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CIBC Economics

This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Avery Shenfeld: Welcome to another edition of CIBC&#8217;s economic podcast, Eyes on the Economy. I&#8217;m Avery Shenfeld, the Chief Economist of CIBC. I&#8217;m joined by Andrew Grantham, another economist in our group and an Executive Director at CIBC. And we&#8217;re here to discuss a paper that we recently put out on the efforts to bring back factory jobs to the US. And our analysis of that, which is posted on CIBC&#8217;s economic website, really asks the question, should the US actually be trying to bring back all those factory jobs? There&#8217;s a certain romanticism about factory employment, but the reality of our analysis suggests that bringing these jobs back would not in fact represent a clear improvement in American living standards. And that&#8217;s because we&#8217;re starting from a position of full employment. So this isn&#8217;t really about creating more jobs, it&#8217;s about reallocating the US workforce towards some of the manufacturing sectors that have lost share over time. So we&#8217;re going to start off, I&#8217;ll ask Andrew to comment on whether or not there is in fact room right now, either in terms of capacity, industrial capacity or in the labor market to significantly expand the U.S. manufacturing share of the economy.
Andrew Grantham: Yeah, and the simple answer of that is no, there isn&#8217;t that much capacity. We do have data available for the US as per most industrial countries, not just on employment, but on capacity use rates within the industrial sector. And what we showed looking at those is for the here and now, there really isn&#8217;t that much spare capacity in terms of the US economy. And even in some of the sectors, where there does seem to be a little bit, and we identified two areas as primary metals, maybe a little bit in the auto industry, the transportation equipment areas, even making use of that little bit of spare capacity, if they were able to do that, would only really offset about 10% of the trade deficit that the US has been running in those areas. So for the very, very near term, there is a little bit of spare capacity, not anywhere enough to displace the reliance on imports. But I think one of the things that we looked at in this paper isn&#8217;t just the short term, but it is the longer term in terms of bringing back that investment, bringing back those jobs, and whether that can or would be a good idea for the US economy.
Avery Shenfeld: And that&#8217;s certainly where the rubber would really hit the road. The question is, do we want to shift workers back to manufacturing from other areas of the economy? And the reality is that while it was true that decades ago, manufacturing jobs paid more than the average job in the overall economy, that&#8217;s no longer the case. Manufacturing average hourly earnings are in fact below those of the private sector as a whole. And that really goes to the heart of what&#8217;s happened in manufacturing in the US during these decades where it lost share of both employment and economic activity. If you look at the share of GDP and how that&#8217;s declined, there&#8217;s really two ways that could happen. One is that volumes of output declined, or it could also be that the prices of those output declined. And in fact, if you look at it, it&#8217;s mostly been a story about prices. What&#8217;s happened is that over time, the relative price of goods produced by the manufacturing sector has been declining relative to the price of services. And so, in fact, the sectors of manufacturing that shifted out of the US economy are, to the most part, ones that had below average levels of productivity, relatively weak pricing, and therefore a relatively weak ability to pay the kind of wagers that would have made manufacturing jobs more attractive than those in the service sector. We do put a romantic hue on these jobs in manufacturing. The reality is that jobs in the knowledge economy in the service sector actually pay more, particularly in the kind of jobs that shifted overseas. Now, of course, it&#8217;s maybe not the case for auto assembly, but it is the case for things like making shoes, t-shirts, low-end toys, and so on. Those are things that Americans used to do, which simply put, now produce low-cost goods and therefore are tied to relatively low wages. And if you look at other countries, Germany for example, a case in point, it has a larger manufacturing share of its economy. It&#8217;s held on to more of its manufacturing jobs. But if you actually look at living standards adjusted for inflation, they&#8217;ve grown faster in the US than in Germany. So it&#8217;s not really clear that the evidence suggests that shifting the workforce back to manufacturing from other parts of the economy would be a winner even for the workers involved in that shift. And of course, it&#8217;s clearly not a winner for consumers who would have to pay higher prices for goods that they now import. Now that&#8217;s the benefit of these kind of jobs. And basically we&#8217;re saying they&#8217;re not really there. What about the sheer issues of the number of workers that would have to be brought on board into manufacturing over time if we really were to make a dent in things like the US trade deficit on the good side? Andrew, I&#8217;ll turn it over to you to talk about what we found there.
Andrew Grantham: Yeah, and that&#8217;s a great point because as you were saying earlier, the US labor market is already quite tight. The unemployment rate is already quite low. So to do this, we would have to be shifting workers between sectors rather than necessarily filling a whole bunch of jobs from people who are unemployed. Now, this wasn&#8217;t necessarily the case 20, 25 years ago. We did have a large number of unemployed people at that time within the manufacturing sector relative to the number of job openings. But what&#8217;s happened since then is that those older manufacturing workers, they&#8217;ve aged, they&#8217;ve kind of fallen out of the labor market, they&#8217;ve maybe retrained into areas of services. So where we are today in terms of the unemployment rates, not just across the economy as a whole, but also within the manufacturing sector, they are very low relative to the number of unemployed people, is very low relative to the number of jobs that are out there. And that makes it very difficult to try and achieve this growth within the manufacturing sector. To make sure that the US economy could manufacture enough goods to become less reliant on imports to balance the trading goods, we calculated that they would need around 3.3 million workers to be able to produce enough to offset that trade deficit. That&#8217;s almost 2% of the current labor force. And given that we&#8217;re at an unemployment rate of only just above 4% right now, that is going to be extremely difficult or impossible to achieve. Now, where we did see some benefits or potential benefits in some of the sectors that are higher productivity, so these are sectors that maybe US workers wouldn&#8217;t have quite so much of a cost disadvantage or wage disadvantage too. So these are areas such as autos, metals, maybe some electronics. But even if we look at just those sectors, then the amount of people, the amount of extra workforce needed would be the equivalent of about 1.8 million workers, around 1% of the current workforce. So in order to achieve this shift in manufacturing, in order for the US economy to become less reliant on imports, even if we concentrated on just those higher productivity sectors, we would need that transition between sectors. We can&#8217;t just fill that through the current unemployed population. And as you mentioned earlier, it&#8217;s not really necessarily the case that that shift would be good for the US economy as a whole, because a lot of these service jobs that are currently being undertaken are actually very well paid and in terms of incomes that is beneficial for the US economy over these potential manufacturing jobs.
Avery Shenfeld: And the bottom line, of course, is that protectionist policies might not actually create all those jobs that the administration is aiming for in the US. Remember that when you put tariffs on other countries, they put tariffs on you. That hurts your exports. The tariffs on inputs, things like steel and semiconductors and so on, will make US exporters less competitive. So there may not actually be a job gain from this protectionism anyway. Now none of this is to say that there aren&#8217;t some non-economic reasons for the US to perhaps try to build sectors like semiconductors or defense equipment where there&#8217;s a national security interest. But bottom line here is that our study casts some doubt of whether broad tariffs on across the board of manufactured goods really make sense either in terms of trying to generate employment or whether that employment would in fact be a net gain for an economy that currently is sitting near full employment. And with that, we&#8217;ll wrap up this edition of our podcast. Until next time, we&#8217;ll be keeping our eyes on the economy and calling it as we see it.
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.

Would bringing all the factory jobs back be a winner for the US?

CIBC Economics

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Andrew Grantham

Senior Economist

CIBC

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