Dispelling myths of U.S. manufacturing

A lot has been made of America losing its manufacturing prowess, but talk and perception have muddled the truth: U.S. manufacturing is more proficient and productive than it has ever been.

At the SIOR Fall 2011 World Conference in Chicago yesterday, a panel of experts addressed the issues facing the American manufacturing industry and what it may mean for the future of industrial real estate.

China jumped onto the world stage during the last two decades and many believe that its growth has been at the expense of the U.S. In one sense, there can be an argument for this as U.S. labor has decreased dramatically.

However, the rise of China in no way has affected the productivity of the U.S. manufacturing sector.

William A. Strauss of the Federal Reserve Bank of Chicago has been studying U.S. manufacturing statistics for more than a decade and he has found that an inverse relationship exists between production and labor.

Production in the manufacturing sector has increased an average of 3.1 percent annually for the past 63 years, with a majority of the production jumps beginning in the late 1970s. This can be attributed to continued strides in automation. In 1950 it took 1,000 workers to do what 177 do today.

It has also become a very profitable industry, outpacing GDP and outperforming non-financial corporate business in the last 60 years.

Of course, what has been good for manufacturers has not been good for labor. Labor in the sector has been declining an average of .3 percent annually since 1947. Now, manufacturing labor accounts for just 9 percent of the overall workforce.

Both trends continued until the recession hit in 2008. Production in manufacturing peaked at an all-time high in 2007 and then plunged 20 percent in 2008. Likewise, the sector lost 2.3 million jobs in the recession, accounting for one in every four lost in that time frame.

As the recovery has slowly emerged, production and labor are not on the same trajectory. Production has recovered at a robust 5.8 in the last 24 months and has almost made up for half of its losses since the trough. It has been a steady V-shaped recovery that Strauss believes will reach back to 2007 numbers in a few years.

Labor has only added 300,000 jobs in that same time period, one for every eight that was lost.

“We will not get back all of the 2.3 million jobs,” said Strauss. “I think that in 10 years manufacturing will be less than 9 percent of the workforce. It will decline even more in 20 years.”

Strauss pointed out that this is not a new phenomena. The U.S. has seen many sectors do this in the past, most prominently in the agricultural sector. In the 1870s, half of the U.S. population had to work in the agricultural sector just to produce enough food to feed the nation. Today, 1.6 percent of the population works in the farming sector and the country is able to produce a significant surplus for a much larger nation. Strauss believes that the manufacturing sector is on the same path. Output will continue to increase, while labor will continue to decrease.

Where will all of the jobs go? The most likely place to look would be the service sector, which has grown by 2-3 percent each year since 1947, when manufacturing began its decline.

Trade imbalace

While the U.S. has not lost its edge in terms of production there is a large trade imbalance with China.

19.1 percent of all U.S. imports come from China and 7.2 percent of all exports go to China. It is our third largest exporter.

However, once again, the numbers somewhat shade the truth. While many products say Made in China on our shelves in the U.S., the majority of them should really read Assembled in China.

Trade numbers have remained stagnant between the U.S. and other Asian markets such as Japan and Korea, but we still buy plenty of Japanese engineered and developed products…they are only shipped from China. To save on labor costs the majority of Asian countries now develop products in their home country and then outsource the assembly and manufacturing to China. Rather than ship the product back to Japan and then on to the U.S., the companies ship direct from China.

China then gets the distinction of being the exporter, but Strauss estimates that only 25-35 percent of goods it exports have Chinese-added-value. The majority is assembly and shipping.

Going toe-to-toe with China in this facet might not be in the nation’s best interest. Rather than attempting to compete as a manufacture of goods, the U.S. must make certain that it continues to lead the world in ideas and innovation.

As Jim Reeb of Institute St. Onge pointed out, “America’s best export now is its intellectual capital and innovation.”

Optimism

Despite the poor labor projections for the manufacturing sector both Strauss and Reed are optimistic for the future.

“Don’t count out U.S. growth,” said Strauss. “We are the third most populous nation and our purchasing power is much greater than the top two (China and India).”

He pointed out that the U.S. population is still growing at 1 percent annually, which may not sound like much, but that outpaces China’s .5 percent annual population growth. India leads with population growth of 1.3 percent and will eventually overtake China as the world’s most populous nation.

Reeb said that international manufacturers will look at the U.S. favorably in future. Many European-based firms are looking to expand and the U.S. is the most likely place for them to go. Even though the U.S. is in a slow recovery, it is still considered a very stable investment in the eyes of foreign investors.

“Many European firms are coming here for access to capital and a stable economic environment,” he said.

Mark Goode of Venture One Real Estate said that there will be plenty of opportunities for firms to land build-to-suit deals with manufacturers looking to establish locations in the U.S.

His firm has been off to a good start, recently landing a project for Danfoss Drives, a Havnbjerg, Denmark-based manufacturer of variable-speed drives and electronic motor controls. Venture One recently began construction on a 100,000-square-foot manufacturing facility in Loves Park Ill.

The future of manufacturing may be bright, but it will be undoubtedly be a painful adjustment for some. It’s not the first time this story has been told. Automation has made the country more efficient, but it has displaced workers in the process.

The U.S. will have to rely on its innovation and intellectual capital to create new sectors and employment opportunities in the future to make up for the loss. It’s happened in the past…hopefully it will continue in the future.

-Mark Thomton

L-R: William Stauss, Jim Reeb, and Mark Goode

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One Response to Dispelling myths of U.S. manufacturing

  1. c1ue says:

    It would be more useful, I think, to graph manufacturing jobs as a percentage of population and/or overall jobs vs. manufacturing output as a percentage of GDP.

    Merely expressing GDP in fixed dollar terms is misleading as it assumes all changes are purely due to inflation.

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