Make Me: The State of U.S. Manufacturing

The United States has been hollowed out. It no longer manufactures goods. Once the factory of the world, the U.S. now 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 television or electronic good 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, 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% now.

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. There were more than 17 million 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.