Is US Manufacturing Fundamentally Strong?

from the St Louis Fed

Many people think that the U.S. manufacturing sector is in a downward spiral and that it can no longer compete globally, but a recent Economic Synopsesessay argues that is not the case.

The authors – Kevin Kliesen, a business economist and research officer at the St. Louis Fed, and John Tatom, a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise at The Johns Hopkins University – examined trends in U.S. manufacturingand concluded that its slump is largely due to the performance of the U.S. economy overall.

“We believe that U.S. manufacturing is fundamentally strong and that claims about foreign competition tend to be overstated,” they wrote.

Manufacturing in the U.S. vs. Other Countries

To examine the competitiveness of U.S. manufacturing, the authors first compared its performance with that of seven other developed countries.1 U.S. manufacturing output accounted for a little more than one-third of this group’s total in 1997 and about 36 percent of this group’s total in 2015.

“By this standard, U.S. manufacturing is competing well against the manufacturing sectors of other large, developed countries,” they said.

Kliesen and Tatom also looked at China and found that China’s share of global manufacturing output increased 10.1 percentage points (to 19.7 percent) from 2005 to 2015. In contrast, the U.S. share declined 3.5 percentage points (to 15.3 percent) over that period. However, the authors added that China gained more manufacturing share from other countries.

“So, while China successfully expanded its market share compared with the United States, that success registered even more at the expense of China’s non-U.S. competitors,” they wrote.

Sensitive to the State of the Economy

Kliesen and Tatom noted that U.S. manufacturing continues to grow and to have a large global share, but its performance (especially in terms of productivity and output growth) has declined relative to previous periods.

They explained that U.S. manufacturing output and employment are sensitive to the state of the economy, as shown in the figure below. For example, manufacturing output and manufacturing employment declined 20 percent and 13.7 percent, respectively, during the Great Recession.

“We don’t see this as a signal that U.S. manufacturing is weak, however; instead, we see economy-wide factors at work,” Kliesen and Tatom wrote. For instance, they cited the slow growth of the U.S. population – and of the labor force in particular – as having an impact on long-term economic growth and employment.

“So, along with the aggregate economy, manufacturing output and productivity growth have been unusually slow,” they said.

Securing a Brighter Future for U.S. Manufacturing

The authors pointed out that, historically, manufacturing has seen rapidly rising productivity growth and declining employment, but that U.S. manufacturing output’s share of GDP has been roughly constant over time.

However, in recent years, manufacturing has not seen the strong output growth that might’ve been expected. Kliesen and Tatom attributed this to a slowing labor component and also to weaker manufacturing productivity growth. The latter, they added, has slowed since the end of 2007, both in absolute terms and relative to U.S. productivity growth overall.

They calculated that manufacturing output per worker increased at a 0.6 percent rate from the fourth quarter of 2007 to the third quarter of 2017, while real GDP per worker increased at a 0.9 percent rate. “Thus, weaker manufacturing output growth importantly reflects fundamentals in the aggregate economy,” the authors wrote.

Conclusion

Kliesen and Tatom concluded: “So, if there’s any credence to the view that U.S. manufacturing has diminished, it mostly stems from the nation’s slower economic growth process and very weak economic recovery. If aggregate productivity rebounds, it will be reflected in a re-energized manufacturing sector.”

Notes and References

1 In addition to the U.S., the seven other developed countries studied were France, Germany, Italy, Japan, Mexico, South Korea and the U.K. Kliesen and Tatom noted that these eight countries make up about 82 percent of manufacturing activity among all Organization for Economic Cooperation and Development countries.

Additional Resources

• Economic Synopses: Here’s Why U.S. Manufacturing Is Fundamentally Strong
• On the Economy: Advanced Manufacturing Is a Key Cog in U.S. Economy
• On the Economy: The Manufacturing Sector’s Evolution and Its Role in an Economy

Source

https://www.stlouisfed.org/on-the-economy/2018/may/us-manufacturing-fundamentally-strong

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.