Don't Count American Manufacturing Out Just Yet

From an investment perspective, “what everyone knows” is seldom worth knowing. Worse, “what everyone knows” is often wrong.

Here’s a “fact” that everyone knows: America is no longer a manufacturing powerhouse. Whereas the USA used to be respected for the superior quality of its manufactured and machined goods, we have outsourced our manufacturing and are becoming a nation of consultants and burger-flippers (with different constituencies arguing the relative value to society of one versus the other…)

This “fact” is just plain wrong. It may be that a greater share of GDP comes from services than in prior years. But the US still accounts for the greatest share of manufactured products in the world. Let me address both issues:

First of all, services are more than flipping burgers and consulting. They also include software design, systems analysis, engineering services, retailing, transportation, and much more. If manufacturing declines as a percentage of total goods and services because the US is on the cutting edge of the global shift for advanced nations with high literacy and education to lead the new information economy, that would be a good thing!

According to the U.S. Census Bureau, the largest subset of the Services component of GDP is Professional, Scientific, and Technical Services. This category includes not just accountants, lawyers, interior designers, and payroll service providers, but also, among many others, computer systems designers and programmers, architects, engineers, veterinarians, advertisers, and environmental and life sciences researchers.

The next biggest is Information, which includes books, movies, newspapers, Internet publishing, the actual software applications, magazines, radio and TV programming, telecommunications services, and cable providers.

Third is Health Care Services provided by hospitals, nursing facilities, home health care, assisted living and so on. Well down the list, after auto mechanics, dry cleaners, truck drivers and a whole host of others who provide services, are those employed flipping burgers.

You can see that, while it may be glib and (once-upon-a-time) clever to bemoan that we are becoming a nation of burger-flippers, there is nothing wrong with being a cutting-edge nation that leads in information technology, life sciences research, internet content and so on. Why did Willie Sutton rob banks? “Because that’s where the money is.” Why is America on the leading edge of the information-based economy? Because that’s where at least part of the future is.

But there’s even more to the story. As I wrote recently in Investor’s Edge:

America is still the bastion of service and manufacturing innovation – which is why we still rank #1 in both areas. That last comment may come as a shock to some. Sure, we’re tops in service industries like information technology, financial services, retailing, health care, and transportation. But manufacturing? Didn't we lose that title years ago to China or Japan or Germany or somebody else? No.

American workers manufacture more than 20% of all factory goods sold worldwide. China is second at 12 or 13%, just ahead of Japan, with 11%. Germany, bulwark of the EU, is barely above 7%. America is the world leader in making “things.”

Think about it: Which nation on earth produces more food and farm equipment than any other? Which produces the most chemicals and pharmaceuticals? How are we doing in shipbuilding, skyscrapers, and big-ticket items like airplanes and power generation equipment? How about mining and energy extraction equipment? Or telecommunications equipment, semiconductors, metals, or plastics?

If labor is cheaper offshore, why do so many companies choose to stick with American workers in American cities? I see three compelling reasons they stay home:

1. While we have had an increasingly centrist, statist tilt since the early 1990s, we are still a nation that rewards entrepreneurs and offer the greatest likelihood of a stable nation with the least likelihood of confiscation. Which nation would you rather trust not to confiscate your assets on a whim, Russia, China or the U.S.?

2. Companies pay more for American labor but what they get for their dollars are people who are more productive than most anywhere else in the world. The American work ethic is alive and well. And the more complex the task, the more American firms benefit from using American labor. Because their learning curve is often faster, U.S. workers are not as expensive as they once seemed to executives who only looked at hourly wages. That’s why many of those outsourced jobs are coming home now.

3. It costs big bucks to ship products over long distances. Why produce wind turbine blades in China if you’re going to use them in Texas? Whatever you may have saved in labor, you’ll pay in transportation costs. The heavier the item, or the more perishable, the smarter you are to manufacture it where 300 million people who need it are living.

If the U.S. is the world's biggest manufacturer, why do so many people talk about the “Rust Belt” and “outsourcing” and “off-shoring” and how we are a nation that doesn’t make anything any more?

I think the answer can be found at your local Wal-Mart (WMT) and the other places we turn to, in times of recession, for the cheapest prices on mostly-disposable consumer goods. Just about everything you buy at such places is made in China. But I for one am sick and tired of buying junk that no one took pride in making and then having it fall apart.

That doesn’t mean that all American-made goods are top quality. It doesn’t mean that others can’t make a good consumer product. Some great brand names hail from Germany, Japan, the UK, Australia, New Zealand, Sweden, Norway and so many others – the list is long of others who care about making quality products. Anecdote: I just took a plant cutting this morning with a Buck knife that is almost 40 years old and as sharp today as it was then -- it has a lifetime warranty and is a pleasure to sharpen and hold. I could have bought a made-in-China knife at Wally World, but I’ll bet I’d have bought another dozen over the years because they snapped under pressure or didn’t hold an edge.

That is why the US is still #1 in manufacturing. When you’re buying something you expect to depend on or expect to last, it makes sense to buy the best. Consumer disposables, toys, and kids' and adults' clothes and shoes are what we mostly see, which leads us to believe there is no more American manufacturing. But where American companies shine is in making the best airplanes, ships, locomotives and railroad cars, oil drilling equipment, farm equipment, turbines, heavy-construction equipment, nuclear reactors, factory machinery, and engineering and laboratory equipment in the world.

