The Story of Manufacturing
Manufacturing has long been seen as the bedrock of economic growth in the United States. From the factories of the Industrial Revolution to the semiconductor plants of the Information Revolution, America has a proud history of making things. Yet anyone who has spent time in the Rust Belt has felt that uneasy sense that America’s manufacturing heyday lies in the past. Decay and joblessness abound in former boomtowns, all while factories seem to rise up every day in countries like China. Recessions come and go, yet manufacturing still seems trapped in the economic doldrums. Or is it?
A close look at the state of U.S. manufacturing reveals a number of factors that seem to favor the future of U.S. production. As a recent report by the Boston Consulting Group put it, “Within the next five years, the United States is expected to experience a manufacturing renaissance.” Could this really be happening? The story of manufacturing in the United States is best told through two indicators: employment and productivity.
At the middle of the last century, the number of manufacturing jobs was set on a steady course upward, peaking in 1979 at a total of 19.5 million jobs. Throughout the 1950s and 60s, America enjoyed a wage bubble of previously unknown proportions. But from 1979 onward, the decline was permanent. In 2000, the bursting of the dot-com bubble took manufacturing employment out at the knees, and by 2011 only 11.75 million were employed in manufacturing (all while the overall population increased by nearly 30% from 1979).
It is this decline in jobs that made Nobel Prize-winning economist Paul Krugman lament that “manufacturing, once America’s greatest strength, seemed to be in terminal decline.” On the other side of the coin is productivity in manufacturing. In 1950, the average worker was producing goods averaging $12,600 in value each year. That total doubled in faster increments, until by 2011 that same worker was making goods worth $153,000 a year. In 2009, the United States was producing nearly the same amount in manufactured goods as Germany, Italy, France, Russia, the United Kingdom, Brazil, and Canada combined ($2.33 trillion versus $2.44 trillion).
In fact, while nearly all developed countries like Japan and Germany have seen their manufacturing output grow at relatively moderate paces over the past decade, America’s has marched on a steep path up after its brief dip in 2000-2001. If demand for manufactured goods had kept up with this increased production, employment would have stayed roughly the same. Yet, according to the Congressional Budget Office, less than 40 percent of U.S. consumer spending is now devoted to manufactured goods, down from 67 percent in 1950. In short, “as consumers’ income has risen, they have increased their purchases of goods but boosted their spending on services -- including medical care, notably -- even more.”
In addition, manufacturing wages increasingly looked uncompetitive against the salaries being paid to blue collar workers in China, India, and elsewhere. Not only could fewer workers make more than enough to meet demand, but firms could save a bundle in costs by off-shoring labor demand abroad. Change is afoot though. As Mark Perry states in NCF’s inaugural edition of the Business Horizon Quarterly, “the U.S. manufacturing sector is poised for growth.” Anecdotal evidence is emerging that ever more firms are moving manufacturing jobs back to America; companies such as Caterpillar, Toyota, Otis Elevator, and others.
Wage growth in China – now at 14% year-on-year – is fast undercutting its wage advantage over the United States. And while manufacturing output continues to grow, it only barely keeps up with the voracious demand in the BRIC countries (Brazil, Russia, India, China) and beyond. Thus more employees are needed. Closer to home, American makers are realizing the cost-savings of tapping manufacturers on our shores, knowing that they will avoid the steep transportation costs and intellectual property risks of having things made abroad. Manufacturing appears to be recovery, but let's face it: It has a long way to go.
According to MAPI's Chief Economist Dan Meckstroth, the sector has only half recovered from its decline during the Great Recession. A full recovery isn't expected until the 2nd quarter of 2014. Take out the tech industry from that count and you'll be waiting for the end of 2015. And while America is becoming more cost competitive, let's not discount how much the high transportation costs and the natural and political risks of an over-extended supply chain can contribute to on-shoring in America. In many ways we are at a tipping point in manufacturing. Will America remain competitive? Is there any hope for job growth in the sector? How do we create a workforce that's ready for 21st century manufacturing? Such questions are increasingly relevant.
In the end, the future of manufacturing will likely not be about winning or losing the future. Neither will it be about riding the bubble of the "next big thing." It will be about identifying the critical elements of manufacturing where our producers glean the greatest value-added. We will have to shift our conception of manufacturing from smokestacks and drill-bits to white lab coats and design rooms. And let's not forget that education and innovation will remain the essential components of competitiveness throughout America's economy. America has always been about making things and making things happen. That story hasn't finished yet.