Yes, Manufacturing Matters


Manufacturing employment has fallen below 12 million jobs for the first time since 1941, and manufacturing jobs as a percentage of total employment has fallen below 9%, the lowest level since the Bureau of Labor Statistics started collecting data in 1939. But annual manufacturing output per worker is also at a record high: $223,915 (in constant 2000 dollars). That's almost 3 times as much output per worker as in the early 1970s, and twice as much output per worker compared to the mid-1980s.

That has been the trend over the last 40 years: more output with fewer workers. That’s a good thing, or inevitable, or both – isn’t it? I used to think so; now I’m not so sure.

Reversing Industrial Decline
A recent report by the Lexington Institute spells out the depressing picture: After dominating global industrial activity for a century, the United States is losing its edge in manufacturing to other nations. Over the last 30 years, manufacturing has fallen from a quarter to an eighth of the domestic economy, while the share of manufactured goods consumed in America but produced by foreigners has risen from a tenth to a third. The decline of US manufacturing is reflected in record merchandise trade deficits, the loss of over 40,000 manufacturing jobs every month in the current decade, and the shrinking role of American producers in global industries such as electronics, steel, autos, chemicals and shipbuilding.

US manufacturers continue to generate over 20% of global industrial output and have increased productivity by a third in this decade, but if current trends continue America will cease to be the biggest manufacturing nation in the near future. Many factors have contributed to the slippage in US standing, including high corporate taxes, burdensome regulations, globalization of the economy, and the efforts of trading partners to protect their economies.

If the erosion of US manufacturing persists, America will become more dependent on offshore sources of goods and the nation’s trade balance will weaken. That will undercut the role of the dollar as a reserve currency and diminish US influence around the world, eventually having an adverse impact on our national security. This can’t be a good thing.

China Gains in Manufacturing
China is on its way to surpassing the US as the world's largest manufacturer far sooner than expected. Does that matter? In terms of actual size, the answer is no. But if size is a proxy for the relative health (and prospects) of each nation's economy, the answer could be yes.

The US remains the world’s largest manufactuer. In 2007, the latest year for which data are available, the US accounted for 20% of global manufacturing; China’s share was 12%. The gap, though, is closing rapidly. According to IHS/Global Insight, China will produce more in terms of real value-added by 2015.

US manufacturing is shrinking, shedding jobs and, in the wake of this deep recession, producing and exporting far fewer goods, while China's factories keep expanding. Given the massive trade gap between the two nations and uncertainty in the US over when and to what degree manufacturing will recover, China's ascent has become a point of growing friction.

Many economists argue that the shrinking of US manufacturing – both in terms of jobs and share of gross domestic product – is a normal economic evolution that started long before China emerged as a manufacturing powerhouse. From their point of view, the shrinking would happen regardless and is actually a sign of health: the sector doesn't need to be big to be productive.

To those with this view, China's rise is normal, healthy and beneficial, for it is the natural course of things for national economies to progress along the continuum from agriculture to manufacturing to services. We have trod that path, and now China is following.

But another school of thought, held by "manufacturing fundamentalists,” contends that US manufacturing decline is not natural, healthy or beneficial, and must be reversed to retain America's economic power and well-being. From this perspective, the idea that we can be a nonmanufacturing society – and still be rich, free and independent – is nonsense and folly. Such thinking has led, and will lead, to the collapse of civilizations.

Even in its weakened state, manufacturing remains a surprisingly large part of the US economy. The sector generates more than 13% of the nation's GDP, making it a bigger contributor to the economy than retail trade, finance or the health-care industry. Thus it would be devastating if US manufacturers now being hit by the economic downturn never recover.

Manufacturing Not In Decline
And yet, according to the Cato Institute, notwithstanding the recent recession that has affected all sectors of the economy, US manufacturing has been thriving in recent years. How can this be so? Again, it’s the productivity. Real US manufacturing output has increased by 81% since 1987. American real manufacturing value-added – the market value of manufactured goods, over and above the costs that went into their production – reached a record-high level in 2007.

Manufacturing as a share of gross domestic product peaked in 1953 at about 28% of the economy and has been trending downward ever since. Today manufacturing accounts for about 12% of our services-dominated economy, but manufacturing output and value-added are higher than ever in real terms.

According to the United Nations Industrial Development Organization, US factories are the world’s most productive, accounting for 25% of global manufacturing value-added. By comparison, Chinese factories account for 10.6%.

That may be hard to fathom, says Cato, given that US factories tend not to produce the sporting goods, toys, tools, and clothing found in Wal-Mart and other retail outlets nowadays. But US factories make pharmaceuticals, chemicals, technical textiles, sophisticated components, airplane parts, and other products. American factories have moved up the value chain.

In comparison, the percentage of Chinese value-added in high-tech exports is quite small. Economists at the US International Trade Commission estimate that only about 50% of the value of US imports from China is actually Chinese value-added; the rest is value added in other countries and embedded in the components, design, engineering, and labor.

In iPods, for example, the Chinese value-added is a few dollars on a product that costs $150 to produce and retails for $299. Further, their sale in the United States and elsewhere supports high-paying American engineering, marketing, and logistics jobs, while providing Apple with the profits to conduct R&D to employ more engineers and keep the virtuous circle going. Without complementary Chinese and other foreign labor, far fewer American manufacturing ideas would come to fruition.

American manufacturing is therefore not in decline, right?

The Plight of American Manufacturing
No, that’s not right, and yes, manufacturing is in decline, and therefore so is America. That’s the case strongly made in Manufacturing A Better Future for America, published by Alliance for American Manufacturing.

The United States is broke because it has stopped producing what it consumes, writes the book’s editor, Richard McCormack, who is also the editor and publisher of Manufacturing & Technology News. Even an increase in consumer demand, he notes, will not put Americans back to work as the spending will only help workers making products overseas.

About 40,000 US manufacturing plants closed between 2001 and 2008, resulting in the loss of millions of good-paying jobs, according to AAM. Offshoring of production means that the United States is not generating enough wealth to pay its mounting and massive debts. The mindset among America’s economic elite – that the country does not need an industrial base – has put the country and the world economy in a ditch.

The book refutes some widely promoted myths, including that the US economy can thrive with just service industries as good-paying jobs are replaced by other sectors. It also debunks the notion that lost manufacturing plants will not mean lost research and development. It details the unfair trading practices China employs, and explains the social costs of the decline in manufacturing.

It is often said our economic future is dependent on innovation and/or job training. These factors are supported most strongly in manufacturing.

You can see why I have developed doubts that the diminishing of a manufacturing base and loss of manufacturing jobs are natural, inevitable, or good for the United States and its citizenry. A post-industrial economy does not obviate the need for industry. A large and rising value of intangible goods does not obviate the need for the production of tangible things. And a “new economy” does not obviate the need for a manufacturing base.

Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.