Spotlight on Manufacturing

Update 380 — Spotlight on Manufacturing:
Trump, Uncertainty Make America Wait Again 

The NY Times last week quoted Sheri Menelli, co-owner of RJM Music, seller of Chinese LCD screen imports based in Vista, CA: “We keep hearing on TV that China is paying for the tariffs… I can tell you that right now, I’m paying for the tariffs.”  We all are.  

Sheri is trying to pass costs on to consumers but “we’ve been eating it for the last two months.”  The situation is even worse for producers. Manufacturing has now officially been punched into flatlining, as factory jobs shrank in August for the first time in 36 months.  The key variable is the unending tariff war and the president is making America wait again.  

More below…




U.S. Manufacturing Forecast: Cloudy 

The U.S. manufacturing sector is a critical gauge of the country’s economic health. Last month, the Purchasing Managers’ Index (PMI), measuring the overall direction of manufacturing, reached its lowest point since January 2016 — 49.1 percent; the first time since August 2016 that it has dipped below 50 percent, indicating a contraction in the massive sector. 

In 2018, the sector added an average of 220,000 jobs per month amid strong PMI numbers. This year so far, it is only mustering a monthly average job gain of 6,000. Some experts expect September’s numbers will show a decline. These trends are ominous, currently anomalous against the backdrop of the robust rest of the economy, but putatively the tip of the recessionary iceberg.  

Basic and low-end manufacturing has been declining for decades, but firms have adapted to globalization by producing more sophisticated and intricate goods. America remains a world leader — contrary to conventional wisdom. 

Source: Bureau of Labor Statistics

Manufacturing Responds to Change

Due in part to the proliferation of free trade agreements throughout the 1980s, 90s, and 00s, the U.S. share of global manufacturing activity has declined sharply from 29 percent in the early 1980s to 18 percent today. China overtook the U.S. as the largest global manufacturer in 2010. 

President Trump’s ongoing trade war with China and our European allies is ostensibly being waged to revive America’s manufacturing prowess. Not so — businesses everywhere are responding by cutting back on investment, meaning they are not only producing less but also purchasing less equipment from suppliers. U.S. manufacturers provide many of the capital goods other companies buy as an investment. 

Technological advancement enables modern and sophisticated manufacturing, where the U.S. remains a world leader.  While manufacturing’s share of the workforce has fallen precipitously, real output per worker doubled between 1947 and 1980 and doubled again from 1980 to 2010. R&D spending by U.S. firms continue to outpace foreign competitors. Manufacturing sectors that did not exist 50 years ago, such as biopharmaceuticals and types of medical devices, start and thrive in the U.S. as a result. 

Amid globalized labor markets and the offshoring of jobs, automation accounts for much of the decline in the share of workers in manufacturing employment. In 1943, 38 percent of U.S. workers were employed in the manufacturing sector — that share has since plummeted.  It has plateaued at eight percent. 

Automation eliminates redundancies and adds efficiencies along supply chains. It can even replace entire jobs — especially those considered ‘routine’ and ‘predictable.’ Shifts in the composition of both manufacturing employment and output have produced: 

  • Sectoral Changes: Labor-intensive sectors like apparel, textiles, and printing have been decimated. Employment in the computer and electronic products sector is also much less than decades ago. Conversely, transportation equipment, fabricated metal products, plastics, and rubber manufacturing continue to add workers to payrolls year after year. U.S. food manufacturing has also seen growth. 
  • Regional Impact:  Post WWII, firms operating across the Rust Belt accounted for more than half of all U.S. manufacturing and about 43 percent of all employment.  After a rapid decline, the Rust Belt continues to experience long-term economic distress. States across the South have fostered manufacturing through low labor standards and corporate tax welfare. Despite growth in automotive and aerospace manufacturing, the region is plagued by low wages, lower educational funding, higher poverty rates, and low intergenerational mobility. 

Legislative Perspective

Many members of Congress realize the importance of the manufacturing sector, which accounted for 11.8 percent of U.S. GDP in 2018 and have set out to strengthen it. 

  • 1933 Buy American Act and Buy America Provisions: Mandate that manufactured items for public use must be produced in the U.S. with U.S. materials. Lawmakers regularly waive ‘Buy America’ requirements, undermining the effectiveness of the program. Sens. Baldwin and Brown have championed the provisions and have called for restoring some of their original intent by procuring all materials needed for infrastructure improvement only in America. 
  • USMCA: President Trump has been touting his new U.S.-Mexico-Canada Agreement (USMCA) trade deal since he proposed it as a supposed upgrade from the 1994 North American Free Trade Agreement. Democrats in both chambers have called for an increase in labor standards and domestic labor reforms in Mexico to be included in the USMCA. 
  • H.R. 2397: Rep. Haley Stevens’ H.R. 2397, the American Manufacturing Leadership Act, passed the U.S. House on July 23 by voice vote.  The bill would reauthorize and improve the Revitalize American Manufacturing and Innovation (RAMI) Act, which established 14 manufacturing institutes around the U.S. to encourage investment in manufacturing.  It would improve RAMI by increasing funding, strengthening the institutes’ role in workforce development, and facilitating supply chain development.

An Uncertain Trajectory 

Currently, 12.9 million Americans work in the manufacturing sector, about 8.5 percent of the workforce.  While both figures have traditionally been higher, overall unemployment in the sector is at record lows; it still has more job openings than applicants. Sectoral shifts in employment from manufacturing to services and other sectors is not zero-sum in the aggregate.  The drop in the number of aggregate manufacturing jobs, for example, is virtually offset by new ones in food service alone since 2000. Today, the two sectors have nearly the same number of workers, and the wage advantage manufacturing workers long enjoyed over the minimum-wage jobs of food service has shrunk.

The decline of union participation (as well as the worker benefits that go along with it) and the movement of manufacturing to ‘Right-to-Work’ states helps explain part of the wage stagnation experienced by manufacturing workers, automation takes a toll in jobs but gives back in wages.  These issues exacerbate income inequality, though causality is unclear.  

What happens in the manufacturing sector may not stay there. Some economists believe U.S. manufacturing is already in the midst of a recession. This is especially problematic in regions like the Rust Belt, where industry is hanging on by a thread, or the South, where economic vitality depends on strong manufacturing.  With job gains in the sector slowing and the PMI contracting, some are predicting that the industry will start losing jobs as early as next month. The manufacturing sector may well be the canary in the mineshaft for the end of the recovery, if not for the next recession.  

Leave a Comment

Your email address will not be published. Required fields are marked *