I received an investment advisor email today that muttered darkly about how the current world structure, in which the US acts as a design and assembly platform while other countries, like China, do all the manufacturing, was unsustainable and would lead inevitably to the collapse of the US. I have heard this idea repeated in many different forums and ways. Apparently, the fact that the US manufacturers nothing but financial assets, as the email complained, while China produces real goods, will lead to the end of the world as we know it.
But all the thousands of stories about China's manufacturing buttons and toy trains doesn't mean that US manufacturing has crumbled. In fact US industry continues to produce a greater share of industrial value added than any country in the world, and it has been growing every year.
The confusion probably comes from two sources. Total value of US manufacturing has grown consistently over the decades, but other sectors -- research, design, services -- have grown faster, so that manufacturing's share of the US economy has declined. Also manufacturing productivity has grown quickly, resulting in a decline in the number of workers involved in manufacturing. But producing more and more with fewer and fewer workers is actually a sign of economic success, not failure.
On that note here is an article that was published in yesterday's Chicago Tribune:
Trade Fears are All Smoke
by Daniel J. Ikenson
Daniel Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute.
On the campaign trail and on Capitol Hill, politicians are promising to save U.S. manufacturing from the sweeping tides of international trade. "If we don't have a strong manufacturing base in our economy, it won't be long until we don't have a strong economy," proclaims presidential candidate and Sen. Hillary Rodham Clinton (D-N.Y.). Congressional Democrats have been pitching a new trade policy agenda that will "stand up for American workers, farmers and businesses, especially in the hard-hit U.S. manufacturing sector [emphasis added]."
When Congress reconvenes, committee leaders are expected to begin marking up some of the nearly two dozen pieces of pending trade-related legislation. Most of those bills are antagonistic toward our trade partners or outright protectionist, inspired in large measure by the myth of American manufacturing decline. But U.S. manufacturing is not in decline; it is thriving. By historic standards and relative to other countries' manufacturing sectors, U.S. manufacturing is firing on all cylinders.
In 2006, the sector achieved record output, record sales, record profits, record profit rates and record return on investment. American manufacturing performance has never been stronger. Nor was 2006 an aberration. Since the nadir of the manufacturing recession in 2002, all of those indicators have been trending upward. Earlier this month, the Federal Reserve released its monthly report on industrial production, which found that U.S. manufacturing output has continued to rise throughout 2007.
Contrary to the inferences one would be expected to draw from the dishonest political discourse, U.S. factories remain the world's most prolific, accounting for more than 20 percent of the world's added manufacturing value. By comparison, Chinese plants account for about 8 percent. Thus, for every dollar of product made in China, U.S. factories produce $2.50 of output. And not only is manufacturing thriving. It is thriving in large measure because of international trade. Manufacturing exports and imports hit records in 2006.
Over the past few years, the world economy has been growing at a faster clip than the U.S. economy. Domestic producers have availed themselves of the benefits of that growth through higher foreign sales revenues and declining unit costs of production — the result of the longer production runs afforded by growing foreign demand. Meanwhile, better access to imported raw materials, components, other production inputs, and capital raised though stock and bond issues has helped restrain overall costs of production, as growing world demand has bid up the prices of industrial commodities.
While misguided (or disingenuous) politicians rail against the rising trade deficit, they fail to comprehend (or acknowledge) that U.S. producers are America's largest importers. In 2006, 55 percent of all U.S. goods imports were industrial products and components, the kinds of purchases made not by consumers, but by producers.
That statistic supports the strong correlation between manufactured imports and U.S. manufacturing output, which has been observed for decades. Imports and output rise and fall in tandem. Thus, policymakers who seek to restrain imports are effectively advocating a manufacturing recession. If their mercantilist worldview prevails, and imports decline, reports of idled factory equipment will not be far behind.
Those who speak of American deindustrialization often cite the decline in manufacturing employment. Recently, Sen. Carl Levin (D-Mich.) complained that "the Bush administration has not lifted a finger to support manufacturing in America while we have lost 3 million manufacturing jobs on its watch."
