Manufacturing Growth: Much Worse than We Thought

According to the official statistics from the BEA, real manufacturing output, or value-added, grew at a 2.6% annual rate between 1998 and 2007. That’s barely a hair below the 2.7% growth rate for the entire economy.

More astonishingly, every major durable goods industry (with the exception of primary metals) grew over this stretch, despite massive increases in imports. How can this be?

The answer is: It can’t. The measurement of manufacturing growth was distorted by the problems with the import prices. I explain it all in my online story “Growth: Why the Stats Are Misleading”. Here’s an excerpt:

… new research by Emi Nakamura and Jón Steinsson of Columbia University suggests pervasive problems with the government’s import-price statistics. One example: Figures from the Bureau of Labor Statistics seem to show that the reported price of imported furniture rose by a total of 9% from 1998 to 2007. But how can the import price of furniture have risen over a stretch when the price paid by consumers fell by 7%? Or take computers. Official stats indicate that the price of computers for consumers fell at an average annual rate of 22% a year from 1998 to 2007, which seems to fit with personal experience. However, the import price index for computers shows a drop of only 8% per year over the same time, which seems unlikely. Similar problems occur for other imported consumer durables, including motor vehicles and parts.

Like a slow water leak that eventually erodes the foundation of a house, these apparently arcane import-price problems mean that the real growth of imports has been significantly underestimated for goods such as computers that have rapid model changes. That in turn distorts the productivity and growth stats, making them look a lot better than they really are. Adjusting for the finance bubble and the import-price problems means economywide productivity growth may have been about 1.3% per year rather than the reported 1.7%. Similarly, real growth of gross domestic product falls to roughly 2.3% annually from 2.7%. (The exact size of the downgrade depends on what is assumed about the correct change in import prices.)

That’s bad enough, but the real downgrade comes in the manufacturing sector. Official stats seem to show that U.S. manufacturing output grew at a 2.6% annual pace from 1998 to 2007, a strangely positive picture considering how many factory jobs were lost and how much production was shifted overseas. After the adjustments, however, the new growth rate for manufacturing output might be as small as 0.8% a year, and factory productivity growth becomes weaker as well. The conclusion: You can’t depend on productivity and output growth to make a case for strong innovation

This is a big deal. Take a look.