Job boom in the manufacturing sector: History says it likely won't last

Summary

The number of factory jobs climbed steadily between the late 1930s and 1979. The ncutbacks started, with the manufacturing sector shedding more than eight million jobson balance over the subsequent thirty years.

The financial health of the manufacturing sector had deteriorated significantly by thelate 1970s. Unit labor costs were surging and profit margins were shrinking.

The manufacturing sector faced two more challenges in the 1990s: NAFTA and theemergence of China as a low-cost center of production. American manufacturer sincreasingly substituted capital for labor to increase local production.

These rationalization efforts helped to improve the financial health of the manufacturing sector. Unit labor costs fiattened throughout the 1990s and the firstdecade of the 21st century.

Manufacturing employment has recently enjoyed a renaissance of sorts with payrollsrising by 1.3 million over the course of the last decade.

But productivity growth in the manufacturing sector has been anemic, unit labor costshave shot higher again and profit margins appear to be narrowing.

Manufacturing employment likely will continue to grow, at least in the near term.Producers have hefty backorders and job openings in the sector have surged.

But there are signs that manufacturers are beginning to ramp up capital spendingagain. We suspect that another secular round of capital deepening in the manufacturing sector, which would reverse the fiattening in the capital-to-labor ratiothat occurred in the past decade, is in the offng.

We do not think that manufacturing payrolls will go into reverse, but we believe that manufacturing employment will be hard-pressed to match the gains of the pastdecade in the 2020s. 

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