Goodness me, could this be industrial disease ?’

This morning has seen some developments in a theme which has been building up over the past year or so. It is the issue of how production and particularly manufacturing is struggling in quite a few parts of the first world. Back on the 2nd of December last year I put it like this.

Some of this is no doubt a shift to countries with cheaper labour forces but there seems to be a bit of a tectonic plate shift as well. Or as my Dire Straits musical reference of October 7th put it.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease

I pointed out back then that this may be the beginnings of something of a post industrial society as economies move towards the service sector. In the UK this  “rebalancing” has been particularly pronounced in the credit crunch era albeit that it has moved in exactly the opposite direction to that promised by the former Bank of England Governor Baron King of Lothbury.

Production output fell between 2011 and 2013 to below levels seen at the height of the downturn in 2009……..Although there has generally been growth across all major components of GDP since the start of 2013, the services industries remain the largest and steadiest contributor to economic growth.

If we take the first quarter of 2008 as our benchmark then services are at 112.6 whilst production is at 90 and manufacturing at 93.2. The numbers speak for themselves and there is a particular irony in production actually falling as Baron King was trumpeting exactly the reverse as a result of the fall in the UK Pound £ ( circa 25% in around 2008) he was so keen on. As we assimilate this then we are left with the thought that by now services must be 4/5 ths of our economy as the 78.6% official estimate is from 2012. Oh and speaking of assimilation is the service sector like this?

We… are Borg. You will be assimilated. Resistance is futile.

For the UK the latest official data for manufacturing is for February and it told us this in annual terms.

The largest contribution to the fall came from manufacturing, which decreased by 1.8%. This was the largest fall since July 2013, when it fell by an equal amount.

The mood music or business surveys are sadly hammering out the same beat as we see below.

The UK Manufacturing PMI fell below its critical 50.0 mark for the first time in over three years in April…….On this evidence manufacturing production is now falling at a quarterly pace of around 1%.

This Morning

Germany

This was a particularly interesting addition to the list as the official data was as follows.

In March 2016,production in industry was down by 1.3% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In February 2016, the corrected figure shows a decreased of 0.7% (primary –0.5%) from January 2016.

If we look to the underlying index we see that rather than the expected growth it at 109 in March is only just above the 108.8 of March 2015 showing that on current trends there is a danger of year on year falls. This is significant because as you can see from the 9% growth since 2010 until now German manufacturing had been rumbling forwards.

As to the business surveys well they are downbeat too.

the German manufacturing sector remains stuck in a low gear at the start of the second quarter. (Markit)

La Belle France

The statistics office was up early to tell us this.

In March 2016, output decreased sharply again in the manufacturing industry (-0.9% after -1.4% in February)…..Over the first quarter of 2016, output diminished in the manufacturing industry (-0.7% q-o-q)

This is becoming a familiar state of play although there are individual differences as for example annual growth in France remains more positive at 0.9%. Although over the credit crunch era it has not done as well as Germany as growth since 2010 has been a mere 1.2%. If we move to the Markit business surveys we get more gloom.

“The French manufacturing sector slipped further into contraction during April, precipitated by a steeper reduction in new order intakes.”

Greece

The bad news just keeps on coming here as you can see from this morning’s official communique.

Manufacturing production decreased by 2.5% (working day adjusted)

This adds to the disappointing survey data I looked at only yesterday and opens the door to a further decline in something which had previously seen some flickerings of hope.

The United States

If German manufacturing is an engine for Euro area growth then manufacturing in the United States has a similar role for the world economy. I pointed out last December that revisions had meant the past was no longer as good as it had been reported and now we see this.

Manufacturing output decreased 0.3 percent in March…..For the first quarter, manufacturing output moved up at an annual rate of 0.6 percent, roughly reversing its small decrease in the fourth quarter of last year.

So the sector is treading water overall maybe as we note on a monthly basis 2016 has gone 0.4%,-0.1% and now -0.3%. Oh and this year’s annual revision again told us that the past was not as good as we had been told.

