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# Strength in NumbersPUBLIC ACCESS

The U.S. Still a Manufacturing Powerhouse, But Just How Powerful Depends on How you do the Math.

[+] Author Notes

Associate Editor

Mechanical Engineering 130(09), 48-50 (Sep 01, 2008) (3 pages) doi:10.1115/1.2008-SEP-6

## Abstract

This article highlights that today, however, American factories are in decline; their products cannot compete internationally, and they are being overtaken by global competitors. US manufacturers not only face very real challenges, but they also have their share of success when compared with many of their counterparts in other countries around the globe. Economists spend a lot of time arguing about the trends behind the data. Yet the debate takes place against a changing background. The US economy has grown more international and more globally integrated than anyone could have imagined 30 years ago. Federal Reserve economists use marketplace feedback to place a value on such added capability, and that is the number that shows up in the IP Index for computer and electronic products. Subtract computers from the index for the manufacturing sector, and the numbers look very different. Hence, manufacturing output should include computers and electronics, but subtracting them from the total provides a very different picture of the rest of the manufacturing economy.

## Article

When the media talk about American manufacturing, the news is usually bad. Most stories involve brutal global competition, rising imports, job losses, factory closings, or a combination of them all.

Stories like these or maybe it's the unemployed factory workers now stocking shelves in grocery stores or dishing out (1st food-have created a pervasive urban legend. It asserts that a generation ago, U.S. manufacturing was the envy of the world and a fount of innovation. Its products were universally respected. Today, however, American factories are in decline, their products cannot compete internationally, and they are being overtaken by global competitors.

The reality is far more complex and nuanced U.S. manufacturers face very real challenges, but they also have their share of success when compared with many of their counterparts in other countries around the globe.

"The United States is still the number one manufacturer in the world," said David Huether, chief economist for the National Association of Manufacturers, an industrial trade association in Washington, D.C. "We account for about 21 percent of all global manufacturing output, down from a recent peak of about 23 percent.

"The big changes have been in Japan and China, where Japan has outsourced a lot of its manufacturing to China. Since 1994, when China devalued its currency to make its products more affordable, it went from 4 percent of global manufacturing to 13 percent, while Japan fell from 18 percent to about 12 percent today."

In fact, if U.S. manufacturers had formed a separate nation in 2004, they would have ranked as the world's eighth largest economy (just behind Italy), according to an analysis by the National Association of Manufacturers based on data from the International Monetary Fund and the U.S. Bureau of Economic Analysis.

Moreover, U.S. manufacturing productivity has been accelerating, as Kristin Forbes, a member of the President's Council of Economic Advisors, pointed out in a 2004 paper. The U.S. Bureau of Lab or Statistics measures productivity as output per hour. According to Forbes, it rose 2.8 percent annually between 1950 and 1973, 2.6 percent between 1973 and 1995, 4.0 percent between 1995 and 2000, and 4.8 percent between 2000 and 2003. Including the three years of data published after her paper, productivity growth between 2000 and 2006 reached an astonishing 6.8 percent per year.

If things are this good, then why all the doom and gloom? The answer is that there are other ways of looking at American manufacturing, and they are not as encouraging.

Forbes's 2004 paper holds some clues. In it, she made the classic case for rising productivity: " It raises real wages and living standards for American families, so that U.S. workers can buy more for every hour of work. It lowers the cost of production for American firms, improving their competitiveness relative to foreign companies. But rapid productivity growth means that companies can produce more goods without adding more workers."

Jobs have certainly declined. In the early 1940s, Forbes said, 32 percent of all Americans worked for manufacturers, according to data from the Bureau of Lab or Statistics. By 2007, the number of people working in manufacturing had fallen to only 12 percent of the workforce.

The same data show that the actual number of manufacturing jobs has declined sharply since the late 1990s. During the 20 years between 1978 and 1998, manufacturing lost 1.3 million jobs. Over the past 10 years, it has shed 4 million workers, falling to fewer than 14 million jobs. The decrease is even steeper after subtracting managers, engineers, and other professionals from the mix.

Yet rising productivity has not produced higher wages. The Department of Lab or reports that the average factory worker made $729 per week in June 2008. But when statisticians "deflate" that number-subtract the impact of inflation and express the data in "real" 1982 dollars the average factory worker's weekly income actually declined to$340 per week in June 2008, from \$361 in 1978. The survey does not include benefits, such as insurance and pensions, which have declined even further.

Economists spend a lot of time arguing about the trends behind the data. Yet the debate takes place against a changing background. The U.S. economy has grown more international and more globally integrated than anyone could have imagined 30 years ago. In The World is Flat, a book that made him one of the best-paid business speakers in America, two-time Pulitzer Prize-winning author Tom Friedman argues that many of the barriers that once separated nations are now falling.

Thanks to the Internet, work flow software, and cell phones, information and manufacturing technology moves around the world at lightning speed. Companies in developing nations like China, India, and Brazil are now perfectly capable of competing with developed nations. Moreover, those same technologies-plus the ability to fly nearly anywhere in a day-have given buyers in developed nations the confidence that they can talk and work with vendors half a world away as easily as those in the next state. The removal of traditional barriers to trade has flattened the world, making it easier for anyone to compete anywhere.

## Winners and Losers

The Industrial Production (IP) Index published by the Federal Reserve System is the standard measure of industrial production, which includes manufacturing, mining, and utilities. It seeks to measure value added, the price of a final product minus the cost of the components that go into it multiplied by the volume of output, according to Fed spokesperson Susan Stawick. The index uses real 2002 dollars to calculate all values.

Manufacturing jobs declined by about a quarter in the past 30 years. As a share of the job market, they plummeted as overall employment rose at the same time. Source: U'.S. Department of Labor.

The IP index makes it possible to compare how the output of different types of industries compares over time. At first glance, the index shows surprising growth for manufacturing output. Real manufacturing output more than doubled between 1978 and 2007, rising 124 percent. This was not much slower than the nation's Gross Domestic Product. the total market value of all final goods and services produced within the country, which increased by 130 percent over the same period in real dollars.

The tripling of manufacturing volume in durable goods since 1978 was spurred by production of computers and other technology products- many representing product markets that did not exist 30 years ago. Source: Federal Reserve System, Industrial Production Index.

Even more surprising is the surge in durable goods, such as vehicles, machinery, and aircraft. Between 1978 and 2007, it more than tripled, rising 206 percent. Over the same period, output of non-durables, such as food, paper, and chemicals, rose just under 50 percent. The power behind the surge in durable production was computers and other technology products, which increased an astounding 5,700 percent.

The surge in technology products is not entirely surprising. Remember, in 1978 hand-held calculators were still in their infancy and computers were just making the transition from hobbyist kits to consumer products.

Huether of the National Association of Manufacturers said that the way the IP Index measures computer and electronic products overstates the strength of manufacturing. "Strip out the high-tech products and you get a very different picture," he said.

The problem is that just as engineers have developed several different ways to measure hardness, so economists have created more than one way to measure output. When it comes to computers and electronics, they do not just count boxes or chips as they roll off the line. They also count the capability of computer products, so a computer with a more powerful processor has a greater output weight than last year's model.

Federal Reserve economists use marketplace feedback to place a value on such added capability, and that is the number that shows up in the IP Index for computer and electronic products. Subtract computers from the index for the manufacturing sector, and the numbers look very different. Between 1978 and 2007, manufacturing output grew 46 percent, and durable goods production rose 49 percent. Clearly, manufacturing output should include computers and electronics, but subtracting them from the total provides a very different picture of the rest of the manufacturing economy.

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