The Road to Growth in Manufacturing
By: Aimee Sukol, JD/MA/MS Ed.
Manufacturing is a metric for the US economy’s stability
Commerce and modern civilization cannot exist without manufacturing. The industrial sector produces life-saving medicine/supplies, food, clothing, homes, transportation, and modes of communication that drive everyday activity. As a national industry, manufacturing employs unskilled and educated workers who run production lines and design prototypes. When a country loses its manufacturing sector, we must ask why, and does this decline have implications for other areas of the economy.
This article highlights economic studies that argue national debt, lack of domestic investment, and a shift toward foreign investments over the course of several decades weakened domestic manufacturing and resulted in millions of lost jobs. This study further argues that automation has little to no impact on the loss of manufacturing jobs. As developing nations, most specifically China, experienced improvements in quality of life and worker compensation, US companies have begun to see cost savings in domestic production. Most recently, a wave of reshoring has placed an emphasis on the domestic supply chain and increased reliance on a local workforce. However, a renewed interest in domestic production has not significantly impacted manufacturing at this time, which continues to maintain large investments overseas.
As a precision sheet metal manufacturer, Meta Fab is eager to work with the local supply chain and explore methods for supporting American companies. We see incredible potential in automation, and investments in workforce skill development that provide opportunities for domestic manufacturers to improve output and efficiency. As we look ahead, we believe that exploring solutions together, manufacturers can individually and collectively support and protect domestic manufacturing.
COVID lays bare both manufacturing and the US economy’s vulnerabilities.
With little warning, COVID19 disrupted every aspect of the global economy. Hardest hit were areas that relied on capacity and human interaction (small businesses, brick & mortar, and hospitality sector), and these vulnerabilities arose decades ago as the US shifted towards a service-based economy and away from manufacturing.
Productivity (gross value add and employment) are measures of manufacturing growth. In the face of several wars and economic declines, manufacturing experienced considerable fluctuations in productivity. The Great Depression was among the first events to impact domestic production as consumer demand plummeted. US manufacturing growth was slower than other countries between the 1950s and 1970s, but a few factors pushed US production ahead of others: 1973 introduced the floating exchange rate and two oil shocks that provided an advantage for the US dollar against other currencies. After 1973, US labor costs grew significantly LESS than in other countries. US manufacturing production saw peaks in the ’90s, but the addition of a) China to the WTO; b) increased national debt, and c) trade relations with China that called for increased imports of Chinese made goods led to significant declines in US domestic manufacturing productivity.
In fact, US manufacturing growth is largely attributed to low labor costs between 1950-2000. However, US emphasis on maintaining costs low through less compensation per unit worked also led to weakened US production into the 21st century where trade agreements enabled countries to purchase US securities in exchange for agreeing to purchase their exports. Trade agreements were prefaced on the notion that domestic production or labor was not a strong interest at that time.
The decline in US manufacturing also created a decline in demand for trade schools and increased demand for 4-year universities. However, as Chinese and other industrializing countries increased their domestic production, so did their quality of life and wage expectations, thereby increasing US manufacturing costs. Again, as with domestic labor from the 1950s to today, US manufacturing sought to lower its overall costs through cuts to labor expenditures and has renewed interest in domestic production. Unfortunately, this historic trend of controlling costs through the price of compensation continues to present a problem as manufacturing seeks a domestic labor supply that has since been depleted for lack of job opportunities and competitive wages.
COVID19 impacted the global economy, disrupting production as each country focuses resources on its own population and production. To strengthen the United States’ position and capacity to address national needs, it must invest in domestic production of goods and domestic employment.
Experts’ miscalculations have led to misunderstandings about manufacturing performance and output.
To understand manufacturing’s impact on the economy and vice versa, its productivity (gross value add + employment) must be correctly measured. Over the past few years, there has been discussion of a manufacturing renaissance as analysts pointed to increases in manufacturing output to show stronger productivity. Unfortunately, this measure is flawed leading to the false belief that existing policies have sufficiently served the manufacturing industry.
First, manufacturing gross value add is value of output (quantity and price) minus the value of consumption (production costs). Compared to non-manufacturing industries, manufacturing as represented by all subsectors appeared to have higher production. Two miscalculations led to the conclusion manufacturing’s gross value add was higher than non-manufacturing industries. The first mistake was to inflate computers/electronics’ impact on manufacturing as a whole. While it appeared that productivity for computers was high, it only comprised a small fraction of the manufacturing industry. When computers and electronics were removed from the equation, manufacturing did not outperform non-manufacturing industries by any meaningful margin. The second mistake was overvaluing computer/electronics’ costs. For example, X gross value add of 1000 units at $.50 cost per unit will appear higher than X gross value add of 1000 units at $.25. It is implied that X’s gross value add is high if X can still produce 1000 units at higher costs. However, computers/electronics were buying parts overseas at lower prices than other manufacturing subsectors. Because analysts compared computers/electronics costs to other sector costs, such as precision sheet metal or plastics, they inflated computers’ gross value, which comprises a small portion of the manufacturing industry.
Employment in manufacturing also did not outperform non-manufacturing sectors. First, data shows manufacturing’s share of US employment has declined over 40 years. One measurement of employment is increased consumer demand and in the 1990s demand for electronics was at an all-time high. This demand helped sustain manufacturing in a period when employment across the board had declined. However, as with productivity, employment in the computer/electronics industry represented only a small fraction of manufacturing’s overall employment.
Tying US manufacturing employment to its rate of production and the computer sector was not the only mistake. As mentioned earlier, US manufacturing shifted towards outsourcing in the 2000s to curb costs. In fact, manufacturing lost one-third of its total employment figure between 2000 and 2011. While there is a new focus on reshoring, the manufacturing industry continues to employ foreign labor due in part to trade agreements that encourage imports at the expense of exports. It is worth noting that after examining the extent of investment in robotics/automation and access to capital to acquire automation, robotics is extremely limited and not a basis for low employment numbers.
Refocusing priorities: To recover in the face of COVID, the US must reinvest in its infrastructure, automation, access to capital, innovation, and reevaluate its spending/revenue policies
The above discussion highlights the fact that US manufacturing growth is intricately tied to economic priorities and culture, and the same conditions that expose the economy’s weaknesses impact manufacturing. US economic policies that shifted investments overseas and focused on the service sector (i.e., banking, accounting, consulting) led to a decline in domestic production and manufacturing growth.
First, public and economic policies do not benefit everybody equally. Trade policies at times benefit certain manufacturing sectors over others, so it is necessary to have a fundamental understanding of the priorities behind economic policies, and how they impact subgroups within manufacturing (i.e., company size and manufacturing subsector).
Second, once we understand that building a market for American exports over international imports is the road to manufacturing recovery, we have to identify and implement the framework that supports domestic production. Areas that impede domestic manufacturing are poor infrastructure, short labor supply, limited access to capital for local businesses to invest in automation, and trade policies that favor foreign imports. It is suggested by trade economists that the primary way to accomplish this is to reduce our national debt and encourage consumer savings.
In short, US manufacturing has not seen increased employment or growth because of an increased demand for electronics. Production efficiency, especially in electronics, has improved so companies can churn more output without increasing its labor.
In fact, manufacturing’s share of US employment and growth is modest or declining. The factors that most contribute to manufacturing’s declining economic influence are changes in economic priorities and policies that address external factors like tariffs, as well as internal investments, such as infrastructure and access to capital. When we pick through all of the factors, we see more possibilities and a road to real growth for all sectors from electronics to precision sheet metal.