The revised, smaller increases for manufacturing for 2014 and 2015 resulted from rates of change for many durable and nondurable goods industries that are lower than reported earlier.

Looking forwards the JP Morgan business survey was not optimistic.

April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth…….Output volumes were close to stagnation in April, with the latest survey pointing to the weakest rise since the current period of expansion began in October 2009.

Comment

There is much to consider here and there is an element of the world changing. What I mean by this is the inexorable rise of the service sector which can be illustrated by the music industry. Last week the Financial Times reported this about Warner Music.

Warner Music Group has become the first major record company to report that streaming has become its largest source of revenue, surpassing sales of physical formats such as CDs and vinyl……..Overall digital revenue increased 20 per cent to $328m, offsetting declines in physical formats.

Thus a service replaces something which is physically produced. The online stream or cloud replaces the physical production and possession of an acetate ( reads better I think than LP…) or a CD or if we stretch our memories a cassette or cartridge. If I may divert for a moment this illustrates another theme where we rent rather than own things (which in itself is a reversion to say the 1970s intriguingly when we were poorer…) which is of consequence for those who have read the recent Apple I-Tunes stole my music blog. There are gains  in not having to physically store things and use up scarce resources in production but also losses often in terms of the music’s quality ( I mean bits per second here) and matters like album sleeve art such as the prism on the cover of Dark Side of the Moon. Oh and has actual music quality fallen too and is that a coincidence?

But as well as that above there is a  secular or tectonic plate shift to cheaper emerging economies. Also if we are to pursue the Holy Grail of annual economic growth combined with finite resources then until we can mine asteroids,comets and planets then manufacturing has to see a relative decline.

Perhaps also we need to double-check how we define manufacturing…..

 

 

 

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24 thoughts on “Goodness me, could this be industrial disease ?’

  1. Shaun, I think your last sentence hits the nail on the head – what is manufacturing in the 21st century? If I take raw materials, convert it into iron and make something and sell it to you it is manufacturing. If I take other raw materials and make a meal and sell it to you it is service sector. There are many other examples of where the lines are blurred and as our life styles and markets evolve we will indeed need to rethink the definition of manufacturing.

    • Hi Pavlaki

      I wanted to put some lyrics to the song Blurred Lines in but they did not quite work. As a more serious point I agree with you and have been wondering for a while if the definition of the service sector has seen the equivalent of what the military call mission creep? There was the situation a year ago when a £1-2 billion business was switched into construction to balance things out and that of course poses its own questions.

      I will make a formal enquiry to the ONS.

  2. The shift to a more service based economy is something we’ve come to expect but one thing you don’t mention is how much may be due to offshoring to China et al.

    The simple transfer of manufacturing overseas would automatically shift the pendulum towards services but this could be termed as “bad” rather than evolutionary as you are painting it. One cannot rid oneself of the suspicion that we have had a process of deindustrialisation since the early 1980s and this has not been evolutionary but more the result of a very open economy completely sold on the idea of comparative advantage. The result is that we are certainly more services biased but that may not be a good thing.

    Also the outsourcing of some functions such as security and administration automatically boost the service sector and reduce manufacturing whereas previously they would be included in manufacturing alone.

    • Hi BobJ

      The definitional issue is one that needs looking into as I have already replied to Pavlaki. It is now on my to do list! I thought I had covered off the offshoring bit in my last paragraph so let me make it clear I agree with you. Japan for example did this in Thailand (then in the way of luck for Japan now saw floods there….).

      So we find some good moves but also some not so good.

  3. I was looking at the distinction between manufacturing and services some years ago, and found to my surprise that the biggest service sector in the UK economy is Government Services. Followed (if I remember aright) by financial services, retail services, transport etc.

    I also observed that many manufactured goods are sold with service component (eg a guarantee).

