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No, U.S. Manufacturing Is Not at an All-Time High

| May 11, 2020 | Economics

Daniel Moynihan once stated that “Everyone is entitled to his own opinion, but not his own facts.” This is no more true than with today’s debate over the health of U.S. manufacturing; a debate that is critical to get right if policy makers are to respond appropriately.

Apologists for the status quo paint a Pollyannaish picture of U.S. manufacturing. Emblematic is the National Association of Manufacturers’ claim that “manufacturers have been setting new records when it comes to manufacturing output, and through the first quarter of 2019, the industry has continued to reach new heights.” But this is like saying the movie industry is setting records because box office revenues are at an all-time high. Of course they are because population, GDP and prices grow every year.  It is hard not to grow in this situation.

An fair measure of U.S. manufacturing health has to be grounded in 3 factors: 1) constant dollars to control for inflation; 2) value-added rather than gross output (value added includes what manufacturing firms contribute, taking out the value of inputs like iron ore and electricity); and 3) as share of GDP (if manufacturing is growing, but more slowly than the overall economy it will eventually shrink to almost nothing).

Using U.S. Bureau of Economic Analysis (BEA) data for these three measures, the picture is nowhere near as rosy. Measuring growth from 2007 (before the Great Recession) to 2019, GDP grew by 22 percent, but manufacturing value-added grew just 5.6 percent. As a result, manufacturing’s share of GDP fell from 13.2 percent to 11.4 percent. This also obscures significant differences within sectors. All eight non-durable goods sectors (such as paper, chemicals and plastics) were producing less in 2019 than in 2007 in both absolute and share of GDP terms.

Moreover, as a number of analysts, including ITIF, have shown, BEA significantly overstates the growth of the computer sector (NIACS 334) because it assumes that when a computer doubles in speed due to Moore’s law that actual production doubled. But when computers are not included, U.S. manufacturing output declined by 3 percent.

Even more troubling is that U.S. manufacturing is in a productivity slump. In 15 out of 18 years from 1990 to 2007 manufacturing productivity grew faster than overall non-farm business productivity, often by more than twice as much. But after 2007, manufacturing productivity grew faster in just 3 of the 12 years. In 2019 while  business productivity grew 1.9 percent, manufacturing productivity grew just 0.1 percent.

One reason for this might be that U.S. manufacturers increased capital expenditures by just 17 percent between 2008 and 2017 (the latest year available), compared to 23 percent for the whole economy, and just one-third the rate of the information sector (e.g., internet, communications, etc.). Without robust productivity growth, manufacturing becomes less globally competitive, which is a key reason it is growing more slowly than GDP.

One would think that with manufacturing productivity growing more slowly than the rest of the economy that job growth would be robust (as other sectors become relatively more efficient). But at the end of 2019 manufacturing jobs were still 6.5 percent below their pre-recession levels.

If all this is what manufacturing success is, I’d hate to see what failure looks like. This picture of manufacturing reality should be a wakeup call to Washington that if it wants to avoid the U.S. becoming like the UK (an economy with a hollowed out manufacturing sector propped up by a shaky financial sector), that it will need a robust national manufacturing strategy.

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Rob Atkinson

Rob Atkinson is the founder and president of the Information Technology and Innovation Foundation.

@RobAtkinsonITIF

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