What Really Drives Growth in the Industrial Sector?

Although U.S. manufacturing employment has declined by 40 percent since its peak in 1979, the volume of industrial output in the United States has nearly doubled over the past 30 years. How have manufacturers been able to expand output so much, while significantly reducing headcount? Although an increase in the capital stock has helped, the most important contributor to output growth has been total … Although U.S. manufacturing employment has declined by 40 percent since its peak in 1979, the volume of industrial output in the United States has nearly doubled over the past 30 years. How have manufacturers been able to expand output so much, while significantly reducing headcount? Although an increase in the capital stock has helped, the most important contributor to output growth has been total factor productivity (TFP), which is defined as improvements in the technology that is used to combine capital and labor. Our analysis, which disaggregates overall industrial output into 19 industries, shows there is a significant relationship between the amount of information technology (IT) used in each industry and the rate of TFP growth. In addition, industries that experience the shock of a sudden decline in profitability tend to boost TFP growth in subsequent years. Thus, the recent strength in IT spending and the collapse in profits during the recent downturn argue that TFP growth in the American industrial sector should remain solid for the foreseeable future. Although a significant increase in manufacturing employment in the years ahead does not seem very likely, U.S. manufacturers should continue to be viable competitors if, as we expect, TFP growth remains strong. Thank you for your interest in Wells Fargo’s Economic Commentary by email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by email registration page: http://www.wellsfargo.com/economicsemail.