    I came to the conclusion that the real distinction lies between “wealth generating” activities and “wealth circulating” activities. Thus, “manufacturing” creates new value and adds to the total wealth in the economy: whereas “services” transfer value from one actor to another and drive the circulation of wealth around the economy.

    The world has moved on a long way since then: but this still seems a useful distinction.

    • Hi ChrisSW and welcome to my corner of the online world.

      You got me wondering what the current state of play was in UK services. You may be amused to discover that the January update tells us that the weights in the period 1997 to 2015 all add up to 1000. Thanks for that ONS!

      I have tracked down a basic breakdown. Business services and finance 40%, Government services 30%, Distribution hotels & restaurants 17% and Transport,storage and communication 13%.

      A sector which has boomed is the one below which could have at least some components in construction and manufacturing.

      “architectural and engineering activities; technical testing and analysis ”

      Compared to 1997 at 100 it is at 241.4 whereas the overall measure is at 165.1 so there could be more than a few worms in this can so to speak.

    • You make a very good point about added value, Chris.
      Adding value is the real wealth creator.

      I think it was Mrs Thatcher who opined that we would never be wealthy if we all ‘just did each other’s washing(laundry)’ for a living.

  4. Hi Shaun
    The more I think of manufacturing
    and production, the more anomalies I see.
    3d printing seems the next big
    thing and while the printers and raw materials
    they use are manufacture, what of the design
    software? If you separated robotics from what
    people actually produce I think it would be
    staggering.

    JRH

  5. hello shaun ,

    I read that cassettes and records are making a come back

    but with the music theme – making a guitar is manufacturing and a gig is a service is it not ?

    thanks god for gaffer tape !

    but gaffer tape is a good and its use is a service ,hmm

    you cannot run an economy on taking in each others washing – doesnt work

    sure you might not need many people to make things – but they still need to be made – including the feed stock to 3d printers . I view that as just local manufacturing on small scale . After all its a self employed business man making widgets to sell to other people

    paintings are worth more if they are bigger , or smaller with thicker paint 😉

    so ? its what is made and sold isnt it , and we aint doing so well according the papers today – ho ho

    and remember you can impute services but you can’t impute a car or ipod *

    Forbin

    * no doubt I’ll be proved wrong

    PS: imputed popcorn does not fill you up – a service then ?

    • Hi Forbin

      I prefer the LP myself as there were always issues with cassettes. Mind you back in the day they did provide the ability to take music around with you although I would have needed a rucksack for what my MP3 player has on it! My player is a Walkman which is what I used then albeit of a different technology.

      3D printing is a good point and it reminds me of the Replicator machines on Star Trek. Some technology is really on the march isn’t it and as so many have replied today the lines are becoming increasingly blurred.

      What about 3D printed popcorn?

  6. The problem is “Globalisation”.
    What this actually means is capital taking advantage of sweat labour, wherever in the World, to maximise profit at the expense of wages.
    It’s just another way to redistribute wealth upwards, as is “Free Trade”.
    The people of developed economies don’t need it; the people being exploited do not benefit.
    We should immediately impose tariffs on all imported goods where the only advantage is labour costs, to create a level playing field.

    • I lived and worked in Asia from mid 80’s through to mid 90’s when there was a huge shift in manufacturing from the west to south east Asia . It had enormous benefit to the countries involved and lifted huge sections of their populations out of poverty and created a demand for professional and technical expertise. These people did well working for multinationationals and many went on to found their own businesses and to use the skills they had developed employed by western companies. Singapore Inc in particular became better at business than the companies who originally taught them! Thailand and Malaysia developed sophisticated manufacturing of their own and the region is now an industrial powerhouse. This is also happening in China although my experience there is less than S.E.A. Not all low cost manufacturing is bad.

      • South Korea was selling cargo ships at a lower price than the cost of steel to build them, such was the level of Govt. subsidy.
        Not all low cost manufacturing is good.

