Center for American Progress

Problems for households will persist, even if hiring increases:

Problems for households will persist, even if hiring increases:

Manufacturing once again made front page news this week. The Institute for Supply Management (ISM) released its index of the outlook for manufacturing yesterday. The ISM index had risen to 62.8 from 57 in the prior month, with any figure above 50 suggesting an expansion in this vital sector. The rise in the ISM index was largely due to an indication of manufacturing firms’ willingness to start hiring again. While improvements in the manufacturing sector are certainly welcome, it is important to keep in mind that is too early to declare the prolonged recession in this sector to be over.

• Manufacturing employment started to decline in April 1998. Since then, manufacturing has lost 3.1 million jobs.

• Manufacturing employment has declined for the past 39 consecutive months. Although manufacturing output has been improving for a few months, the most recent ISM index may be the first sign that the prospects for manufacturing employment are also improving.

• One month of improved employment, if this index proves to be an accurate predictor, does not mean we have a sustained recovery. In fact, since March 1998, there have been six one-month increases in manufacturing employment – the last one in June 2000. Each was followed by even larger employment declines.

• The recession in the manufacturing sector was caused by a surge in imports and a drop off in exports following the Asian financial crisis in late 1997, as close to 80% of U.S. trade are in manufactured goods.

• Record trade deficits since then resulted from a high value of the dollar – compared to its trading partner currencies – which made U.S. exports less competitive and subsidized imports into the U.S.

• The dollar’s value began to slide against a number of currencies, the euro, the Canadian dollar and the Japanese yen, among others, in early 2002.

• A decline in the value of the dollar takes about 18 months before it affects the trade deficit. Thus, the prolonged decline of the dollar since early 2002 most likely contributed to the declining trade deficit in the third quarter of 2003.

• The Chinese yuan remains undervalued compared to the dollar, causing the bilateral trade deficit to rise.

• Due to the prolonged recession, which pushed many employees into early retirement, manufacturing firms are saddled with large costs for health and pension benefits for former employees.

• Even if manufacturing firms expect to increase their production, they often face a skill shortage when it comes to hiring.

• It will take some time before hiring increases will lead to substantial improvements in wages and hours worked.

• Thus, income gains for those with jobs will remain rather slow.

• However, stronger income gains are needed to allow households to repay the debt that they accumulated to make ends meet at a time, when employment and hours declined, and wage growth was slow.

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