While it is true that the number of workers employed in the U.S. manufacturing sector declined by about 2.8 million between 2000 and 2003, the fact is that job attrition in the sector reverted to its much more modest, decades-long rate of decline after 2003. Since 2003, the sector has shed about 300,000 jobs.
But declining employment in a sector that is producing record output is hardly credible evidence of doom. In fact, the two indicators taken together are evidence of soaring labor productivity, which is the source of long-term increases in living standards. With the national unemployment rate at 4.5 percent, 1.8 million net new jobs created on average every year since 1980, U.S. plants producing record output, and manufacturing companies earning record profits, what is so troubling about the loss of manufacturing jobs?
The much larger threat to manufacturing is the proclivity of meddling policymakers to fix what ain't broke. Spreading myths about the precariousness of U.S. manufacturing and laying the blame on trade policy may score political points with the unions. But if Congress passes legislation that compromises the access of U.S. producers to international markets, there will be real problems to solve.
There are many people who are smarter then average who are taken in by every fad. My daughter has a super high IQ and has won awards at her college as the best student in math and engineering. She said the other day that the US makes nothing that it’s a total service economy. People like that get all their information from the headlines of the New York Times with out critically reading the articles. I could go on and on about how they are wrong about almost everything but they are incapable of change. .
By James Briggs - 9/6/2007 7:20 PM
There are many people who are smarter then average who are taken in by every fad. My daughter has a super high IQ and has won awards at her college as the best student in math and engineering. She said the other day that the US makes nothing that it’s a total service economy. People like that get all their information from the headlines of the New York Times with out critically reading the articles. I could go on and on about how they are wrong about almost everything but they are incapable of change. .
By James Briggs - 9/6/2007 7:21 PM
Comparisions on nominal prices are senseless, because China produces goods at about 1/4 the OECD price. Thus saying that US produces 20% of world manufacturing output while China only 8 is misleading. On PPP Chinese industrial output is exceeding that of US.
By Gabor - 9/7/2007 5:46 AM
Gabor, I don't think you can inflate industrial production up using full PPP adjustments because an awful lot of Chinese industrial production is exported. In thise cases I would guess that the nominal dollar value is the correct one to use. In addition, Chinese SOEs tend to do everything inhouse, which by an accounting quirk means that even things that are "service" related become part of industrial output. With many large US firms outsourcing things like design, marketing, information processing, etc. these high-value-added activites become transformed out of the "manufacturing" column and into the "service" column, when in China they stay as part of "manfacturing". Finally, I am not sure why the argument that Chinese manufacturing is expanding is used to prove that US manufacturing is declining. It is perfectly possible for both countries to produce more.
By Michael Pettis - 9/7/2007 12:38 PM
The question is, is US industrial production collapsing. That is has the US stopped all industrial production or is it likely that US industrial production will be effectively zero in less then 5 years.
The hidden but false assumption in bringing up China’s industrial production is the idea that the more China produces the less the US can produce. The trick here is to assume that industrial production is a zero sum game where production never varies so that the more one country produces the less another country can produce.
The left keeps predicting a depression that would dwarf the Great Depression of 1929 out of wishful thinking. Every 6 months Atlantic runs an article with that theme. Yes absolutely positively and we really mean it this time America is doomed claims Atlantic.
The right on the other hand keeps up their Chicken Little stories about the demise of the economy as an excuse to transfer wealth from the Middle Class to the rich. They want people to pity the rich, believe the Middle Class is lazy and poor people are worthless. They claim America is doomed unless government cuts all services but the armed service and that the only thing America can afford is another tax cut.
By James Briggs - 9/8/2007 3:39 AM
The issue is still jobs. We lost 45,000 manufaccturing jobs in August. Ikenson seesm to think that layoffs have dwindled. He also decries U.S. "protectionism" but holds no objection to China's blatantly protectionist and self-aggrandizing policies. What Ikenson is really doing is providing cover for the multinationals who've already outsourced to China. Gotta keep that gravy train rolling...
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (6) for "US industrial production is ...
- 9/11/2007 5:24 AM
November, 2007