#700 – Does Manufacturing Really Matter?

Posted on | The Agurban

A recent post on IndustryWeek.com asked, “Does manufacturing really matter?” Below are excerpts from the piece that includes 12 vital signs of manufacturing and how they are trending.

Does Manufacturing Really Matter?

William Strauss, a senior economist at the Federal Reserve Bank of Chicago, stated that “on average, manufacturing output has been growing 3.1% annually over the past 63 years. Automation has enabled U.S. manufacturers to produce significantly more with fewer workers than they did in previous decades. Today, 177 workers can generate as much output as 1,000 plant employees could produce in 1950. Far from a cause for concern, the dramatic loss in manufacturing jobs should be seen as a key metric of success.”

Other economists say that the loss of manufacturing mirrors what happened to agriculture in the 20th century, implying that it is a normal economic correction. But the supporters of the agriculture analogy overlook a key point: When agriculture became automated and required only a tiny percentage of workers to increase output, we may have lost the employment, but we still kept the land and the industry. We are now facing losing entire manufacturing industries, not just the workers.

Economists who believe that a service economy will provide the needed growth for the American economy are simply relying on hope, not facts. The truth is if manufacturing continues to decline, then America will decline. The assumption that a service economy is adequate is a huge gamble which risks living standards, the economy, and in fact, our position as the No. 1 economy in the world.

Assessing manufacturing growth requires looking at 12 vital signs of manufacturing and how they are trending. Together, these signs make the case that American manufacturing is declining in terms of market share and employment but can be saved by policy changes.

  1. Manufacturing jobs –Bureau of Labor Statistics’ data shows the long-term trend in manufacturing jobs is negative, with manufacturing jobs going from 12,348,000 jobs in 2016 to 11,611,000 in 2026 – a loss of 736,000 jobs.
  2. Advanced training –Politicians are desperate for middle-class jobs that don’t require a college education, and they always point to manufacturing as the answer. But the fact is that most manufacturers don’t want the people who have been laid off. They want multiskilled employees (apprentice/journeyman) who will help them do more with fewer workers.
  3. Machine tools –Machine tools are the foundation of manufacturing. They are the master machines that make other machines. In 1965, U.S. machine tool builders were responsible for 28% of global production. By 1986, that share had declined to less than 10%. According to the 2016 Gardner Market Research survey, our share of the global machine tool market now stands at 5.8%.
  4. Trade deficit –When imports and exports of a country are in balance, all trading countries benefit. Each country specializes in what it does best—exchanging its most competitive products for products it could not produce as cheaply as the trading country. Normally trade deficits are self-correcting, because as the deficit grows, the country’s currency is supposed to decline in price in the world market. This makes exported goods less expensive and foreign goods more expensive, which brings trade into balance. But this is not happening because we allow our trading partners to manipulate their currencies to always keep the dollar high and force the U.S. to run trade deficits. An article by the Economic Policy Institutemakes a strong case that trade deficits are related to the loss of jobs. It asserts that between 2000 and 2007, 3.6 million manufacturing jobs were lost. After the Great Recession, between 2007 and 2014, another 1.4 million manufacturing jobs were lost. Overall manufacturing lost more than 5 million jobs since year 2000, during a time of increasing trade deficits.
  5. Federal research –Basic research by the federal government differs from private R&D in that federal basic research is high-risk and seldom translates into commercial products in the short term. Private R&D, on the other hand, is driven by shareholders for short-term profits. Most people are unaware that federal basic research was the initial research that led to the development of many products seen today, including the Google search engine, the internet, GPS, supercomputers, artificial intelligence, smart phone technology, shale gas, seismic imaging, LED technology, MRI, Human Genome Project and advanced prosthetics, to name just a few. In the early 1960s, federal research spending was more than half of the total R&D spending; by 2012, it had fallen to 31% of total R&D. This decline is a very bad trend because this research is the lifeblood of all R&D, and most experts believe that declining basic research will eventually lead to declining GDP growth.
  6. Manufacturing’s share of R&D –Manufacturing R&D is vital because it is 70% of all business R&D. Any decline in manufacturing will result in a decline of R&D and our strategy of innovation.
  7. Advanced technology products –China has already swallowed the low-tech products we use to make. What they want now is our advanced technology products and all of the new technologies that go with them. The U.S. government-designated Advanced Industries sector includes 50 industries—35 manufacturing, three energy, and 12 service. They are our best shot at maintaining competitive advantage and sustainable economic growth. According to the Brookings Institution, Advanced Industries employ 80% of the nation’s engineers, perform 90% of private sector R&D, generate 85% of U.S. patents, and account for 60% of U.S. exports. These industries employ more than 12 million workers and another 27 million secondary workers for a total of 39 million jobs. America’s Advanced Technology Industries now produce 17% of the U.S. gross product. But as important as the Advanced Industries are, there are big problems emerging. Job creation in this category has been stagnant for many years and running trade deficits since 2002. We need to protect the technology of these industries or we simply won’t be able to lead in innovation.
  8. Net exports of capital goods as a share of GDP –Trade in capital goods, such as airplanes, medical equipment, semiconductors, etc., are a big part of our exports and have long been a factor of our competitive strength. But this is no longer true. Capital goods have changed from a surplus to a deficit.
  9. Industries lost or in decline –It would seem that the simplest indicator of either growth or decline is the government figures on industries. The industries that are essentially lost and probably never coming back include textiles and apparel, semiconductors, coal, cellphones, robots, and luggage. The industries that are in decline and may eventually die unless they get some protection include furniture, steel, aluminum, autos, computer and peripheral equipment, and motor vehicle parts.