  7. Build 10 cars that 10 people use – industry

    Build 5 self driving cars that 10 people use – industry + Service

    Industry loses 50% and services gain, but the gain from services is not going to offset the total fall in output. Bad for nominal gdp but everybody are better off as long as the efficiency gains are offset by higher demand for other goods and services.

    What we have now is both demographically and policy (taxation, redistribution, public investment) driven slump in demand. Old people have all the stuff they need and more. They want services, experiences, care.

    Services mostly are produced locally and are insensitive to exchange rate fluctuations. If services are in demand and goods are not generally speaking, then lowering exchange rate will not help. And in fact if prices are falling due to exchange rate appreciation, then it would benefit more that which is in demand – services – and hurt less that which probably would lose anyway – manufacturing.

    Who gets to post-industrial economy first, while maintaining viable manufacturing to supply the services with self-driving cars and whatnot, that’s not a bad place to be. You may get there faster if you lose ideas of past – that we need 10 cars for 10 people – and losing the race to bottom in controlled fashion may prove to be as good a way to achieve that as any.

    • but the young cant afford to buy a car or a house or much else

      they have to pay off the uni fees , save for a deposit for a cardboard box thats inflating its way out of the solar system

      and if they do have any pennies left over for a pension – its giving -3% returns !

      the post industrial economy thats emerging is a fuedal one

      and England is leading the way!

      Forbin

      PS services are great if you can sell them abroad – mostly yu cant- so no income then to support seriviced based economy

      you must be able to make something to sell it abroad – we are even tarmacing the feilds for more houses ! heh!

    • I fail to see how exchange rate appreciation would benefit services when, as you have explained (and I agree with) services are difficult to export/import.

      Please explain the relationship you allude to.

      • Indirectly by raising real income via lower import prices. Lower import prices hit the consumer relatively quickly. But lower exchange rate will lead to higher exports only through delay – possibly years – and while that foreign demand is building up, you’re suffering the immediate consequences of higher import prices, lower demand for domestic products and services.

  8. The software sector seems to need staff. Britain appears to have many more progrramming vacancies than Germany and France even fewer.

    As cars and complicated industrial machinery require more complex control software, Germany’s advantages in precision manufacturing diminish. The bureaucracy needed to test mechanical parts that stay in a car for 10 years is very different to managing the production software components that need to interact. Expect lots of technologic disruption. Computing services are growing and providing well paid employment. Many new IT job classifications didn’t exist 15 years ago.

    • Hi ExpatInBG

      Your software point is an example of something I was suggesting earlier which is that some of the ground needs to be made via education. We could put all that university training to better use although we might have to train up a few more lecturers etc first.

      The new era of robotics awaits us. I hope they remember Isaac Asimovs 3 laws so that we have many more triumphs than disasters in the years ahead.

      • They need to start with merit based schooling and bringing back streamed classes in math. My high school had 5 math streams, allowing the better pupils to be challenged and interested in the subject. There is a strong co-relation between maths ability and good programming skills. Bulgaria has specialist math schools which are oversubscribed and the entry criteria are claimed to be meritocratic. This part of the education system has helped a booming IT sector.

        I dislike the educational focus on standardised tests – one size does not fit all. Or I could describe George W Bush’s policy “no child left behind” as no smart child allowed ahead with a challenge …

  9. Thanks for a thought provoking post Shaun. Clearly, in the West (with the exception of Germany) we need to be less concerned with manufacturing numbers, accepting manufacturing is in terminal decline due to the comparative advantage of EM’s to which Bobj refers and more concerned with Services numbers. We should be trying to find new ways of measuring services more accurately as you have been saying over the last few months.

    Thee is one problem, Services tend to be one to one functions, leaving little scope for productivity gain (eg how can a barber become more productive??) and this may the explanation for the missing productivity improvement in the UK and the possibly non existent output gap to which the bank of England constantly refers.

    • Hi Noo2

      My pleasure. As to your points I agree. The only caveat is that whilst we are unlikely ever to know everything we know much less than we should considering the technology revolution which is ongoing.

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