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Manufacturing, Services, and the American Worker - June 5, 2018

Back on May 15, we wrote briefly on the difficulties in balancing disparate data from equally credible sources. Another challenge is breaking down extremely broad questions, such as “What’s the state of the American worker?”.

If Trumpian rhetoric is to be believed, the easy way to figure this out is to look at manufacturing. We’ve examined this relationship in past TFTDs, finding that Manufacturing is strongly related to Industrial Production, as well as the ratio of Employee Compensation to GDP. Given these correlations, does the most recent NFP data, in which Manufacturing jobs missed expectations while overall payroll beat, imply that the blue-collar worker is being left behind? Does the IHS Markit PMI data released today, indicate the same thing? That report said,

“The US economy kicked up a gear in May. A markedly improved service sector performance takes the final composite PMI reading above the flash estimate and to its highest for over three years. The composite PMI is a reliable leading indicator of GDP, and has risen to a level which is consistent with the economy growing at an annualised rate of approximately 3.5%.”

Perhaps not. First, while Manufacturing Job Openings may be at a 17-year high, the job numbers may have been muted by a lack of supply of workers. As Steve LeVine of Axios highlighted in an article last week,

“For the first time in a decade, the U.S. worker shortage is so pronounced that it is visible in suppressed aggregate hiring numbers, economists say, and it will probably become worse.”

Additionally, historical relationships may be in flux. As a 2017 study produced by Georgetown University points out,

“Traditionally, many people with good jobs that pay without a BA have worked in manufacturing. Those jobs are declining while the number of good jobs in skilled-services industries, such as health services and financial services, is increasing.”

Looking across all 50 states, from 1991 to 2015,

“Even with the job losses in manufacturing, blue-collar jobs rose in 23 states because of growth in construction and blue-collar industries other than manufacturing.”

So if there is massive demand and widespread job growth, why aren’t wages increasing rapidly? As the Kansas fed drily argued in a recent paper,

“[T]he current pace of wage growth is not historically unusual. Our results suggest wage growth may continue on its gradual path as long as the incidence of wage rigidities [, individuals whose nominal wage is unchanged YoY,] remains elevated.”

Wages will go up when people see increased wages? Seems to us that it always rains after a dry spell.

P.S. Things may also be in flux for young people with a B.A., who didn’t see an increase in median salary from 2010 to 2016, who may have a degree that isn’t quite as in vogue as it used to be, and who may have been hired for a job that doesn’t really require a four-year degree.