The Heritage Foundation

WebMemo #388 on Taxes

January 9, 2004

January 9, 2004 | WebMemo on Taxes

Unemployment Report: Manufacturing Down, Service Up; Long Term Trends Still Positive

Today's employment report disappointed most analysts. But there is still reason for Americans to be optimistic.

 

While the Bureau of Labor Statistics report recognizes a number of short-term weak spots and shows that more work has to be done, it also reveals some longer-term, positive employment trends.

 

Charts:

Continuing Recovery

The economic plans of the Bush Administration and the Federal Reserve appear to be working as expected, slowly moving the economy in the right direction. Among the other signs that the recovery continues:

  • Investment and productivity are at near historic highs,
  • Business activity is showing strength not seen for years,
  • Trade flows strongly indicating sustained recovery, and
  • The lagging parts of the economy - which include employment and wages - are turning in the same direction.

Tax relief has lowered the cost of capital, made existing enterprises more profitable and investment and expansion more attractive. As the economy continues to grow and expand, stronger job performance will follow.

 

While today's report shows that the recovery in the job market has not been a smooth, steady climb, it is moving in the right direction. Since June:

  • 221,000 new jobs have been created, and
  • The unemployment rate has declined to 5.7percent from 6.3 percent.

Jobs: Manufacturing Down, Service Up
For now, the continued sharp declines in manufacturing are of particular concern. This past year's declines are greater than expected. However, manufacturing jobs as a share of the economy have been declining steadily since 1952. This is happening for two reasons: 

 

  1. The incredible improvements in efficiency and productivity brought about by new technology have allowed businesses to produce more at lower cost and, while using fewer employees, they can pay higher wages commensurate with increased skills required in a more technologically based environment.
  2. Our economy is evolving structurally from a manufacturing based economy to a service based. In fact, the service-producing sector is five times bigger than goods producing, or manufacturing. We are undergoing many of the same growing pains that were experienced between 1890 and 1920, when we moved from an agricultural economy to a manufacturing one.

This service part of the economy shows that the economic recovery is underway, even in employment. For example,

 

  • The unemployment rate fell for the year from 6.0 to 5.7 percent (December 2002 through December 2003). In fact, unemployment in every demographic category (except white teenagers) fell in 2003.
  • Since December of 2002, the nation's factories and businesses added 14,000 jobs. In the service sector (which includes government), over 307,000 jobs were added during the year.
  • And, average weekly earnings (seasonally adjusted) rose by 3 percent in the goods producing and manufacturing sectors and increases were seen across a host of other categories. For example, average weekly earnings in the utility sector rose by 4 percent from $997 to $1,033.

Long-Term Trends

Despite this disappointing jobs report, expectations for a robust job market in 2004 remain.

 

To identify long-term trends one must measure economic indicators over a longer period of time. One month's data does not negate the overall positive signs both in terms of the overall economy and the jobs market.

 

Forecasting companies, such as Global Insight, predict over 2 million more jobs will be created in 2004.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis