Danielle DiMartino

Fiona Sigalla

English

Research Papers in Economics

SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2007 12
he U.S. manufacturing sector conjures
up images of Michigan’s auto plants,
Pennsylvania’s gritty steel mills and the
iconic smokestacks that stand today as
artifacts of a time when the U.S. economy
and its manufacturing sector were one
and the same. Mention manufacturing,
and the furthest thing from most people’s
minds might be Texas—long renowned
for its cattle ranches, oil derricks and
cowboy-booted bankers. 
Yet, Texas has emerged as one of the
nation’s fastest-growing manufacturing
hubs. Between 1990 and 2005, a time
frame long enough to encompass an
entire business cycle, the state’s factory
output grew an average of 5.8 percent a
year, eclipsing all other major manufactur-
ing states (Chart 1A).
1 A longer-run per-
spective shows that Texas’ share of the
nation’s manufacturing base has been ris-
ing for at least four decades—with a par-
ticularly pronounced output jump in the
past year or so (Chart 1B).
In 2005, Texas’ manufacturing pro-
duction reached $126.8 billion, or 8.2 per-
cent of the U.S. total. The state ranked
second in output after California—another
nontraditional manufacturing center—and
led all states in exports, with 14.5 percent
of the U.S. total. 
What’s behind the rise of manufactur-
ing in the Lone Star State?
In Texas, factory operators can check
off many of the prerequisites they need to
prosper in a highly competitive, rapidly
globalizing business environment: 
• A central location within North
America.  
• Good distribution facilities that
include one of the world’s largest sea-
ports. 
• A fast-growing and flexible labor
market. 
• A relatively low cost of living and
an attractive business climate.
• Low land and construction costs
compared with other parts of the U.S.
Made in Texas: The Natural 
Selection of Manufacturing
By Fiona Sigalla and Danielle DiMartino
T
0
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2
3
4
5
6
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NY OH MI NC PA IL WI US IN CA TX
3
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5
6
7
8
9
2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963
Employment
Output
Chart 1
Manufacturing Trends: Texas and the Nation
A. Factory Output for Major Manufacturing States 
(Real annual average growth, 1990–2005)
Percent
SOURCES: Bureau of Economic Analysis; Federal Reserve Bank of Dallas; authors’ calculations.
B. Texas Share of U.S. Manufacturing Output and Employment
Percent
SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve Bank of Dallas; authors’ calculations.
• The presence of Mexico and its
maquiladora plants just over the Rio
Grande, providing manufacturers with a
nearby partner for globalizing supply
chains and finishing production in the U.S.
2
These advantages have encouraged
companies to expand Texas operations,
build new plants and relocate from
other states. The payoff extends beyond
increases in factory output. The state’s
manufacturing job base has also held up
better than that of most other statesFEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2007             SouthwestEconomy 13
amid a nationwide decline in factory
employment.
Manufacturing’s Evolution 
The past half century has brought
many changes to the nation’s manufactur-
ing sector. New technologies and global-
ization have given consumers a greater
variety of products at lower prices, but
these forces also have ratcheted up com-
petitive pressures on firms to increase
efficiency and lower costs. In the U.S., the
result has been decades of declining fac-
tory employment as companies invest in
productivity-enhancing equipment and
outsource labor-intensive assembly to
workers in other countries. 
Nationwide, manufacturing payrolls
contracted an average of 1.5 percent a
year between 1990 and 2005, but this
masks a deep disparity among states
(Chart 2). New York shed factory jobs at
an annual average of 3.4 percent, more
than double the U.S. rate. Meanwhile,
Texas’ manufacturing employment
declined an average of 0.4 percent—or
less than a third the U.S. rate.
Two broad factors explain states’
diverse experiences. First, manufacturing
firms in some states have outperformed
similar firms in other parts of the country.
Second, some states have larger shares of
fast-growing or rapidly declining indus-
tries than others.
Decomposing these two influences
determines how they’ve affected employ-
–4
–3.5
–3
–2.5
–2
–1.5
–1
–.5
0
NY NC PA CA OH IL US MI IN TX WI
–25
–20
–15
–10
–5
0
5
10
15
20
NY NC PA CA OH IL MI IN TX WI
Change due to industry composition
Change due to within-industry performance
Chart 3
Employment Growth for Top 10 Manufacturing States 
(Compared with U.S., 1990–2005)
Percent
Steeper job losses than overall manufacturing: Apparel, primary metals, computer and electronics,
electrical equipment, petroleum and coal, paper and printing. 
Less severe job losses than overall manufacturing: Transportation equipment, machinery, chemicals,
furniture, nonmetallic minerals, fabricated metals, food and beverages.
Net job creators: Wood and plastics.
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; authors’ calculations.
ment in the top 10 manufacturing states.
The height of the bars (Chart 3) reflects
each state’s decline in manufacturing jobs
relative to that of the nation from 1990 to
2005.
3 Purple bars are above zero when
the state’s firms grew faster or contracted
more slowly than similar firms in the
same industry nationwide. Green bars are
above zero when a state had a mix of
industries that did better than the overall
manufacturing sector during this period.
Chart 3 also lists the job performance of
manufacturing industries relative to the
sector as a whole.
Manufacturing employment outper-
formed the overall U.S. in Wisconsin,
Texas, Indiana and Michigan. All four
states benefited from having a relatively
large share of industries that fared better
than manufacturing overall. Texas, for
example, is home to a significant number
of firms producing chemicals and fabricat-
ed metals, industries that did quite well
from 1990 to 2005.
Firm-level forces weren’t kind to
Michigan, but companies outperforming
their peers was the biggest factor con-
tributing to relatively healthy manufactur-
ing in Texas, Wisconsin and Indiana. 
In the furniture industry, for example,
Texas increased employment 51.9 percent
over the 15-year period, compared with a
12.2 percent contraction nationwide. In
electrical equipment, employment was up
11 percent at Texas firms but down nearly
30 percent in the U.S. Other relatively
strong Texas industries have been food,
machinery and nonmetallic minerals. In all
these industries, Texas firms added work-
Chart 2
Manufacturing Employment
(Average annual growth, 1990–2005)
Percent
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; authors’ calculations.SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2007 14
ers, while businesses in the rest of the
country reduced employment on net.
New York, North Carolina, Pennsylvania,
California, Ohio and Illinois didn’t do as
well as the nation as a whole in retaining
manufacturing employment. All six states
had a large share of producers that per-
formed below their industry benchmarks.
For example, employment in North
Carolina’s relatively large furniture indus-
try fell 36.2 percent, almost triple the U.S.
decline. 
New York, North Carolina, Pennsylvania
and California were also hurt by their
industry composition. They entered the
1990s with a disproportionately high share
of industries with shrinking employment.
North Carolina suffered the greatest rela-
tive job loss due to the composition of its
industrial base. In 1990, the state had a
larger-than-average share of apparel and
textile mills. These industries had more
severe job contractions than manufactur-
ing as a whole. 
While painful for affected workers,
job losses don’t necessarily signal industry
contraction. Table 1 breaks down industry
performance by output and employment
for the U.S. and Texas over a shorter peri-
od, 1997–2004. Some industries, such as
computer and electronic product manufac-
turing, had sizable increases in output that
were accompanied by employment losses.
Other industries, such as paper and print-
ing, suffered declines in output and
employment. 
Productivity’s Role
Despite job losses, all of the top 10
manufacturing states produced more
goods in 2005 than they did in 1990. This
can mean only one thing—productivity
gains. 
Average real manufacturing output
per U.S. worker rose from $52,000 in 1990
to $108,000 in 2005. Once again, the per-
formance was disparate across states. Real
output per worker rose rapidly in Texas—
from $57,000 in 1990 to $141,000 in 2005,
the highest among the 10 states. Wisconsin
posted the weakest gains, remaining under
the U.S. average throughout the period. Its
output per worker was $88,000 in 2005.  
Texas’ output per worker was on par
with the rest of the nation and other lead-
ing manufacturing states a decade ago
(Chart 4). By the end of 2005, its manu-
facturing productivity was running 30 per-
cent above the national average.
Texas’ productivity gains derive from
two major sources: efficiency-enhancing
technologies adopted by manufacturers,
and shifts in the types of goods produced.
Demand has surged the past few
years for chemicals and machinery—two
of the state’s most productive sectors—
resulting in increased output in these rela-
tively capital-intensive industries.
Texas also outperforms the nation in
such industries as computers and electron-
ics. In recent years, output per worker has
been higher in Texas than in the U.S. and
the high-tech mecca of California.  
Texas’ factory sector has mirrored a
broader national trend of manufacturers
moving less-productive operations to
Table 1
Industry Performance for U.S. and Texas, 1997–2004
Percent change
United States Output Employment
Output increases with fewer workers
Chemical manufacturing 14.2 –11.1
Computer and electronic product mfg. 292.2 –28.5
Electrical equipment and appliance mfg. 6.0 –25.0
Furniture and related product manufacturing 5.9 –8.5
Miscellaneous manufacturing 34.3 –10.0
Nonmetallic mineral product manufacturing 12.0 –3.9
Plastics and rubber products 16.6 –14.5
Primary metal manufacturing 2.8 –27.6
Wood products 10.6 –7.4
Output and employment declines
Fabricated metal product manufacturing –2.4 –12.6
Food manufacturing –0.5 –4.6
Machinery manufacturing –1.8 –24.2
Paper manufacturing –16.4 –22.2
Petroleum and coal products –18.8 –18.7
Printing and related support activities –6.0 –20.8
Total manufacturing 22.6 –18.7
NOTE: This table has a different time period from the other analyses because 
comparable output data by industry are unavailable prior to 1997.
SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve 
Bank of Dallas; authors’ calculations.
Percent change
Texas Output Employment
Output and employment increases
Furniture and related product manufacturing 18.9 5.1
Nonmetallic mineral product manufacturing 38.1 9.3
Output increases with fewer workers
Chemical manufacturing 16.1 –16.3
Computer and electronic product mfg. 305.5 –27.6
Electrical equipment and appliance mfg. 35.3 –19.5
Fabricated metal product manufacturing 2.4 –11.2
Food manufacturing 16.5 –0.8
Machinery manufacturing 40.8 –12.6
Miscellaneous manufacturing 14.6 –13.7
Plastics and rubber products 7.3 –9.3
Primary metal manufacturing 38.9 –16.9
Wood products 5.5 –17.0
Output and employment declines
Paper manufacturing –16.3 –25.3
Petroleum and coal products –4.4 –9.4
Printing and related support activities –7.4 –22.3
Total manufacturing 44.1 –15.9
(Continued on back page)SouthwestEconomy is published
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Made in Texas: 
The Natural Selection of Manufacturing
(Continued from page 14)
lower-cost countries, leaving the higher-
value-added production at home. A more
recent development may be even more
telling: Foreign auto and semiconductor
manufacturers are establishing new pro-
duction facilities in the state. 
In 2006, Texas reversed its decline in
manufacturing employment. The state
added 26,300 jobs, an increase of 2.9 per-
cent, while the nation’s manufacturing
sector continued to shed positions, down
84,000, or 0.6 percent.
Manufacturing remains an important
driver of the Texas and U.S. economies.
Since 2004, the Dallas Fed has been col-
lecting data from key Texas manufacturers
to better understand the economy. The
responses are tabulated monthly in the
Texas Manufacturing Outlook Survey (see
related article on page 15). 
While the survey is still very young in
the world of economic indicators, prelimi-
nary statistical analysis suggests this tool
will help provide insights into the Texas
and national economies. 
Sigalla is an economist and DiMartino is an
economic writer in the Research Department of
the Federal Reserve Bank of Dallas.
Notes
The authors wish to thank Pia Orrenius for helpful com-
ments. Raghav Virmani and Anna Berman provided excel-
lent research assistance.
1 The states of Texas, California, Indiana, Wisconsin,
Illinois, Pennsylvania, North Carolina, Michigan, Ohio and
New York represent 53 percent of employment and 55 per-
cent of output in manufacturing.
2 For more about maquiladoras and their effect on the Texas
economy, see “A Decade of Change: El Paso’s Economic
Transition of the 1990s,” by Jesus Cañas, Federal Reserve
Bank of Dallas Business Frontier, Issue 1, 2002.
3 A shift-share analysis was used to break down the differ-
ence between each state’s employment growth by industry
and the performance of the same industry in the U.S.
30
50
70
90
110
130
150
2005 2003 2001 1999 1997 1995 1993 1991
Texas
U.S.
Chart 4
Real Manufacturing Output per
Worker: Texas and the U.S.
Thousands of dollars
SOURCES: Bureau of Economic Analysis; Bureau of Labor
Statistics; Federal Reserve Bank of Dallas; authors’ calcula-
tions.

Made in Texas: the natural selection of manufacturing

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Made in Texas: the natural selection of manufacturing

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