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Focus: Manufacturing

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From SCDigest's On-Target E-Magazine

March 24, 2011

Supply Chain News: US Manufacturing - is the Glass Half Full or Half Empty?

US Manufacturing Continues to Grow in Absolute Terms, but Most See Manufacturing Sector in Decline; Productivity Gains or Offshoring?

SCDigest Editorial Staff

Where does US manufacturing stand right now? It depends on your perspective, and who you ask.

For now, America remains the world's largest manufacturing, producing more 20% of the world's manufactured goods, according to a new report issued this month by the United Nations Industrial Development Organization (UNIDO).

In 2009, the most recent full year for which international data are available, US manufacturing output was valued at $2.155 trillion (including mining and utilities). That figure is more than 45% higher than China's 2009 output - though how you calculate those numbers is a subject of some debate.

SCDigest Says:

According to the Bureau of Labor Statistics, American factories are producing 57% more output by value today than they did in 1987, but they are doing so with 33% fewer workers today.

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Regardless, it is clear that US manufacturing output is far from shrinking in absolute terms. The US is producing more than twice the output in constant dollars today than it did during the 1970s, for example. Even though manufacturing represents only about one-third of the total economy, US manufacturing would rank today as the sixth largest economy in the world, just behind France and ahead of the United Kingdom, Italy and Brazil.

Right now, manufacturing is the hottest sector of the US economy. Manufacturing output was up 9% in 2010 over the admittedly dismal levels of 2009. That trend is continuing in 2011. The ISM Purchasing Managers index rose for a seventh straight month in February to 61.4%, matching its highest reading since 1983 (in this index, any score over 50 indicates manufacturing growth).

Despite much discussion about the "death" of US manufacturing, US industrial production was rising steadily until the recession, took a big drop in 2008-09, and then has started back to its normal upward progress as the recession ended, as shown in the graphic below.

That is the "glass half full" view. In relative terms, however, much evidence says US manufacturing is losing ground, perhaps inevitably given global demographics. The National Organization for Manufacturers (NAM) has argued that the US share of global production has remained steady at just over 20% in the past decade, and that there are questions about how China's output is calculated, overstating its production levels.

Still, most believe that the global share of manufacturing from developing economies in general and China in particular is rising. The UNIDO report notes that "Leading developing economies such as Brazil, China and India showed strong performance in economic growth in 2010. MVA [manufacturing value-added] of all three countries grew by more than 10% in 2010," though that was not much above the US growth rate of 9%.

Thanks to the high growth rates achieved by all developing countries, their share in world manufacturing output has reached 32% in 2010 compared to 20% 10 years ago, according to UNIDO. However, that gain in share may be coming at the expense of other countries even more so than the US, though the impact has been felt in American for sure as well.

US Manufacturing Continues to Grow in Absolute Terms

Additionally, most believe it is inevitable that China will overtake the US in industrial production at some point, perhaps as early as the next few years, according to researchers at IHS Global Insights. NAM disputes this prediction, and says if it occurs it will not be until after 2020.

(Manufacturing article continued below)

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But even more so that the absolute versus relative analysis, what more likely affects the impression that US manufacturing is dying is the loss of jobs in the sector, somewhat as a result of outsourcing but more powerfully from improved productivity.

As Rex Nutting of MarketWatch recently noted, at one point, during World War II, more than a third of all American workers were employed in a factory. That share has been falling steadily ever since, and now only 9% of workers have a factory job. Factory employment peaked in 1979 at 19.6 million; it’s now down to 11.6 million, even as output has soared since that time.

As just a comparison, consider what happened in the agricultural economy. The US produces far more agricultural output today than it did 100 years ago, when farming jobs represented almost 40% of the labor force. Today, just 2.6% of US workers are found in farming.

The same thing has been happening in factories. According to the Bureau of Labor Statistics, American factories are producing 57% more output by value today than they did in 1987, but they are doing so with 33% fewer workers today. The average US factory worker on average is connected to more than $180,000 of annual manufacturing output, triple the $60,000 in output per worker in 1972, using constant dollars.

That trend shows no sign of letting up in the long term. Manufacturing productivity rose by 6.7% in the US last year, though since the output growth was even higher, 112,000 manufacturing jobs were added in the US last year.

But that job growth is a drop in the bucket, really. Manufacturing employment likely will continue to fall.

Others note that the parallel between employment in farming and manufacturing is not a good one, because the reductions in farming employment came almost exclusively from automation improvements, whereas is in manufacturing many of the jobs were lost due to offshoring. The breakdown for jobs lost to automation/productivity gains versus offshoring is hard to find, and there are differing opinions, often with an agenda behind them.

US exports are also up. In 2010, exports of manufactured goods rose nearly 19% to $952 billion. Unfortunately, imports were up even faster, leading to a growing trade deficit. The last time the US had a trade surplus was in 1975.

At SCDigest, we think this really is a glass half full/have empty scenario. The question is the glass will go from here - and it looks to us like it will be a glass one-third full before too long.

Is the US manufacturing glass half full or half empty? More importantly, which direction does it go from here? Let us know your thoughts at the Feedback button below.

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