Auto Recovery, yes ... but as for the rest

by mike smitka

The US recovery continues at a snail's pace; the auto industry is doing better. The rise in the SAAR [seasonally adjusted annual rate of sales] puts us below the bubble-inflated peak of 2005-6, but given subsequent population growth is at a more sustainable level. Other auto-related indicators show marked improvement, but suggest we still have a ways to go. First, the share of the auto industry (retail and manufacturing) was at 2.3% of the labor force in the late 1990s; it then fell steadily to 2.0% before falling off a cliff in 2008. The nadir was 1.6%; today we're back to 1.8%. That is only about halfway, assuming that other structural changes in the US (the continued growth of healthcare) makes it possible to return to the days of yore.

...automotive employment's only about halfway back...

If we look at the details, we get a more nuanced story. The retail side (which includes auto parts and not just vehicles) peaked at about 1.9 million workers; it fell by 300,000 during the Great Recession, and is now 2/3rds of the way back to that level. Manufacturing took a harder hit, falling from 1.1 million at the start of 2006 to 1.0 million in 2007, before dropping by 400,000 in 2008-9 to just above 600,000 workers or less than half the level of the late 1990s. We're now back to almost 850,000, a sharper rise than in retail, but with further to go. Yes, suppliers are running at more than 100% capacity, and that must normalize. So employment will rise further, as overtime and other expedients are replaced by permanent hires. Still, it's not clear that the US is on track to get back to earlier levels, though over the next few years other changes may help (e.g., Honda's goal to export 30% of US-based production).

But overall the story from labor markets is of an anemic recovery. As the baby boomers retire, the growth of the working age population will slow. At present, however, we're only just keeping up with population growth, and the gap between "normal" employment (I tracked age-specific levels back to 1994) is large, roughly 9.1 million workers as of November 2013. Furthermore, more jobs are part-time while a sizeable share of the labor force that had been working employed full-time are still working short hours. If we adjust for that, we're shy 10.8 million full-time jobs. Let's not forget long-term unemployment either, the 27+ week component is improving but is only down to what had been previously been the historic peak.

Finally, this is not due to boomers entering retirement early. Indeed, participation of older workers has trended up throughout the Great Recession and subsequent recovery. In other words, they aren't retiring with past rapidity. That's part of the reason that prime-aged participation rates remain below historic levels. Again, I've traced these levels back much futher – they were essentially flat going into the Great Recession. Now we can see a small increase since the worst of the recession, but only by about 1 percentage point to 95% of the previous norm. And the rate for young workers (age 20-24) remains in the abyss.

      Click on the graphs to expand!

I've added the export graph (vehicles, engines, parts) from the St Louis Fed "FRED2" data service

The Bad Old Days: Chrysler Mack Stamping

I often wonder how many people read this blog. I was thus heartened by a substantive comment on my previous post on Mack Stamping in the City of Detroit. Let me add a bit on the bad old days.

...Quality was a management issue...

In 1973 I was working on a rail line [cross-member = engine cradle?] when the die on one of the old, old flywheel presses shifted, in the first machine on the line. The operator noticed it, called the foreman, and they tried hitting a piece. Bent, as they expected. We then ran it through the rest of the machines. The inspector came over, and threw it down in disgust, because not only was it bent, but the bolt holes were out of true. No way to fix. Repairing would require pulling a millwright from some other emergency; the plants were running 24/7 so there was no downtime for maintenance.

[I'm leaving out the colorful language and gestures, talking – screaming! – was a challenge given the high ambient noise levels, particularly when you were near the smaller punch presses.]

We quickly had the general foreman there, and the top inspector. So what happened? We worked the full shift making scrap. Only the plant manager and the #2 had the authority to shut down a line, and they were out for meetings at some other facility. The priority was indeed to "make production" and for that purpose bad parts counted, not just good.

We worked the full shift making scrap.

There's a tale of the CEO of the late 1970s, pre-Iacocca, an accountant by background, visiting Jefferson Assembly to see rows of vehicles parked outside with their hoods up. He asked why, and was told that they had problems, popping the hood made sure everyone knew not to ship them. He went down one row, slamming the hoods down, came back the next row doing the same, and left the plant without another word: his bonus depended on the number of cars shipped (equivalent to gross revenue, because at that point dealers had to pay for them). Warranty chargebacks weren't factored in.

This is from a UAW newsletter that someone from the MIT Intl Motor Vehicle Program shared with me – a manufacturing guy, not a union person.

Technology and not just management make stamping different today. Last week I was at a conference in Pittsburgh – the Natl Assoc of Japan America Societies, not an auto industry function – and there were several steel guys there, including the top sales person from US Steel. We chatted a bit, including about the changes in the industry; sheet steel is now a high tech product, qualitatively different from that available 20 years ago, not to mention 40 years ago. Each car company has their own specifications – the steel used in "Class A" (painted surface) stampings is not a commodity – and there may be multiple layers developed through very precise pickling and heat treating.

