Economics

PART 1:

“The rumors of my death have been greatly exaggerated.”
-Mark Twain

Manufacturing in the U.S. is dead. The future is in off-shoring and outsourcing.

Certainly, when one looks at data such as that in Figures 1 and 2, it appears as though in terms of output and employment that the manufacturing sector of the United States economy is in serious trouble. However, as in the famous quote by Mark Twain (above), the rumors of the demise of U.S. manufacturing have been greatly exaggerated. In a two-part series we will examine the current state and future prospects for manufacturing. This article, Part 1, will look at manufacturing in the U.S. overall and Part 2 (in Fall 2006) will discuss manufacturing in the Northern Ohio and Midwest Region. U.S. Manufacturing: A Profile Although as a percent of Gross Domestic Product the output of goods declined from 47% in 1959 to less than a third in 2005 (see Figure 1) and employment in manufacturing was less in 2005 than in 1959 (see Figure2), the manufacturing sector is still a dynamic and growth-oriented sector of the U.S. economy.

Figure 3 shows on an index basis that in most years manufacturing activity has increased in the U.S. The sharp upward slope of the manufacturing activity curve in Figure 3 in the 1990s indicates that in spite of employment declining in that sector in the 1990s, that the country's factories were putting out large quantities of goods. Likewise, Figure 4 shows that in most years industrial production increases with very robust growth occurring during the 1990s.

Both Figures 3 and 4 show, however, that in the early years of the 21st century manufacturing activity slowed considerably in the U.S. Although the recession in the early years of the decade was not severe, the manufacturing sector was especially hard hit and experienced a longer and more severe contraction than the economy as a whole (Forbes, 30). It does need to be pointed out, though, that since 2001 both industrial production and the output of goods have resumed an upward trend.

The question arises, of course, of why hasn't employment in manufacturing responded more positively to the general economic recovery? The answer is a “good news/bad news” type of story. The bad news is that employment growth in manufacturing is weak. The good news is that productivity has increased dramatically in the U.S. economy.

Figure 5 shows the direction of productivity growth in the U.S. From 1959 to 2004, on average output per hour of all persons in the U.S. economy grew 2.29% annually.

However, from 1990 to 2000, productivity per hour accelerated and grew at an annual rate of 3.48% and from the mid 1990s to 2004, it grew at a somewhat slower but still historically impressive rate of 3.04% (ERP, Table B-49).

In the late 1990s, investment growth was unusually strong which contributed to the productivity surge  

The key point and conclusion of the MIT study, though, is that not everyone is engaging in modularity and outsourcing. A lesson to be learned for U.S. manufacturers is that under certain circumstances integrated firms can do well. To be successful, though, the integrated firm must assure its in-house functions can compete with the best-in-class single function companies (Berger, 73-90).

The critical question of labor costs in modularity versus traditional manufacturing and vertical integration is addressed in the MITstudy, which concluded that it is not wages per se that are important. Rather, the driving force for a firm is unit labor costs. Therefore, the real cost of cheap labor in China or India or other developing countries is a complicated issue. The real costs of labor have to take into consideration potential costs of possible low quality, lack of manufacturing flexibility, political unrest, boycotts, corruption,lawlessness, and low productivity (Berger, 113-125).

What do the conclusions of the MIT study imply for the future of U.S. manufacturing? The MIT study suggests that for America to compete, it must invest in the human capital of training and education needed to maintain a comparative advantage in a dynamically changing world. Instead of viewing government action through protectionism as the answer the MIT team concludes government social policies related to health insurance, portable pensions, wage insurance, and the like, along with greater emphasis on educational attainment will be necessary (Berger, 282-291).

Other suggestions to strengthen U.S. manufacturing offered by Forbes include a comprehensive set of strategies. These include making tax relief permanent which will lower the cost of capital for manufacturing firms, making health care costs more affordable, streamlining regulations to reduce costs to firms, and expand efforts to train new workers and develop new skills in older workers who have been laid off from traditional industries (Forbes, 36).

The U.S. has a remarkably resilient society and economy. A reasonable guess is that it will rise to the challenge and will provide the investment in human capital, business incentives, and regulatory environment that will propel the manufacturing output and productivity curves of Figures 3, 4, and 5 upward well into the 21st century.

Next: Part 2 – Manufacturing in the Midwest and Ohio

Works Cited

Berger, Suzanne. How We Compete. New York: Currency Doubleday, 2005.

Forbes, Kristin. “U.S. Manufacturing: Challenges and Recommendations.” Business Economics, July 2004, 30-37.

Economic Report of the President (ERP). Washington, D.C.: United States Government PrintingOffice, 2006. Accessed at http://www.gpoaccess.gov/eop/ May 4, 2006.

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