As those industries decline, manufacturing’s share of GDP drops. From 1948 to 2003, manufacturing output increased along with productivity. But from 2000 to 2010, the share of GDP growth began to decline along with manufacturing jobs and overall GDP. In fact, in that decade, manufacturing productivity increased by 66%, while manufacturing jobs declined by 33%. Manufacturing’s percentage of GDP has been declining since 2014.

  1. Exports –Most people do not know that U.S. manufacturing has contributed an average of 70% of American export shipments every year since 2000. But, exports are not growing fast enough to offset the trade deficit. In fact, we are beginning to lose our place as exporter to the world. China has taken over the No. 1 position in world exports. The U.S. exports have fallen to No. 2 and Germany is third and likely to take over the No. 2 position. If increasing the ratio of exports to imports is the only way we can reduce our trade deficit, then manufacturing exports are not only vital, they are the solution to the trade deficit problem.
  2. Our strategy of innovation –Just about everybody, liberal or conservative, believes that innovation is the primary strategy America depends on to compete in the global economy. But the loss of our technologies through partnerships, unfair trade, technology transfer and espionage has shown that we are fast losing our innovation edge to countries like China. If we can’t stop this ongoing loss of technology or halt the decline of U.S. manufacturing, we will not be able to compete with a strategy of innovation.
  3. Manufacturing and national defense –Many industries, like aerospace, high tech, software and others build the products that allow America to have the world’s most powerful arsenal. Basic industries like the chemical, petroleum, mining, and electronics industries are part of our strategic and defensive reserves. Maintaining these industries and the suppliers and skilled workers in them is a matter of national security, yet we are losing ground to foreign manufacturers who manipulate their currencies, have government subsidies, or don’t have to pay the same tariffs they place on foreign imports. For most of the declining industries (despite increasing productivity) it means continuous decline of employment, more imports and the eventual loss of the industry to foreign competitors.

All of these issues problems are connected. If we are to keep an industrial base and have any hope of growing manufacturing or competing with an innovation strategy, we have to address each of these problems with new policies.

Michael Collins  is the author of The Rise of Inequality and the Decline of the Middle Class. He was a vice president at Columbia Machine in Vancouver, Washington.

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