In my time at Mack Stamping there were constant problems with dies, as above. But bad steel was also an issue, splits and buckling and all that, not necessarily in the highest stress points. As you'll recall, there were also finishing guys at the end of each line for pieces that would be painted, doing their best to polish up these steel defects. My recollection is that some lines also had 7 presses, because you couldn't do deep draws all at one shot, the steel wasn't up to it. I've been past modern stamping operations, and my sense is that there are only two shots (though I've not seen a big vehicle roof to do a true comparison).

And then there are the presses, new electroservo ones reputedly so quiet you can carry on a normal conversation. I've been next to hydraulic transfer presses, one machine doing multiple "hits" rather than a long row, clean and comparatively quiet. Long gone are the days (thankfully!) of flywheel presses, where a sticky clutch could cause a double-strike and cost you a finger or hand. Ditto the old hydraulic presses that while safer and quieter sprayed a constant mist of oil, so that by the end of the shift the shoulders of shirts were saturated and (with my longer hair of that era) requiring 3 shampoos once I got home.

Quality was a management issue, not a worker issue. When we were given free rein, my observation was that workers preferred turning out good parts and did so. (A small group of us spent time in another plant making parts that somehow hadn't been scheduled, taking over presses in a tool-and-die shop down the road.)

No one thought they were good old days. It was still very physical in the 1970s. More, it was psychologically exhausting: it's hard to work day after day when it's very clear that you are not allowed to do a good job. Anyone strolling through the plant could smell the pot (and infer the alcohol) that helped all too many get through the day. It was easy to conclude that workers were the problem. It wasn't; management was.

I did ask those around me if Chrysler, or Mack Stamping, was particularly bad. Enough had worked in Ford and GM plants to assure me that the others were little different.

Costs in the Japanese auto industry

...it's not just OEMs...

Monday I was at the award ceremony for the Automotive News PACE Supplier of the Year competition, for which I've been a judge for the past 19 years; more on that in a later post. On Friday (19 April) I spoke on the Japanese auto industry at an UMTRI conference in Ann Arbor, Michigan. One data point was an overview of the industry; since I begin a new (4-week) term tomorrow (22 April), let me elaborate as indirect class preparation.

The auto industry is not just OEMs, but encompasses dealers and parts suppliers. For Japan, the Economic Census provides an overview of employment of various subdivisions. As in the US, the downstream industry is the largest source of employment. (Note I'm puzzled by the large level of employment at wholesalers; I have no answer.)

	Automotive Assembly	Vehicle Bodies	Automotive Parts
Establishments
2006	51	201	8,799
2007	66	210	8,979
2008	67	221	8,921
2009	72	198	7,996
2010	72	170	7,812
Employment
2006	176,662	39,661	633,297
2007	182,993	18,842	693,322
2008	182,707	18,503	664,257
2009	166,479	15,513	604,644
2010	161,158	13,402	612,193
Annual per worker cash compensation, ¥ million
2006	7.47	6.65	5.13
2007	7.32	5.05	5.25
2008	7.57	4.89	5.47
2009	6.92	4.73	4.92
2010	7.08	4.59	5.10
500+ workers	7.11	4.77	6.39
Source: Census of Manufactures (工業統計表). Wages are cash compensation divided by employment in establishments

Within manufacturing, the parts sector is the largest by about a factor of three. That's consistent with the US, where Thomas Klier and James Rubenstein found about a 3:1 ratio (Who Really Made Your Car? Restructuring and Geographic Change in the Auto Industry, Upjohn Institute Press, 2008). Now Census data represent classifications by those reporting, so miss the full count. In addition, I didn't include categories (e.g., piston rings) that aren't reported under "autos"; Klier and Rubenstein work with a much more comprehensive set of data. Hence the table at right underreports parts employment.

Finally, I include very rough data on compensation; mandatory benefits add at least another 20%. These data, alongside the employment data, provide a sense of the sharp downturn in 2009-2010, under the impact of the Lehman Shock (as it's called in Japanese). Reflecting lower bonuses (in larger firms the norm is 4.5 months or more pay) and cuts to overtime, compensation fell sharply in those years. I also give a row for cash compensation restricted to the largest size establishments; such locations would in almost all cases be unionized (though contingent workers – contract and part-time employees – would not normally be members and would receive lower pay and benefits).

Now as I write this the exchange rate is ¥99.8/US$1.00, or ¥1 is equivalent to a penny at market exchange rates. The average parts worker in a larger establishment, which account for 2/3rds of output, is thus about $64,000. Add in mandatory benefits and that rises to $76,000. Even at the April 21st exchange rate, that is far higher than the US; at the ¥80 level of last year, that would have been ¥95,000. While this would include engineers, at least if they were located in a manufacturing facility, it is a tidy sum. And it has obvious implications: even if the average worker is more productive than their US equivalent, Japanese workers have (on average) priced themselves out of the global market.

For recent data on the US industry, see the Bureau of Labor Statistics auto industry page: http://www.bls.gov/iag/tgs/iagauto.htm

...Mike Smitka...