Why Celebrate a False U.S. Manufacturing Renaissance?
The repeated claims that U.S. manufacturing is enjoying, or is on the verge of, a renaissance have been undermined again. The latest reality checks were provided by official statistics on manufacturing output.
The Commerce Department’s first report on domestic industry’s full-year 2012 performance showed an impressive increase in U.S. manufacturers’ output. Yet the figures released June 6 were hardly profound, even by the standards of the previous decade, which no one considered a golden age for U.S. industry.
President Barack Obama and other proponents of a manufacturing renaissance got even more bad news June 14, when the Federal Reserve’s industrial-production data for May showed that the sector’s rebound from the recession had just about stalled. Manufacturing output remains smaller than when the last recession began in 2007, despite the huge government stimulus since then.
U.S. manufacturing’s 6.2 percent inflation-adjusted growth in 2012 was much faster than the 2.5 percent growth of the economy as a whole, and considerably faster than manufacturing’s 2.5 percent real expansion in 2011. Even so, we are nowhere near a renaissance. In 2010, early in the current recovery, the sector recorded real growth of 6.9 percent; it showed an 8.2 percent expansion in 2004, and grew 6.4 percent in 2000.
Moreover, not only has U.S. manufacturing previously surpassed the 2012 number, it doesn’t appear that it will stay at these levels. According to the Fed’s May report, industry’s real year-on-year growth rate is about 2.4 percent, the worst showing since the recession ended in June 2009. And the momentum has slowed since January.
It’s true that manufacturing growth has outpaced the overall economy during the recovery. Doesn’t that reverse a longtime trend? In particular, doesn’t that relative strength signal progress toward Obama’s worthy goal of creating an economy “built to last,” one based on producing and earning, instead of borrowing and spending?
The data don’t support this optimistic reading, either. Manufacturing’s robust growth last year did raise its percentage of inflation-adjusted total economic output to 12.5 percent. That’s a big change from its nadir of 11.5 percent in 2009. But this improvement is only a return to levels that industry reached regularly during the previous bubble decade, when manufacturing is widely thought to have atrophied in relative terms largely in response to the financial sector’s bloat.
In fact, the new statistics -- along with the latest monthly results from regional Fed banks and private-sector surveys -- show that the manufacturing-renaissance skeptics have been right all along. Industry’s recent surge is a direct result of the magnitude of this highly cyclical sector’s recessionary decline. From the recession’s onset in 2007 through its bottom in 2009, domestic manufacturing output fell almost 15 percent after inflation. Overall output fell, too, but only by 3.9 percent.
Since 2009, real manufacturing production has rebounded by 16.4 percent, more than twice as fast as the 6.4 percent growth for the entire economy. Nonetheless, domestic industry still hadn’t quite regained its pre-recession peak by the end of 2012. The full economy, meanwhile, had erased all of its real gross-domestic-product losses by 2011.
The new data aren’t the only reason to doubt the renaissance claims. Job creation in the sector has turned negative in the past three months, and the pace of recovery in manufacturing has been less than one-third as fast as the overall employment recovery. The manufacturing trade deficit set a record of $686 billion (in pre-inflation terms -- the only official data available) in 2012 and is headed toward another record high this year.
Imports now control a greater share of U.S. markets for advanced manufactured goods (38 percent, according to a new U.S. Business and Industry Council study) than ever before. And U.S. manufacturing output keeps slipping further behind that of China, the world’s new industrial-production leader.
Further, while a future reversal in U.S. manufacturing’s fortunes can’t be ruled out, many of the long-term trends believed to be lining up in its favor look decidedly less promising upon closer inspection. For example, though wages and other production costs in China are rising sharply, the prices of Chinese manufactured goods imported into the U.S. are actually falling at roughly the same rate as the prices of all imports of manufactured goods. And the shale-gas revolution’s impact on U.S. industry could be muted by the sector’s continuing shift toward less energy-intensive industries, such as information-technology hardware; sophisticated navigational, measuring and control instruments; and advanced medical equipment.
For U.S. manufacturing to be in a position to thrive, the government will need to devise, as is frequently recommended, new policies in education, taxes, regulations and research, and provide development assistance.
Even then, domestic manufacturers will face financially stronger competitor countries that are much more able to afford subsidies and tax cuts; perhaps two-dozen manipulated currencies; nontariff trade barriers with no U.S. counterparts; and rivals in the developing world (including the overseas affiliates of U.S. companies) that exploit rock-bottom regulatory levels.
That means the U.S. should also press for new international-trade policies. For example, longstanding legislation to strengthen the response to currency manipulation has been reintroduced in the House and Senate. It should be promptly passed and signed by the president. Buy American regulations that govern public-sector procurement should be greatly expanded, even at the risk of violating treaty obligations, and much better enforced. The massive, discriminatory effects of foreign value-added tax systems must be offset by a border-adjustment levy. And new trade deals, such as the proposed Trans-Pacific Partnership, which are modeled on past failures, should be scrapped or reconsidered.
Until then, talk of a manufacturing renaissance will remain just talk.
(Alan Tonelson is a research fellow at the U.S. Business and Industry Council, which represents almost 2,000 domestic manufacturing companies. He is the author of “The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade Are Sinking American Living Standards.”)
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