The Evolution of U.S. Manufacturing

The United States has been hollowed out. Once the factory of the world, the U.S. no longer manufactures goods; now it manufactures debt. The high wage manufacturing jobs have been out-sourced to low wage economies. The demise of U.S. manufacturing is at the core of the decline of America, its chronic trade deficits and growing international indebtedness. It makes the world’s savers reluctant to be exposed to the U.S. dollar.

There is one problem with this widely held view: It is factually wrong.

The value of U.S. manufacturing output in real terms (adjusted for inflation) was a little more than $3 trillion in 2008. That is up from $1.2 trillion in 1972. If the U.S. manufacturing sector was a separate country, it would be the world’s 5th largest economy (behind the rest of the U.S., Japan, China and Germany). The U.S. remains the world’s largest manufacturer. Full stop.

Although international comparisons are fraught with measuring problems, it appears that the U.S. share of world manufacturing is roughly the same as the combined total of the BRICs (Brazil, India and Russia account for a combined 11-12% share).

Share of World’s Manufacturing Output

	1995	2000	2007
United States	22.3%	21.2%	24.7%
Japan	21.1%	20.1%	15.5%
China	4.7%	5.7%	11.4%
Rest of the World	42.4%	53.0%	48.4%

The data also suggests that the impressive rise of Chinese manufacturing has come at the expense of Japan and other East Asian countries more than the United States, which the UN data suggests actually saw a small rise of its global share in recent years.

China has largely injected itself into the production chain at the labor intensive stages, so that televisions or electronic goods that may have been made in Japan or Taiwan or South Korea now says made in China.

Before the end of this business cycle, the real value of U.S. manufacturing output was never higher. If that is true, why is it we can go into a store and have difficulty in finding goods produced in the United States? The simple answer is that many of the goods that are manufactured in the U.S. are not finished consumer goods. Often they are parts or components that may be exported and further processed or assembled abroad, often by affiliates of U.S. multinationals and capital goods.

Metals, minerals and chemical products are the largest U.S. manufacturing sectors, but you are not going to see them in Wal-Mart or Tiffany’s. The U.S. also manufactures motor vehicles and other means of transportation, foodstuffs, and computers and electronics, machinery, appliances and furniture.

Wrong Metrics

The popular under-appreciation of the economic prowess of American manufacturers may stem from two other facts. First, manufacturing has shrunk as a share of the overall economy. In the past decade alone, manufacturing’s share of GDP has fallen from 15.5% to nearly 11%.

Second, there has been a persistent loss of manufacturing jobs in the United States. The share of private sector jobs accounted for by manufacturing has fallen from 26.5% in 1969 to almost 9% now. While there were more than 17 million U.S. manufacturing workers then, there are now less than 12 million; the least in almost 70 years.

The manufacturing sector is smaller compared to the overall economy and there are fewer people working in manufacturing, ergo the U.S. lost its manufacturing edge. Wrong. Manufacturing has not shrunk; productivity has gone up.

Disclosure: No Positions

Comments

[Kimball Corson:]

You say:

"The United States has been hollowed out. Once the factory of the world, the U.S. no longer manufactures goods; now it manufactures debt. The high wage manufacturing jobs have been out-sourced to low wage economies. The demise of U.S. manufacturing is at the core of the decline of America, its chronic trade deficits and growing international indebtedness. It makes the world’s savers reluctant to be exposed to the U.S. dollar."

This observation is the key to our economic mess. Too few, here or elsewhere understand that. The adjustments we are going through are the longer term adjustments to what you describe. I wish more focus were directed to these points by economists, policy makers and commentators. All do not realize the mess we are in now are the adjustments to these phenomena. They have been coming to a head for years and were only buffered for a while by our excessive borrowings.

Oct 03 12:14 AM

[Kimball Corson:]

Technically, you are right, as you phrase matters, but what you say is very misleading and why I reacted so. I need to back up and explain. Here is why.

The facts are that employment in manufacturing has dropped from a high of about 19 million in 1978-9 to less than 12 million in 2009, as the US abandoned and gave up on much potential manufacturing for export during that time. The value of US manufacturing output has only less than doubled during that interval (in constant dollars) and that occurred only because of the very high productivity of remaining US manufacturing workers. The high productivity of the remaining workers should not hide the fact we abandoned much potential manufacturing output by the US for export and in fact shipped those jobs overseas. The high productivity of the remaining workers was largely due to capital improvement so the gains largely went to capital and not the remaining employees (those still employed). This amounts to a double whammy for aggregate demand in the US from which we are still adjusting and it helped badly skew the distribution of income in our country.