If you’re building a power plant or a refinery or a new factory you expect to still be using 50 years from now, you want the best materials and the best workmanship. And you don’t try to buy it for $11.99 (billion) when for $12.99 (billion) you can get the best. That often means buying from US companies like Caterpillar (CAT), Deere (DE), Boeing (BA), Timken (TKR), Apple (AAPL), Exxon (XOM) and other sector leaders.

There are nations nipping at our heels in manufacturing. But so far none of them have been able to combine good corporate governance; a culture of innovation and entrepreneurship; an educated, hard-working and productive workforce; proximity to markets; and the commitment to quality control that define our business-to-business manufacturing prowess.

Of course, we must be ever-vigilant and ever-flexible to maintain that lead. The rest of the world doesn’t stand still and idly watch as our government pumps trillions of your dollars and mine into life support for dying fat cats, instead of spending it on alternative energy, health care, and all the other problems facing us today.

What lunacy tells us it’s smarter to give $30 billion to GM than to create wind farms in the Midwest? I believe, if we can just keep government away from our wallets, maintain our respect for invention and innovation, and enjoy a relatively reasonable tax system, American entrepreneurs will continue to do what they have always done: provide what it takes to build a nation – this one and others.

Disclosure: I am a fan of American ingenuity, not Wall Street dealsters. In the current U.S. markets, I am unable to find pockets of value. After we work through the next Alt-A, credit card, and other credit and housing crises – when many are despairing once more about the future of the country – we’ll be buying with both hands. Until then, we’re mostly in cash equivalents, short-term- bonds and bond funds, and a few well-selected short positions.

Comments

[Dave Wrixon:]

"Which nation would you rather trust not to confiscate your assets on a whim, Russia, China or the U.S.?"

Ask the Chrysler and GM bond holders!

Jun 09 05:27 AM

[abetterplace:]

I am afraid, sir, that your facts are twisted just as they are in the government reports. Manufacturing in the US today is but a fraction of what it has been. GNP is the best reporting tool for the manufacturing track but GDP looks much better to the masses as to how our country is doing. Domestic services should not be used in tracking manufacturing. Just look at DE,CAT,GM,Ford or Chrysler
products. Without all the imported parts they are assembled with (assembled being the key word, not manufactured) they would have no product. Look at what is left of our steel industry. Very little. A real look at manufactured goods would give a very different reading from those used today.

Jun 09 07:42 AM

[john s. gordon:]

would love to see the outsourced jobs come home.
> jack

Jun 09 08:40 AM

[MichaelJ007:]

You forgot to mention some of the true testaments to American Engineering and Manufacturing- Automatic Weapons, Fighter Jets, Missiles, Ships, Subs and Soldiers. We still make THE BEST!

Jun 09 08:53 AM

[Trane250:]

More new age, new economy, new paradigm nonsense. Where did the author come up with "American workers manufacture more than 20% of all factory goods sold worldwide?" Perhaps he is conflating "industrial production" with "factory goods?" Industrial production includes the "manufacture" of electricity, something the US generates in huge quantities.

Jun 09 09:26 AM

[Danny Newton:]

If I plagerized this artical and sent any segment of it to the local newspaper, it would not be printed because it violates everything that justifies industrial policy in my state for the last 30 years. It also violates all of the NAFTA CAFTA etc. excuses. Everyone knows that the jobs went to Mexico and this theory has no place for the jobs to go that can be resented. It would indicate that manufacturing needs no subsidies, especially subsidies for capital expenses. If you want to help manufacturing, work on people related costs and quality of life issues within cities.

Industrial productivity in the US is high and it creates a problem because it tends to get rid of jobs in manufacturing. The productivity rate is doubling the dollar amount of stuff produced about every 32 years while the population is doubling about every 66 years. This is no big problem as long as the real GDP expands with it.

Another problem with industrial policy is that there is no recognition of good manufacturing versus better manufacturing activities. The best manufacturing activities concentrates on making the machines that other industries need to become more efficient. The current data collection does not take this into account. A person making pies at home for sale is considered a manufacturer since 2001.

States like Tennessee are retreats to cheaper labor and also have chronic job loss in manufacturing because they tend to employ those who will shortly be replaced by a machine. At the current rate, half of the manufacturing jobs in Tennessee will be gone in 15 years. Also, the average paycheck in manufacturing is rising but below the background inflation rate.

Jun 09 12:40 PM

[Alphameister:]

Even if you have somewhat overstated the case, as some of the above comments suggest, I appreciate the reminder that a spirit of innovation has not yet been killed of in my country and there are still dynamic pockets of opportunity for entrepreneurs and investors. I am still able to find a handful of bargain-priced US growth stocks, but I'm finding many more in emerging markets, especially China.

Jun 09 01:24 PM

[PainfullyAware:]

Unless the Punitive Tax Structures and Mandated Governmental Bureaucracy is reduced, any real recovery in US manufacturing is Improbable.

Jun 09 03:07 PM

[Dave Wrixon:]

Yes, but you consume them rather than sell them.


On Jun 09 08:53 AM MichaelJ007 wrote:

> You forgot to mention some of the true testaments to American Engineering
> and Manufacturing- Automatic Weapons, Fighter Jets, Missiles, Ships,
> Subs and Soldiers. We still make THE BEST!

Jun 09 03:25 PM

[Whippet:]

Great point. How 'bout we let the damn Europeans defend themselves, and buy our weapons? Not gonna fix all the problems, but at least it would be a start toward reversing broken policies. And it might shut the Spoiled Brat Adolescents over there up if Daddy forced them to hold their own in the mean, tough world.


On Jun 09 03:25 PM Dave Wrixon wrote:

> Yes, but you consume them rather than sell them.

Jun 09 03:51 PM