US Manufacturing -- Losing Out?

Clyde Prestowitz is founder and President of the Economic Strategy Institute [1]. It is posted as part of our series, Is Manufacturing Making It? [2]

Since manufacturing is about 11 percent of U.S. GDP, anyone who has been saying it’s dead has obviously been engaging in hyperbole. But few if any serious observers have been saying this. Rather, what they have been saying is that U.S. manufacturing has been declining unnecessarily and at an unnatural rate that is harmful to the American standard of living. Production index statistics that show rising output do not disprove this.

A large portion of U.S. manufacturing output is of non-tradable or not easily tradable goods, things like toilet tissue, ply-wood, soap, catalogues, and the like. This is the core of our manufacturing base and it will always be with us. It’s not dead and it’s not going to die. Indeed, as the overall economy grows, this production of non-tradable or not easily tradable goods will grow along with it. If we did not produce any tradable goods at all, our manufacturing output would still show an increase when the economy grew.

For most of its history, America has also been a major producer of tradable goods – things like steel, airplanes, semiconductors, machinery, appliances, and so forth. Indeed, we still produce some of these things, but far fewer than we used to. As a result, manufacturing as a percent of GDP has been in steady decline from about 25 percent in the early 1980s to today’s roughly 11 percent. This decline has been particularly precipitate in the past decade during which there has been about a 6 percentage point plunge.

To some extent, this decline is natural and inevitable. Manufacturing as a percent of GDP tends naturally to decline in all economies as they develop and mature. This is even happening to China’s economy now despite its having become the workshop of the world. But the decline in the manufacturing share of the U.S. economy has been far more dramatic than in any other industrialized economy. Even in the UK which has long emphasized services as the core of its economy, manufacturing is nearly 13 percent of GDP. For Germany, Japan, France, Italy, and most other OECD countries the shares range from 15 to 25 percent. Since America has roughly the same or better manufacturing oriented resource endowments as these countries, one would expect its manufacturing share of output to be as high or higher.

That it is not, is a major concern because manufacturing contributes disproportionately to support of R&D, product innovation, and to gains in overall economic productivity. In other words, if America is doing less manufacturing than it could competitively be doing, then it is underperforming in research, innovation, and productivity. This is the major issue.

One way to think about this is to think of a company that produces widgets in an economy that has a rapidly growing widget market. The company’s sales, production, and profits grow rapidly, and its management issues glowing reports to shareholders and stock analysts. But it is actually not growing as fast as the market or as its competitors. In other words, it is losing market share even as its absolute production grows. For a while all seems wonderful, but eventually its share of the market is too small. Distributors refuse to carry its product and it can’t afford to spend to develop new products and eventually goes out of business.

As for employment, because manufacturing pays better wages than services on average, it is desirable that the United States have all the manufacturing employment that it can have on a competitive basis. The manufacturing employment numbers presented here , like the output numbers, are focused on absolute numbers rather than the important percentages. If the absolute number of manufacturing workers was stable during a period of substantial expansion of the work force, then manufacturing employment has fallen as a percent of total employment and the high wages associated with manufacturing are being paid to a smaller and smaller portion of workers so that overall national income is falling or at best stagnating. Which is in fact, exactly what has been happening.

This is not at all a pretty or reassuring picture. And it is clearly the result of mercantilist international trade reducing what under normal market conditions would be the expected level of U.S. tradable goods output and of U.S. manufacturing employment.