Rising Incomes Cushion Economy
Finding highly skilled workers remains a long-term challenge for manufacturers The 10th Annual Labor Day Report
Rising Incomes Cushion Economy
Finding highly skilled workers remains a long term challenge for manufacturers
Over the past year, the U.S. economy has encountered some significant challenges, such as spiraling energy prices and the steepest housing downturn in 16 years. The ongoing correction in the housing market, in particular, remains a serious problem facing the U.S. economy. Meanwhile, the fallout from turmoil in the sub-prime mortgage market continues to unfold raising significant challenges for capital markets. While the Federal Reserve has taken steps to reassure markets, it also has stated additional action may be forthcoming to mitigate the adverse economic effects arising from disruptions in financial markets. To date, the housing downturn has been offset partially by improvements in other areas, namely international trade and business investment in structures. As a result, while the pace of economic growth and job creation has moderated over the past year, the overall state of the economy, and the U.S. worker, remains fundamentally sound. Current State of the Economy. While the economy recently grew by a strong 3.4 percent in the second quarter of 2007, the U.S. GDP increased by just 1.8 percent over the past year — a little more than half as fast as the 3.2 percent rise during the previous four quarters and the second-slowest four-quarter performance since early 2003. The chief cause of this slowdown has been a pronounced decline in residential investment, where output has fallen by 15.9 percent. The effect of the housing downturn on labor conditions is discussed below. Outside of housing, GDP growth has averaged a solid 2.7 percent over the most recent four quarters — identical to the average pace (outside of housing) during the previous 18 quarters of the current expansion.
Chart 1. Current State of the Economy (Q2 2007)
Recovery
12
Expansion
Business Investment Exports
9
6
Government Overall GDP Consumer Spending
3
Percent Change (2007 Q2 SAAR)
-18 -15 -12 -9 -6 -3
0 0 3 6 9 12 15 18
-3
Imports
-6
Residential Investment
-9
Struggling Recession
-12
Source: U.S. Department of Commerce
Percent Change (Q2 2006 to Q2 2007)
As Chart 1 shows, the economy remains in an expansionary mode. While residential housing is clearly in recession, this downturn is offset by strong growth in exports and business investment, as well as moderate growth in consumer and government spending. This composition of growth has had a major impact on America’s workforce within manufacturing and in other sectors of the economy (see section on Employment by Industry below.)
Incomes on the Rise. While job creation has slowed (1.9 million jobs created in the 12 months ending July 2007 compared to 2.3 million jobs created during the previous 12 months), economic growth has been strong enough to continue to push down the unemployment rate modestly from 4.8 percent in July 2006 to 4.6 percent in July 2007. As a consequence, the labor market has further tightened from the cyclical peak of 6.3 percent reached four years ago. This has been good news for the American worker. Tight labor markets force firms to compete for a scarce supply of available workers, which tends to put upward pressure on wages. And that is exactly what has happened.
Table 1. Percent Change in Real (Inflation-Adjusted) Income Measures 2nd Quarter 2005 to 2nd Quarter 2006 0.1 2.4 -0.2 -2.5 2nd Quarter 2006 to 2nd Quarter 2007 1.6 3.1 2.4 3.4
Private sector average hourly wages (1) Disposable income (2) Nonfarm business hourly compensation (3) Manufacturing hourly compensation (3)
(1) Private production and non-supervisory workers (July 05-06 and July 06-07) (2) After-tax income from wages and salaries and other personal income from supplements, proprietors' income, rental income, income on assets and contributions from social insurance (3) Incudes wage and non-wage compensation, such as employer contributions benefits Source: NAM calculations from U.S. Departments of Commerce and Labor data
One year ago, while the economy was creating a greater number of jobs overall, wages were not keeping up with inflation. Due in part to a 20 percent rise in energy prices, the overall inflation rate (CPI) one year ago was running at a 12-month rate of more than 4 percent. By contrast, over the 12 months ending in July 2007, the CPI was up just 2.4 percent. This deceleration in inflation has paid dividends for working Americans. As shown in Table 1, worker pay is on the rise. After adjusting for inflation, private sector average hourly wages are up 1.6 percent over the past year, a significant improvement from a year ago, when wages were stagnant. A year ago, roughly half (49 percent, or 55 million) of workers in the private sector experienced real wage gains. More recently, 82 percent (95 million) of the private sector workforce received real wage gains over the past 12 months. This marks the broadest gain in real wages since 2000, when 95 percent of the workforce experienced real wage gains (See Chart 2). In fact, during the past 12 months only three industry sectors experienced declines in real wages: retail trade, transportation and
