Whistling In The Dark - Bogus Manufacturing Data

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Since the economic downturn (or recession, or Great Recession, or whatever we're calling it) made us all victims, I've watched the traditional media, bloggists, the Twitterverse and every pundit with a virtual bullhorn jump on any uptick in performance, productivity or alleged economic  improvement in the US like Ozzy on a dove's head.

I wish we'd just stop it.

For one, we're not out of the woods yet. Employment, housing, commercial real estate, credit and any number of economic sectors haven't shown enough resilience to generate strong optimism.

And unless you're living in North Dakota, Wyoming or a few other select states in the US that have managed to weather the storm better than others, take a stroll around your neighborhood. Talk to your neighbors. Visit the industrial zones of your city. Drive around the storefronts and shopping centers. Is it really getting better, as far you can see?

I am an optimist, but I believe that we're in for a long-haul recovery and that it's only going to be shortened through tenacity, hard work and honesty - amongst all parties. It's just not helpful to perpetuate flowery propaganda about a random rise in a sliver of the economy or manufacturing when we're clearly still struggling. And a strong, pervasive manufacturing policy would certainly be a good start.

Last week, the most-rockin' site Five Thirty Eight published an extraordinary post titled "Manufacturing Is Not Dead." For those unfamiliar, 538 is a site that has taken statistics and predictive data - especially around US politics - to new levels. (For more about 538, click here.) I'm a huge fan, and who can argue with the message of this post - that US manufacturing is resilient, growing and thriving?

I can. And I'm not happy about it.

This chart from the 538 piece uses BLS data that is considered flawed (click graphic for larger size)

This chart from the 538 piece uses BLS data that is considered flawed (click graphic for larger size)

The 538 post - like so many others recently - point to productivity numbers as proof that US manufacturing is growing steadily and has been for decades. That while employment is dropping like a stone, it's mainly because efficiency and automation and productivity are so strong in the US that they account for our ability to create so much more with so much less. 538 does its usual brilliant job of presenting statistics, metrics and trends to support its premise.  This, from 538:

US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.

But 538 is wrong - because the data they've used to present this case is flawed to begin with.

Back in 2007, Michael Mandell in Business Week wrote an article titled "The Real Cost Of Offshoring" that refutes the numbers that 538 and countless others point to as proof that we are simply "over-producing" ourselves into "under-employment" in manufacturing. This, from Business Week:

The underlying problem is located in an obscure statistic: the import price data published monthly by the Bureau of Labor Statistics (BLS). Because of it, many of the cost cuts and product innovations being made overseas by global companies and foreign suppliers aren't being counted properly. And that spells trouble because, surprisingly, the government uses the erroneous import price data directly and indirectly as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and real gross domestic product (GDP), which is supposed to be the inflation-adjusted value of all the goods and services produced inside the U.S.



The result? BusinessWeek's analysis of the import price data reveals offshoring to low-cost countries is in fact creating "phantom GDP"--reported gains in GDP that don't correspond to any actual domestic production. The only question is the magnitude of the disconnect. "There's something real here, but we don't know how much," says J. Steven Landefeld, director of the Bureau of Economic Analysis (BEA), which puts together the GDP figures. Adds Matthew J. Slaughter, an economist at the Amos Tuck School of Business at Dartmouth College who until last February was on President George W. Bush's Council of Economic Advisers: "There are potentially big implications. I worry about how pervasive this is."

Michael goes on to show how these bogus numbers creep into many ancillary economic and industry reports. It is a quick - but eye-opening - read.

"But this article is from 2007," you say. "Surely, we've adjusted the data to more accurately portray the impact of offshoring, where production actually takes place, and what our GDP vs. Productivity is, right?"

Nope. We haven't. In a recent (October '09) report published by economists from the Federal Reserve (who also use the bogus data from the Bureau of Labor Statistics to create their own reports - Offshoring Bias: The Effect of Import Price Mismeasurement on Manufacturing Productivity - This is a much longer read, but makes a strong case for why the data is formulated and applied incorrectly, and how it continues to misinform all of us regarding offshoring's true impact on the US economy in general, and US manufacturing specifically:

We believe that the overall magnitude of offshoring bias has been extensive in recent years. As discussed below, price measurement is especially problematic in the context of frequent product churning and an environment of persistent price differentials between suppliers of largely identical goods. Recent work shows that both of these conditions are pervasive in the case of imported goods . The recent, rapid shifts in sourcing between suppliers also adds to the likelihood that offshoring bias may be significant.

Taking the time to read both the article and report paint a clear picture - the data and formulae are incorrect, and are giving a false sense of security and optimism. And yet, we re-Tweet, share and shout from the virtual rooftops that Everything's Coming Up Roses.

And just this past Saturday, The New York Times published an Op-Ed piece titled "Trading Away Productivity." In it, Alan Tonelson and Kevin L. Kearns remind us of this glaring misinterpretation of productivity data:

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.


But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.


The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

It's time we stopped buying into these statistics and begin to trust what we see and hear when we talk to our neighbors and drive around our towns. Manufacturing in the US certainly isn't dead - but understanding the realities and what it will take to recover is crucial to taking the right steps to prosperity.

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