US Manufacturing Employment

Paul Krugman has an editorial this morning expressing some optimism about US manufacturing and manufacturing employment in particular:

By the middle years of the last decade, I used to joke that Americans made a living by selling each other houses, which they paid for with money borrowed from China. Manufacturing, once America’s greatest strength, seemed to be in terminal decline.

But that may be changing. Manufacturing is one of the bright spots of a generally disappointing recovery, and there are signs — preliminary, but hopeful, nonetheless — that a sustained comeback may be under way.

and

The story so far: In the 1990s, U.S. manufacturing employment was more or less steady. After 2000, however, it entered a steep decline. The 2001 recession hit industry hard, while the bubble-fueled expansion of the decade’s middle years — an expansion marked by a huge rise in the trade deficit — left manufacturing behind. By December 2007, there were 3.5 million fewer U.S. manufacturing workers than there had been in 2000; millions more jobs disappeared in the slump that followed.

Only a handful of these lost jobs have come back, so far. But, as I said, there are indications of a turnaround.

Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline. The Boston Consulting Group, which is now predicting a U.S. “manufacturing renaissance,” points to major U.S. firms like Caterpillar that once shifted production abroad but are now moving it back. At the same time, companies from other countries, especially European firms, are moving production to America.

As context for this discussion, I looked at the BLS data for manufacturing employment, and normalized it with the civilian non-institutional population over age 20.  This is the result (along with recession bars in pale blue/grey):

You can see that this fraction has been declining since about 1970.  It's worst in recessions.  It used to recover somewhat between recessions, but since the 1980s it's tended to be flat or declining even during recoveries.  Krugman is quite right that it was worse in the 2000s than in the 1990s.  It's also true that its performance after the great recession is slightly better.  However, it's only flat - it's not actually recovering.

I don't personally see much medium term cause for optimism here.  The reason the 2000s were worse than the 1990s was the huge explosion of manufacturing in China.  Here's the BLS data for Chinese manufacturing wages as a percentage of US manufacturing wages:

In 2008, it was up to 4.2 cents on the dollar.  It is growing rapidly - 20-30% a year - but starting from such a small base, it's still going to be decades before it equalizes.  As long as there is such a massive gap, US manufacturing is going to continue to erode more years than not, and it will take a far greater collapse in the dollar to stop that trend.  Admittedly, that cannot be ruled out in coming decades.

If you were just to do the simplest thing and extrapolate the trend of the past 40 years, that suggests US manufacturing employment would reach zero some time in the 2030s:

Of course, many things could intervene to prevent that: some kind of revolution in China, a collapse of the US dollar, a shift to protectionism in the US: these are just a few examples.  But, absent a really big shift like that, I doubt this trend is going to turn around in the near future on account of moderate changes in the value of the dollar.