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Manufacturing Hours and Employment in the Recovery

The labor market showed a bit of weakness in May, gaining only 54,000 jobs. This is well below the rate observed since the beginning of the year. The unemployment rate also ticked up by 0.1 percent to 9.1 percent.

Figure 1. Nonfarm Payroll Employment

Part of May's shortfall was due to weak employment growth in the manufacturing sector. Total manufacturing employment declined by 5,000, and employment in motor vehicles and parts fell by 3,400. There was some evidence that Japanese supply-chain issues reduced production during the month, and May's Institute of Supply Managers (ISM) report also showed a deceleration in the expansion of the manufacturing sector, with the index dropping from 60.4 to 53.5.

Figure 2. ISM Manufacturing: Diffusion Index

There has been some recent discussion of manufacturing leading the way out of the last recession; however, one sees little evidence of this view in terms of employment growth. Growth in manufacturing employment closely matches the gain seen in the rest of the private sector. Since the employment low in manufacturing was reached in December 2009, the manufacturing sector has added 238,000 jobs, a rise of 2.08 percent over the 18-month period. Other sectors have gained 1.93 percent.

Figure 3. Manufacturing Payroll Employment

One might have expected a larger rebound in manufacturing employment, especially given the magnitude of the sector's job loss during the recession and the subsequent rise in industrial production. Industrial production in manufacturing has risen by 12 percent since the end of the recession. This rising production reflects increases in sales and the rebuilding of inventories. More specifically, there has been a substantial increase in export activity for manufactured goods; automobile production has rebounded some off of very low levels, notwithstanding the slowdown in May; and computer-related technology industries have expanded production at a relatively strong pace.

Figure 4. Manufacturing Industrial Production

One reason for the muted employment gains is that during the recession firms not only cut employment levels but also reduced the average weekly hours of their remaining workforces. Total hours, the sum of all hours worked in the manufacturing sector, declined by 17.8 percent over the recession, somewhat more than the level of employment losses that were sustained. However, since the end of the recession in June of 2009, manufacturers have been increasing both average weekly and overtime hours. Indeed, all of the rise in manufacturing hours since the end of the recession can be accounted for by the increase in the intensity of labor utilization—employees working longer days or work weeks. A second reason is that labor productivity in manufacturing has continued to rise—an hour of work can produce more output than it did prior to the recession.

Figure 5. Aggregate Weekly Hours Index

Given that average weekly and overtime hours in manufacturing are at pre-recession levels (40.6 and 4.1 hours, respectively), it is likely that increases in labor utilization going forward are more likely to come from the hiring margin. However, any such gains will depend on further expansion in industrial output and the pace of growth in labor productivity.

Figure 6. Labor Productivity: Manufacturing

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