Fit as a fiddle: Current manufacturing slump greatly exaggerated
By Karen Dilger, contributing editor (kadilger@comcast.net) -- Manufacturing Business Technology, 9/1/2008 12:00:00 AM
While the U.S. manufacturing downturn has dominated the news, conflicting analysis says the outlook isn't quite as pessimistic as it's being portrayed in the media. In fact, the manufacturing sector shows robust health with record output, sales, profits, return-on-equity, and record compensation.
The New York Times points to a decline in manufacturing in May for the fourth consecutive month while inflation surged to the highest in four years. It also states that this year's manufacturing downturn is the worst since the period February to June 2003, and comes as the deepest housing slump since the depression has weakened the broader economy.
“They are missing the big picture,” says Daniel Ikenson, associate director of Washington-based CATO Institute's Center for Trade Policy Studies.
“Manufacturing is in a bit of a slump, but this Chicken Little-ism is a bit far-fetched,” Ikenson adds. “Revenues, profits, ROI, and exports had record highs in 2006, with a slight decrease in profits in 2007. When the dollar weakens, it does hurt our businesses because demand in the U.S. is down, but this is mitigated by record-high exports.”
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U.S. factories have continuously churned out more output year after year—with the exception of brief retractions during economic recessions—regardless of the decline in manufacturing employment, and regardless of import levels. |
Politicians and unions point to a decline in workers in the manufacturing sector, but manufacturing employment peaked in 1979—before China had an impact on the world economy, Ikenson explains. In 1953, manufacturing's share of the U.S. gross domestic product accounted for 28 percent of the total economy. Today it is much lower (at about 12 percent).
“Manufacturing as a percentage of the total economy is lower, but the services sector is growing in a rich country like ours,” explains Ikenson. “We are still the world's largest manufacturer.”
U.S. factories count for 21 percent of the world's output as measured by value added, and China accounts for only 8 percent. In fact, the U.S. produced two and a half times more output in 2006 than Chinese factories.
Ikenson concedes that a large trade deficit in electronics still remains; however, U.S. manufacturing gravitates toward higher valued-added products and focuses more on quality.
“The back of an iPod says 'Made in China,' but it is designed in the U.S., along with logistics, advertising, and some parts manufacturing,” says Ikenson. “People say we should stop importing iPods, but it would be more expensive to produce them here because it's labor-intensive.”
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| Most remarkable in light of all of the hand wringing about manufacturing's dire straits is that for the first time ever, aftertax manufacturing profit rates broke through the 8-percent mark in 2006. Likewise, for the first time ever, return on equity in the sector exceeded an astounding 18 percent. Thus, based on production and operating performance, U.S. manufacturing appears to be firing on all cylinders. |
Measured by historical standards and recent trends, U.S. manufacturing output is strong, says Franklin Vargo of the National Association of Manufacturers (NAM), in Ikenson's report, Thriving in a Global Economy. NAM says the lack of skilled workers is one of American manufacturing's biggest problems, in addition to the rising costs of health care, energy, taxation, and regulation.
Making tariff schedules and other taxation more equitable for the middle and lower class is one way to improve current trade barriers, says Ikenson. The three basic elements of clothing, food, and shelter (steel, lumber) make up the three largest trade restrictions.
“There are anti-dumping restrictions on steel and lumber, and high taxes on certain food products," says Ikenson. "Cotton shirts have a higher tariff than silk shirts, which is obviously slanted against poorer Americans.”
Ikenson thinks the current manufacturing setback can be best described as a temporary glitch and part of a cyclical occurrence that eventually will straighten itself out.
“There was a pronounced drop in manufacturing, but the slope has evened out now,” he says. “The media harps on the fact that the U.S. has lost three million manufacturing jobs, but this occurred back in 2002 and 2003. And the mortgage and credit crisis isn't a trade problem, but a demand issue. Consumers can't tap into their home value, but that also is a cyclical problem.”
