that's higher capex and higher productivity, a trade-off that gets their marginal cost per subwidget down to only (say) $75 after the bigger up-front cost. But if their supplier builds a factory in an Asian country, and sell the subwidgets to our US firm, that's zero capex in the US, but their marginal cost per subwidget might be only $50. Note that the capex is counted at zero in the accounts of the US and of the US firm, but really just took place elsewhere. And note that the third option was by far the best for the US firm: their cost per widget decreased the most, but their capex requirement was the lowest. This is a huge increase in functional productivity--it just doesn't show up when you look too locally.
To overgeneralize, manufacturing capex has only tumbled in rich countries if you get misled by looking at one country at a time. Global manufacturing capex has risen strongly...the activity just moves around. The US stats look bad, but that's because they're the wrong stats. Within the US, the place that this type of "net" productivity benefit might show up is in things like, say, higher US corporate operating margins. Which, as noted in other threads recently, have been weirdly wonderful lately.
A corollary of big changes in outsourcing is that almost all national statistics of capex, employment, compensation and output are at risk of being distorted by this effect. Sometimes to the point of uselessness. For example, one factor in the fall in manufacturing employment is that manufacturers don't employ custodians any more, they hire cleaning firms. Apply this single notion to a thousand different activities.
Imagine trying to calculate the labour productivity of a neighbourhood by adding up the capex and payroll and sales of the firms located there. It might have been just fine so long as everything was local or the town employer was the dominant factor, but any trend you found recently would be meaningless if there were even a single factory more or fewer. In the modern era, looking at just one country, no matter how big, has the same problem.
Jim
No. of Recommendations: 14
This is in my wheelhouse given that I have been in manufacturing life long.
My humble takes on declining productivity and simply dwindling manufacturing
1. US and European manufacturing have adapted very poorly to the salient shift from high volume to high variety production. A number of reasons for this and IMO, the single biggest culprit is that the accounting paradigm hasn’t budged much from (don’t shoot me) the Ford Assembly Line inspired system. Accounting for reporting up and out remains firmly in control, while it wouldn’t be a stretch at all to say that actual, real product and process costs are unknown.
2. The result of distortions in accounting and ensuing behavior at the shop floor shows up in many ways; capital allocation which has been discussed is a notable one. Wasted, inappropriate, underutilized, over complicated capital is significant. Especially in the reality of high-mix low-volume production. Robots are generally terrible at being changed over but impressionable managers are patsies in the hands of equipment sellers, FOMO etc.
I have other observations but is unlikely to keep folks engaged. For those in the know, there’s one company's that has entirely bucked this perverse trend and that is Toyota. For those interested, I cannot recommend reading up on the evolution of Toyota since WWII. Something to chew on, Toyota started moving production to the USA and across the globe starting in the 1980’s while the competition was going the opposite direction- away. This was done primarily because Toyota recognized the hi-mix world was here to stay and was going to be higher-mix(variety) and tattooed that into their DNA. While much of the traditional manufacturing industry remains mired in the ethos of volume production, in perpetual denial.
Sorry for the rant.
Great topic for discussion.
No. of Recommendations: 3
Sorry, can’t edit but my recommendation is to please read up on Toyota ; it came out as the opposite.
No. of Recommendations: 3
I'm not sure manufacturing has much relevance to general equity valuations.
AIUI manufacturing is only ~11% of US GDP and falling over time, so other parts of the economy are more important.
SA
No. of Recommendations: 8
I'm not sure manufacturing has much relevance to general equity valuations.
AIUI manufacturing is only ~11% of US GDP and falling over time, so other parts of the economy are more important.
Fair points.
Though cheer up, it's only falling as a share of GDP, or per capita. Real total US manufacturing output is holding up rather than falling. Currently a little higher than its temporary peak in Q2 2000, a little lower than its temporary peaks in 2007 and 2018. Still way higher than in the 1980s or 1990s. It's not shrinking, it's just that other things are growing in real terms.
Jim