The popular perception that we are suffering as a consequence of what happened is clearly true.

Oct 03 01:10 AM

[john s. gordon:]

well we do manufacture military hardware but that is because military procurement requires domestic sources.
perhaps we could buy tracked combat vehicles and combat boots from brazil & save money.
> jack

Oct 03 08:46 AM

[Marc Chandler:]

I don't know what to say to John Gordon's ill-attempt at wit, but Kimball Corson confuses the facts. We both agree that the data shows a decline in manufacturing workers and increase productivity. I must part ways when he says : "US abandoned and gave up on much potential manufacturing for export during that time." The fact of the matter is that US exports reached a record high during the last business upswing and manufacturing exports improved more than other types of exports.

Nor does the data confirm his assertion that: "The high productivity of the remaining workers should not hide the fact we abandoned much potential manufacturing output by the US for export and in fact shipped those jobs overseas." The data I cited indicates that other countries lost manufacturing jobs during the same time as the US did and some by more. US government data indicates that about 5 mln American workers work for foreign owned companies here in the US and another 5 mln are employed indirectly. American companies hire slightly more foreign workers than foreign companies hire Americans, but the imbalance is not nearly great enough to allow suych sweeping generalizations. Moreover, the data is also clear that American firms primarily locate in other high wage economies.

I am not sway by what I find to be a simplistic answer that: "The high productivity of the remaining workers was largely due to capital improvement so the gains largely went to capital and not the remaining employees (those still employed). " My artcile cited multifactor labor productivity and I provide data to show the each worker is working with more capital, but I do not think that that fact stands behind the widening disparity of income in the US.

I would suggest the breakdown of the social contract that had linked wages to productivity and inflation played a large role as did the US immigration policy. Roughly speaking 1 mln immigrants entered the US in the 1980s and 1990s, more than all the other countries combined (leaving aside political refugees) I embrace this as a important and vital part of America's economic prowess and dynamism, but at the same time , recognize the social strains it creates.

Rather than talk about classes, consider incomes shares. Two parts. Wages and salaries on one hand and profits and dividends on the other. There has been a significant shift from the latter to the former. We agree on that. Mr. Corson says it is justified on the grounds that capital was behind the boost in productivity. I say that there are many other social and political factors that lie behind the shift in income shares away from wages and salaries. Moreover, I would contend that this disparity will ease even as productivity and the amount of capital per manufacturing worker increases.

Oct 03 09:26 AM

[Trane250:]

During the Bush regime, the US ran up a trade deficit in manufactured goods of $3.4 trillion. During the first few months of Obama, our trade deficit in manufactured goods is approaching $500 billion and in a recession no less. That is unsustainable.

Chandler appears to be one of those ubiquitous "new world order," "new economy" types who keep spouting the same mantra about how trade deficits don't matter and the US is the world's "largest manufacturer." Poppycock. That manufacturing output figure includes the "manufacture" of electric power. A lot of the exports are really "re-exports" of goods or partially finished goods produced abroad.

I'm old enough to remember when just about everything had a "made in USA" label. It's a rarity to find such a label now.

There's a limit to how much money we can borrow from abroad or print up on our Swiss-made intaglio presses to support a life style we haven't earned.

Oct 03 10:28 AM

[sod:]

Thank you for the clear explanation of how, in fact, we did lose a large part of our manufacturing base. It seems there is always someone trying to tell us how our economy has not been hurt by the world trade policy. The entities that have benefited from the so called world trade are the multinational businesses. The affects on the rest of America have been economically devastating. Thanks again Corson.


