Ignore Trump’s whining. It turns out U.S. manufacturing was surging all along

NationalPost.com – Opinion – U.S. production has actually been increasing virtually non-stop since the 1970s
November 22, 2017.   PIERRE LEMIEUX

Despite what government planners seem to think, there is nothing sacred about the manufacturing industry. But there is something sacred about truth and facts. And the truth is that, contrary to so much political rhetoric, American manufacturing is not actually on the skids.

On November 10th, President Donald Trump griped in a speech in Vietnam that “jobs, factories, and industries were stripped out of the United States.” As shown on the chart nearby, U.S. real manufacturing production has been increasing virtually non-stop since the 1970s (where the data series begins). Recessions are the exception, and especially the Great Recession. From December 2007 to July 2009, manufacturing production dropped by nearly 20 per cent. But it has since recovered 97 per cent of those losses. Value added by manufacturing, which is equivalent to its contribution to GDP, has recovered even more.

It is true, though, that manufacturing employment has been on a downward trend for several decades, from its peak of more than 19 million employed in 1979 to about 12 million in 2016. (During that time, total employment in the American economy has grown from about 99 million to more than 151 million.) In proportion of employment, American manufacturing has dropped from 25 per cent in the early 1950s to eight per cent today.

Manufacturing employment has been on a downward trend for several decades

But that trend is not limited to the U.S. A recent study by economists David Autor and Anna Salomons shows that, between 1970 and 2007, in a database of 19 developed countries, the average (unweighted) employment share of manufacturing has dropped by more than 15 percentage points.

How can manufacturing output increase while employment is diminishing? The reason of course is the dramatic increase in labour productivity, due to technological progress and the increased efficiency of global supply chains. And how can real manufacturing output increase while its share in GDP is decreasing? The reason is that demand for services has grown faster than it has for physical objects, even though demand grew for both. Two-thirds of what people consume is now made of services — mainly education, health care, recreation and housing (which, whether rented or owned, is always measured as a service in GDP numbers).

Manufacturing has changed, especially in developed economies. The noisy, dirty shop of yesteryear has been largely replaced by engineers and highly trained technicians controlling machines by computer. Additive manufacturing (3D printing) is replacing some assembly lines.

At the same time, services that manufacturers might have provided themselves for their own factories — from logistics and marketing to cafeteria services — are now frequently outsourced to specialized firms, which separated many activities from the manufacturing sector where they once lived. When that shows up in the statistics, it fuels the perception that the manufacturing sector has shrunk. A paper by economists Andrew Bernard, Valerie Smeets, and Frederic Warzynski suggests that some manufacturing firms who have subcontracted their assembling processes have changed their methods so drastically that they may now no longer be classified in economic statistics as manufacturers, even if they are still in charge of all the conception, engineering, co-ordination, and distribution activities for their manufactured products.

Comparative advantage of countries has changed accordingly. Developing countries now have a comparative advantage in assembling components with a lot of unspecialized labour. This has become low-end manufacturing, but nobody complains (or should complain) as this specialization has allowed a large number of poor countries to escape poverty, a huge historical shift. The comparative advantage of rich countries has moved to high-end research and development, conception, design, engineering, complex manufacturing (such as 3D printing), logistics, and distribution.

South Carolina textile manufacturer Milliken & Co. provides an interesting example. Until the death of its founder Roger Milliken in 2010, the company was at the forefront of protectionism. It has now developed high-tech fabrics such as burn bandages, a fabric that snuffs out fires, and a cloth that turns into concrete when hosed down. The company has stopped its protectionist whining, with its cutting-edge products in demand worldwide.

Is manufacturing output going to plateau in America and other rich countries? No prophet can tell you that, but it has certainly been growing, not plunging, over the past several decades. The accompanying chart suggests that most of the post-recession rebound of manufacturing occurred under the Obama administration. Yet, nearly 20 per cent occurred in the few months since Trump took office. Of course, Trump has done virtually nothing policy-wise that could have caused this. The vibrant world economy is probably the main explanatory factor.

In fact, politicos and their armies of bureaucrats can do little to change the causes of the evolution of manufacturing. But they can do lot of damage by continuing to worship the noisy, smelly, unionized shops of the past.

Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book on free trade will be published by the Mercatus Center at George Mason University. PL@pierrelemieux.com.

http://nationalpost.com/opinion/ignore-trumps-whining-it-turns-out-u-s-manufacturing-was-surging-all-along/wcm/5a0a2eae-c191-4a2d-b5d3-6cf48da8041d

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