Table 2. Real Wage Growth by Industry July 2005 July 2006 to July to July 2006 2007 Difference 0.1% 1.6% 1.5% 1.8% 2.0% 0.3% -1.2% 1.9% 3.1% -2.8% 0.7% 3.5% 0.9% 0.6% -0.3% -1.2% -2.1% 0.9% 0.2% -0.3% -0.5% -1.7% -1.6% 0.2% 1.3% 0.3% -1.0% 0.9% 2.2% 1.2% 2.8% 3.5% 0.7% -0.3% 1.4% 1.7% -0.1% 5.0% 5.1% -1.2% 1.1% 2.3%
Total private employment Natural resources and mining Construction Manufacturing Wholesale trade Retail trade Transportation and warehousing Utilities Information Finance industries Professional and business services Education and health services Leisure and hospitality Other services
Source: NAM calculations from U.S. Department of Labor data
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warehousing and utilities (See Table 2.) This positive trend extends to other broader forms of worker compensation, including disposable personal income and hourly compensation, which includes employer-provided benefits. Real manufacturing hourly compensation has increased 3.4 percent over the most recent four quarters — the fastest pace in three and a half years. To some degree, this is a case of history repeating itself: it was not until the unemployment rate moderated over a similar four-year period (1992-1996) that real wage growth began to take place during the expansion in the 1990s. This increase in real incomes could not come at a more opportune time. During the past few years, homeowners used rising home equity values to finance consumer purchases. Now, with housing prices on the decline, home equity borrowing has evaporated. Going forward, consumer purchases will depend more on income growth. With income growth now accelerating, consumer spending likely will continue to expand in the near term, albeit slower than the 3.1 percent pace achieved during the past four years. The low unemployment does add one more worry to U.S. manufacturers in the face of tough global competition. Because more than 97 percent of those in the labor force with at least some college are already employed, finding qualified workers is becoming more difficult. An NAM member survey conducted this summer found that “trouble finding qualified workers” ranks only behind the “cost of health care” as the most serious problem facing manufacturers. Demand for skilled workers will continue to grow as manufacturers continue to innovate in order to remain competitive in the global economy. To supply these workers, the United States must improve the quality of education and improve job training programs to address the demands of training and retraining workers. See the Challenges Going Forward section below.
Chart 2. Unemployment and Real Wage Growth
Share of Private Sector Workforce Getting Real Wage Increases 100% 90% 80%
Unemployment Rate (Percent) 8
7
6 70% 60% 50% 40% 30% 2 20% 10% 0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 1 5
4
3
0 July 06 to July 07
Source: NAM calculations from Labor Department data
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Business Investment and Trade Improving. Two factors that have also partially offset the housing downturn have been an improvement in the balance of trade and strong growth in business investment (particularly structures). Aided by a more competitive dollar and solid economic growth in Asia, Europe and Latin America, U.S. exports have grown by a strong 6.8 percent over the past year. At the same time, imports into the United States have increased just 2 percent. As a result, the trade deficit has narrowed from nearly 6 percent of GDP one year ago to 5.2 percent in the second quarter of 2007 — the lowest level in three years. Continued solid growth in business investment also has buttressed the economy against the housing downturn. Led by business structures, which have grown at an average annual rate of 13 percent over the past year and a half, business investment has increased by 3.4 percent over the past four quarters. These improvements have been good news for the manufacturing sector, where certain industries have been severely hurt by the housing downturn. Employment by Industry. As discussed earlier, employment growth has slowed over the past year compared to the 2005-2006 time frame. Private sector employment has grown by just 1.6 million over the past 12 months. This is half a million fewer jobs than were created this time last year (see Table 3) and the slowest pace in roughly three years.
