U.S. Manufacturing: Yes, It Is Declining

| About: SPDR Dow (DIA)

Summary

Multiple articles have been written on other sites suggesting that US manufacturing is not declining because of rising productivity.

These authors never take account of the rise in population.

It is important to debate the importance of domestic manufacturing for the sake of the health of the nations economy.

Understanding this issue should make us better investors and better voters too.

US Manufacturing output, adjusted for our rising population, is at the same level of output in the 2nd quarter of 2016 as it was exactly 16 years ago.

In other words, despite increases in productivity, on a per capita basis, the US output of manufacturing per capita is dead in the water for the past 16 years.

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Not everyone sees it this way however.

Here is an excerpt from an article written back in May of 2014 by a Forbes contributor, whom I've read before and like, Tim Worstall:

One of the economic tales of our times that continually puzzles is me is the amount of effort that's put into first describing and then providing causes for the decline of American manufacturing. The reason this puzzles me is because as far as anyone can tell there hasn't been a decline in American manufacturing. Far from it, output is at all time highs.

He provided this chart:

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He then went on to say:

as you can see the value of industrial (which is akin to, but not exactly the same as, manufacturing output) has been on a century long tear. And yes, there was a substantial collapse during the recent recession but output is already above the peak reached in 2007.

Allow me now to take that same index and adjust it for population growth:

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On a per capita basis, our industrial production is back to levels we saw back in 1998.

Another recent article that came out just last night comes from Timothy Lee at Vox.com. The title of his article is: "Donald Trump says American Manufacturing Is Declining. It Isn't."

He too is suggesting that manufacturing isn't in decline by looking only at the aggregate output and not bothering to adjust for population.

He writes:

Of course there are some towns in Ohio, Pennsylvania, and elsewhere in America where factories have closed and hence manufacturing has gone down. But for the country as a whole, manufacturing output is actually up about 50 percent since the NAFTA agreement took effect in 1994.

Objective Look At US Manufacturing

Manufacturing jobs are some of the highest paid jobs in the US.

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Average weekly earnings of all employees in the manufacturing sector is substantially higher than all jobs in the private sector and jobs in the health and education fields.

So manufacturing jobs are indeed very important to the US economy.

Same situation with auto assembly production. Looking at this chart showing total auto assemblies, you might well think that things are going great.

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Adjust it for population and we're back to auto production levels we only saw during recessions.

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There are some sectors in the manufacturing field that have been out right decimated.

Printed circuit boards for one. This chart below shows the number of employees that are in the printed circuit board industry in California.

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When I was in my early 20's, I worked for what was America's largest printed circuit board manufacturer. We made 100% of the circuit boards that went into Chrysler cars for example. It all went to China on account of them joining the World Trade Organization, WTO, in 2001. This chart above shows the impact China had on this industry.

Clothing

If there is one industry that should be the poster child of what the end result is of free trade lowest denominator manufacturing, it's the clothing industry.

In 1960, Americans spent some 9% of their personal consumption expenditure on clothing. In that same year, some 95% of the clothes they bought and wore were made in the USA.

Today, less than 2% of clothes are made in the USA and Americans spend about 3.2% of their total personal consumption expenditures on clothing.

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So in 1960, 95% of clothes were made in the USA. By 1980, 70% of clothes were still made in the USA. In 1990, it was 50%.

In 1994, when NAFTA was enacted, it eliminated import duties on clothing made in Mexico and by 2000, 28% of clothing was now made in the USA.

All the while, US jobs in the apparel business are dropping like flies:

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This takes us to today, where is it most certainly evident, very little of what we wear is made in the USA.

The benefits of all this is we don't have to have the pollution associated with manufaturing and we get to buy goods at very low prices.

Two Costs

There are two costs of this change that's occurred in the US economy over the previous decades.

1. The quality of goods had declined. While that is a subjective observation, as a consumer, I've noticed debasement in the quality of clothes, shoes and sneakers as well as manufactured goods including tools and building materials available. It is more important than ever to be a knowledgeable consumer.

2. Our Net International Investment Position. We sell goods to foreigners and we buy goods from them. At the end of each month, there is either a trade surplus or a trade deficit.

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America has been on a trade deficit going back to at least 1992. The end result of years of buying more goods from overseas than we sell, is that foreigners have used those extra dollars to buy our assets.

We now have a negative net international investment position of over $8 Trillion as of the 2nd half of 2016.

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Conclusion

At a minimum, we have to be objective about the state of our manufacturing base and think twice about writing off it's demise.

The dream scenario is America starts making more goods domestically that must be high in quality.

That we have both good high paying jobs for the workers and good high quality products to be had by the consumers, both domestically and abroad.

It's going to require a lot of investment and hard work. As Benjamin Franklin quipped, "there are no gains without pains."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.