We’ve all noticed that prices are higher than they used to be, and one of the key indicators that directly affects our pocketbooks and how they’re changing is the Producer Price Index (PPI).
The recently released December PPI report for the U.S. showed a lower-than-expected increase, which at first glance seems like good news, but a closer look reveals stark contrast in the U.S. economy. The tech industry is shining brightly, while traditional manufacturing is in deep shadow.
1. The PPI report, the story behind the numbers
The PPI rose 3.3% year-over-year in December, below expectations of 3.5%, but above November’s 3%. The underlying PPI, which excludes volatile food and energy, was up 3.5% year-over-year, suggesting that inflation is not easily contained.
Of note here are the disparities by industry. The technology industry, particularly semiconductors, software, and cloud services, has been performing strongly. Conversely, traditional manufacturing industries such as automotive, aviation, and heavy industry have seen relatively low gains – a clear indication that the center of gravity of the U.S. economy is shifting toward the tech industry.
2. The dazzling growth of the tech industry, the shadows behind it
The most striking aspect of the PPI report is the disparity between industries. Technology-related industries such as semiconductors, software, and cloud services have seen relatively high PPI growth. In contrast, traditional manufacturing industries such as automotive, aviation, and heavy industry have seen relatively low PPI growth.
This is more than just a number. It’s evidence that the U.S. economy is rapidly reorganizing around digital. As of 2020, the digital economy already accounted for 10.2% of U.S. GDP and $2.14 trillion in value. The COVID-19 pandemic has only accelerated this trend.
These changes are also having a profound impact on the labor market. In the tech sector, the demand for skilled workers continues to grow, which is putting upward pressure on wages. In fact, tech workers are paid 70% more than average.
3. Traditional manufacturing, a deepening crisis and the possibility of a resurgence
The decline of traditional manufacturing is the Achilles heel of the U.S. economy. Statistics support this concern, with an estimated 5.5 million manufacturing jobs lost between 2000 and 2017. A variety of factors are at play, including global supply chain disruptions, rising commodity prices, and increased competition from China. Productivity declines, in particular, are a serious problem.
However, the crisis also presents an opportunity: traditional manufacturing has the potential to improve productivity and gain new competitive advantages by adopting advanced technologies such as smart factories, 3D printing, and robotics. Governments need to actively encourage companies to innovate through research and development support, tax incentives, and more. This is why education and vocational training policies are more important than ever.
4. The productivity paradox: the mismatch between technological innovation and economic growth
Interestingly, despite the growth of the tech industry, overall productivity gains have not met expectations – a phenomenon known as the Productivity Paradox.
Labor productivity in U.S. manufacturing has remained stagnant since the 2010s, and in some industries has even declined. This is in contrast to rising productivity in services. The following factors have been attributed to this phenomenon:
- Low capital investment: U.S. manufacturers have underinvested in capital equipment, such as machinery and equipment.
- Industry concentration: The market has become dominated by a small number of large companies, and the lack of competition has slowed overall productivity gains.
- Policy factors: Protectionism, such as tariff policies, may provide short-term gains for some companies, but in the long run, it has the potential to reduce productivity due to supply chain disruptions and higher costs.
International comparisons: Where does the U.S. stand?
China continues to improve its manufacturing productivity by aggressively promoting technological innovation and automation through policies like “Making in China 2025,” with high R&D investment and government-led industrial policies being the main drivers.
Japan has seen a recent rebound in labor productivity, but it is still half that of the United States. In Japan, the shift of industries to services and the “Baumol’s cost disease” have been hindering manufacturing productivity gains.
European countries such as Germany have maintained productivity by shifting toward higher value-added products and high-tech manufacturing, but recent economic uncertainty and rising energy costs have slowed growth.
Economic security and supply chain reshaping: New challenges
The recent semiconductor shortage demonstrated how critical a stable supply of this critical technology is to national economic security, prompting the U.S. government to launch a $52 billion initiative to bolster the country’s semiconductor production base.
Furthermore, there is a growing movement to diversify supply chains and expand domestic production in strategically important industries. This is expected to have a long-term impact on global trade patterns and investment flows.
Implications for investors
- Investing in the technology industry is likely to become more important, especially in areas such as cloud computing, artificial intelligence, and cybersecurity.
- Environmental, social, and governance (ESG) factors will become more important, as companies’ sustainability and social responsibility are increasingly influencing their long-term performance.
- Opportunities arising from global supply chain reorganization. Companies that can benefit from the reshoring (return to country of origin) trend will require attention.
- Investments in human capital will be important: companies that are proactive in training and retraining their employees are likely to perform better over the long term.
The need for policy
- Bridging the digital divide: Policy support is needed to ensure that growth in the tech industry translates into productivity gains across the economy. Supporting the digitization of SMEs and building broadband infrastructure in rural areas will be key.
- Reforming the education system: The education system needs to be reformed to produce a workforce that can respond to the changing labor market. Strengthening STEM (science, technology, engineering, and math) education and building a lifelong learning system are important.
- Redefining industrial policy: A balanced industrial policy is needed to restore the competitiveness of traditional manufacturing and foster high-tech industries. In particular, expanding R&D investment and strengthening industry-academia cooperation will be important.
- Creating a fair competition environment: Strengthening antitrust policies is needed to address the adverse effects of industrial concentration. At the same time, policy support for startups and SMEs to foster innovation is also important.
- Improving labor market policies: Active labor market policies (ALMPs) need to be strengthened to counteract the polarization of the labor market due to technological change. A comprehensive approach is needed, including vocational training, re-employment support, and income security.
The changes in the U.S. economy revealed by the PPI report are more than just numbers; they signal that we are entering a new economic paradigm. Whether it’s digital transformation, shifting industry structures, or reorganizing global supply chains, we’re in the midst of a massive wave of change.
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