On Oct 03 01:10 AM Kimball Corson wrote:

> Technically, you are right, as you phrase matters, but what you say
> is very misleading and why I reacted so. I need to back up and explain.
> Here is why.
>
> The facts are that employment in manufacturing has dropped from a
> high of about 19 million in 1978-9 to less than 12 million in 2009,
> as the US abandoned and gave up on much potential manufacturing for
> export during that time. The value of US manufacturing output has
> only less than doubled during that interval (in constant dollars)
> and that occurred only because of the very high productivity of remaining
> US manufacturing workers. The high productivity of the remaining
> workers should not hide the fact we abandoned much potential manufacturing
> output by the US for export and in fact shipped those jobs overseas.
> The high productivity of the remaining workers was largely due to
> capital improvement so the gains largely went to capital and not
> the remaining employees (those still employed). This amounts to a
> double whammy for aggregate demand in the US from which we are still
> adjusting and it helped badly skew the distribution of income in
> our country.
>
> The popular perception that we are suffering as a consequence of
> what happened is clearly true.

Oct 03 09:58 PM

[Econ 101:]

Figures dont lie, but liers figure.

I dont know which is which here. All I can see is that the US is poorer as a country now than in 1972. My Dad operated a crane for many years while I grew up in the late 60's. During that time we ate steak 4 nights a week. I had a car, He had a car and my Mom had a car so did my brother.

His income was about $20 K a year, I make nearly $100k and my family of 3 (Two kids and me, the wife decided smack and meth were more fun). If I read the charts correctly, adjusted for inflation he makes more than I do in real wages. I believe that.

So even if the US is the worlds leading manufacturer, thhat doesnt mean the American people are better off.

Oct 04 02:09 AM

[bbowen7:]

Excellent article. Truly.

The data about shares of world manufacturing output are stunning. Some of the cause and effect discussion is arguable, but much of our national dialogue and public policy starts from a different, false premise.

Oct 04 02:20 PM

[Value Added:]

You wrote: "The U.S. remains the world’s largest manufacturer. Full stop." False. China is. China produces more product. A single toaster made in the US for $50 is not greater output than four toasters made in China for $10 each.

You wrote: "The value of U.S. manufacturing output in real terms (adjusted for inflation) was a little more than $3 trillion in 2008. " False. That is the value of output of firms listed as US manufacturing firms. The actual *value added* from true manufacturing efforts in the US is far less. The reason is simple: much so-called US manufacturing today is a business consisting primarily of importing, quality checks, and logistics. If you add the label, is it still "Made in USA"? Yes. The SIC codes don't change when the business model does.

You wrote: "Manufacturing has not shrunk; productivity has gone up." False/True. Manufacturing has definitely shrunk; metalworking jobs dropped about 40% between 1995 and 2005. Remember, this is against the backdrop of an expanding economy. Productivity did not go up enough to make up that difference.

Visit a manufacturing job-shop conference and ask where your parts will be made. You will hear things like: "Prototypes are made domestically, production is made in [Mexico, Taiwan, China]". Many types of parts are no longer available in the US, in an quantity, anywhere, at any price. Entire industries are gone.

The problem is the metrics. Dig into the data further. By the way, that $50 toaster is no longer made in the US. At best it is "Assembled in the USA of domestic (a label) and foreign (the rest of it) components."

Oct 06 01:10 PM

[cstauffer:]

I have read Marc's latest book two times over the last month and it is truely inspiring in light of all of the hand ringing that is occurring today about just how terrible our economy is and will be for the foreseeable future. That fact is that our economy has modernized greatly over the last several decade. As an economy, we have moved up the food chain as a manufacturer and service provider. The problem that we have is that our economy has moved up that food chain faster than our workforce has.

When you think about all of the life changing and world changing accomplishments that have been born from our domestic economy over the last 100 years, you cannot argue that our greatest strength is not basic manufacturing or providing low level services. The concept is not much different than the "highest and best use" assessment that a real estate appraiser performs when he or she appraises a commercial property. Our economy's highest and best use is not manufacturing toys and clothes or assembling technology equipment. Our highest and best use is evident when one looks around the world and realizes that it is American ingenuity that brought the world a vaccine against polio and anti-biotics, the semi-conductor chip, the airplane, and the internet. Without American entrepenaurship the world would not have products and services from McDonalds, Nike, Google, Microsoft, Coke, Caterpillar, Boeing, Apple, Disney, GE, as well as Pfizer, Merck, Johnson & Johnson, Bristol Myers and Amgen. We have what the world wants. The more affluent the developing world becomes, the more money that they will have to buy our products and services. We have the brands, the franchises and the innovative edge to disproportionately benefit from the the economic success of the BRIC countries.

Oct 07 09:26 PM