Manufacturing's "demise"

Aditya Chakrabortty says UK manufacturing is in "demise". Tim Worstall says it ain't. Who's right?

It depends.

My chart shows manufacturing output since 1970. This shows that Tim is right in the sense that output is higher now than it was at any time before 1988. We're producing more now than we were in the 1960s or 70s, even though manufacturing jobs have halved since then.

However, in another sense Aditya is right. Output has actually fallen slightly since the late 80s; it's actually done even worse than agriculture in this time. This is not merely because we're comparing different points of the economic "cycle." At its low-point in 2009Q3, output was exactly the same as it was in at the low-point of the 1991 recession.

But of course, any comparison of two points is subject to sampling error. Maybe we've had some good luck in recent years, in which case the data overstates the fate of maufacturing. Or maybe we've had some bad, in which case it understates manufacturing's health.

We can measure this by estimating the standard error of trend growth rates. This tells us that in the last 25 years, trend growth has been zero per cent per year, with a standard error of 0.66 percentage points. So maybe Tim's right, maybe Aditya is.

Over the last 50 years, manufacturing output has grown by 0.7% per year, with a standard error of 0.6%. This means that although Tim is probably right over this period, there's a roughly 7-1 chance that Aditya is.

The point here is a simple one, but more familiar to scientists than partisans - that in noisy data even basic inferences are tricky.

Does this matter? I'm not sure. On the one hand, I'm not sure there's much to mourn in the decline of manufacturing jobs; very many of these were tedious, noisy and dangerous.

But on the other hand, perhaps we should worry about relative weakness in the production of internationally tradeable goods. Our large trade deficit is accompanied by a big general external deficit. And this could well be something to worry about, either because (when accompanied by high unemployment) it is a sign of a mismatch between demand and supply, or because it's a sign that domestic debt is rising.

Comments

[Neil Wilson]

"But on the other hand, perhaps we should worry about relative weakness in the production of internationally tradeable goods."

Or perhaps we should look at what we have that is internationally tradeable.

Many countries appear to have a new constitution every second Thursday. Ours is at least three hundred years old, with a stable legal system and operational government.

To a foreigner, that is valuable. And we underestimate its worth.

[Luis Enrique]

if we are talking about production, Tim is right because "actually fallen slightly" is not close to "demise"

Tim focusses on the implications of productivity increases for employment, but I think we should also expect manufactured goods to shrink in relative terms on the demand side too. As we get richer, I'd expect us to spend relatively more on intangible goods and services.

[Dave Timoney]

Re Luis's comment: "As we get richer, I'd expect us to spend relatively more on intangible goods and services". Kinda, sorta.

Economic development can be simplified to a tale of shifts from low productivity / low wage (but high employment) sectors like agriculture to manufacturing. The last 50 years is characterised by many as a shift in turn from agriculture to government and services, which in turn are now facing productivity challenges.

However, what this neglects is that economic activity often spans sectors (tractors are manufactured), and that this compositional complexity is increasing (which may reflect that the sectoral taxonomy is increasingly irrelevant).

A lot of recent growth in manufacturing has been due to the increasing value of support and maintenance services. In ICT, the cost of hardware shrinks as software (a sectoral grey area) and associated services expands, but it all actually depends on that ever cheaper hardware.

As we get richer, we spend relatively more on complex goods that mix the tangible and the intangible.

[Deviation From The Mean]

I think it is wrong to look at this in just absolute terms.

Uk manufacturing, in comparison with the other main players, has growed the slowest between 1980-2010. So from a relative point of view it is falling behind. The growth in demand in places like China and India should also be factored in.

Some experts are predicting that the UK will fall further down the international table (and outside the top 10).

The rate of expansion since the ConDems gained power has been the second lowest in the top 15 (only Spain has done worse).

Add to this that in terms of recovering GDP since the 2007 'crisis' the UK has performed the worst, and that workers in the UK have seen the biggest reduction in income, the story is one of ConDem failure.

[Simon Reynolds]

Surely Deviation From The Mean is right about the need to look beyond absolute terms.

So the manufacturing index today is roughly where it was in 1988/89. But according to the ONS the UK's real GDP is around 70% higher today than it was then.

Looks like a relative decline in manufacturing to me. Demise, in the sense of termination or death, is probably overstating it a bit.

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2013/tsd-quarterly-national-accounts--q3-2013.html

[Geoff Winn]

Could someone explain how "Manufacturing output" is actually measured? Or point me to an explanation?

If it's the value of goods produced then that's going to fluctuate wildly with inflation, raw material prices, technology shifts and so on. For example, a bicycle manufacturer might produce the exact same number of bikes in two consecutive years and yet show "increased" output because the price went up. Or "decreased" output because competition drove the price down. Yet the actual physical output is in fact exactly the same.

If it's measured in "constant" currency then it depends heavily on whoever chooses the fudge factor to convert current prices to whatever counts as constant.

If it's not measured in currency then what on earth is it? Tons of coal? Units of cars? House bricks?

It seems a very dodgy number. Especially over a 40+ year period where the nature of what is being produced has changed so much.

[Simon Reynolds]

@Geoff

Good point. I found that reading the following was a good start to understanding the "how is production measured" question:

http://www.ons.gov.uk/ons/guide-method/method-quality/specific/economy/index-of-production/index-of-production-overview.pdf

[Geoff Winn]

@Simon

Thank you. That will take a while to digest :-)

[Metatone]

Worth noting that the big issues here are actually:

1) As chris notes - internationally tradeable goods.
(All the more so while we're dedicated to be an energy importer.)

2) What is the industrial ecosystem? Many services go to consumers, these can be supported by internationally tradeable services.

e.g. The City of London has lots of expensive food and drink venues.

However, many services wither when there are no local firms. The story of British light engineering is a constant battle against decline, where they have no local customers left and so are always vulnerable to exchange swings etc. when dealing with their new export customers…

Finally of course, the long term health of the City is basically doomed if Britain can't sort it's economy out. If there are no local pools of non-financial-sector money, then eventually the financial services firms have to move to where the local pools are...