Table 3. Change in Employment by Industry
(employment in thousands) July 2005 to July 2006 to July 2006 July 2007 Difference 2,315 1,870 -445 2,168 1,633 -535 64 33 -31 355 -53 -408 8 -175 -183 169 -98 -267 -161 -77 84 132 118 -13.7 -40 73 113.1 101 64 -37 -6 7 12.5 -15 48 63 171 90 -81.6 47 32 -15.1 619 334 -285 415 568 153 297 436 139 22 59 37 147 237 90 Manufacturing production employment detail July 2006 to July 2007 -98 -65.7 -36 -30.4 -22.1 -15.6 -11.3 -10.3 -7.6 -6.9 -2.2 -1.4 -0.7 0.2 4.4 5.2 6.7 8.5 23.6 26.9 35.9
Total nonfarm employment Total private employment Natural resources and mining Construction Manufacturing Production Employment (detail to left) Nonproduction Employment Wholesale trade Retail trade Transportation and warehousing Utilities Information Finance and insurance Real estate and rental and leasing Professional and business services Education and health services Leisure and hospitality Other services Government Source: U.S. Department of Labor
Manufacturing Motor vehicles and parts Wood products Textile and Textile Products Furniture and related products Apparel Computer and electronic products Primary metals Nonmetallic mineral products Paper and paper products Plastics and rubber products Printing and related support activities Leather and allied products Petroleum and coal products Chemicals Electrical equipment and appliances Fabricated metal products Miscellaneous manufacturing Machinery Aerospace and misc transportation equipment Food, Beverge and Tobacco manufacturing
The housing downturn has been primarily responsible for the slowdown in private sector employment growth over the past year. It has hit the construction and manufacturing industries very hard and resulted in significant job losses. However, it is important to note that outside of construction and manufacturing, private sector employment has increased by 1.9 million over the past year, which is 56,000 more than during the prior 12 months. This is a positive sign that the housing correction has not yet had a significant negative impact on other sectors of the economy, outside of some construction and manufacturing industries. After increasing by 355,000 over the previous year, construction employment fell by 53,000 over the past 12 months, a difference of more than 400,000. Two-thirds of this change has been in residential 4
construction employment, which has fallen by 117,000 since last July after increasing by 147,000 the previous year. The impact of the housing downturn also has extended to the manufacturing sector. After increasing by 169,000 during the previous twelve months, manufacturing production employment (employment most-closely tied to output) fell by 98,000 from July 2009 to July 2007 (see Table 3). Of the 20 major manufacturing industries, 12 collectively reduced employment by 210,000. Nearly half (46 percent) of these job losses were concentrated in four industries (wood products, nonmetallic minerals, furniture and textile products) that are closely connected to the housing market. Together, these industries have shed 96,000 jobs over the past year. In addition, because of increased import competition and slowing demand, motor vehicle employment has fallen by nearly 66,000 since last July. At the same time, production employment has increased by more than 11,000 in eight manufacturing industries over the past year. More than three-quarters of these job increases have been concentrated in machinery, aerospace and food product manufacturing. Improvements in trade conditions have likely helped these three industries, each of which has experienced double-digit export growth over the past year. Challenges Going Forward. As the most internationally engaged sector of the economy, U.S. manufacturers have increasingly relied on innovation, flexibility and creativity to remain the leading manufacturing nation in the world. To do this, manufacturing has transformed into a high-productivity workplace. Thirty years ago, a majority of manufacturing production workers did not have a high school degree. Today, that number is just one in five. Today’s modern manufacturing workplace demands a highly specialized and skilled workforce. This is one of the reasons why the average yearly compensation in manufacturing rose to $68,860 for a full-time worker last year, which is nearly 30 percent higher than the average compensation of $53,500 in the rest of the private workforce. With more than 97 percent of those in the labor force with at least some college or an associates degree already employed, the availability of skilled labor is in short supply. The challenge of finding qualified workers, however, is not just a cyclical annoyance, but a serious long-term problem. In fact, according to the NAM’s 2007 Small and Medium Manufacturing Operating Survey, “trouble finding qualified workers” ranks only behind the “cost of health care” as the most serious problem facing manufacturers. America spends more than $403 billion each year on elementary and secondary public education to prepare students to compete in a global workforce. Unfortunately, education and job training programs are not aligned to meet the skills required for the 21st century workforce, which is clearly evident in the decline in U.S. students who study science and engineering and the simultaneous increased reliance on foreign students to populate U.S. graduate enrollment in math, science and engineering. This becomes more worrisome when one considers that the current science and engineering workforce is nearing retirement. More money is not the answer. Our education and training system need to be transformed to meet the demands of the 21st century. Demand for skilled workers will continue to grow as manufacturers continue to innovate in order to remain competitive in the global economy. To supply these workers, the United States must improve the quality of education in the primary, secondary and post-secondary school systems, and improve job training programs to address the demands of training and retraining workers. 5
The NAM has outlined four key principles that embrace manufacturers’ needs and set the direction necessary to reform our current education system: • • • • access to a high-performance workforce, alignment between our education and training systems and business needs, support for lifelong learning to maintain our skilled workforce and accountability to ensure results are achieved.
You can view the National Association of Manufacturers’ (NAM) comprehensive legislative proposal to address this growing problem at www.nam.org/highperformanceworkforce. In response to America’s growing human capital challenges, The Manufacturing Institute/Center for Workforce Success – the NAM’s research, education and workforce arm – has two signature initiatives: Dream It. Do It. and the Business Champions for a 21st Century Workforce. They are designed to foster growth, innovation, and jobs through youth-oriented awareness and workforce-focused education. Dream It. Do It. builds entrepreneurial regional alliances to attract and prepare the next generation of manufacturing talent and the Business Champions engage business leadership across the country to actively speak out and support policies that expand educational opportunities aimed at building a competitive U.S. workforce. For more information about how to get involved, visit www.nam.org/workforce.
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The National Association of Manufacturers is the nation’s largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 states. Headquartered in Washington, D.C., the NAM has 10 additional offices across the country. Visit the NAM’s award-winning web site at www.nam.org for more information about manufacturing and the economy.
1331 Pennsylvania Avenue, NW • Washington, DC 20004-1790 • (202) 637-3000 • Fax: (202) 637-3182 www.nam.org