US Manufacturing Statistics and Outlook

Five Reasons Why America's Manufacturing Is Growing Again

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U.S. manufacturing, a process that is mechanical, physical, or chemical, is the transformation of raw materials into new products. Manufacturing businesses include plants, factories, and mills, and they make their products with power-driven machines and equipment. They also include small and home-based businesses that make things by hand, like bakeries, candy stores, and custom tailors. Manufacturing also includes companies that contract with others to make the goods, but in the U.S., it doesn't include housing and commercial construction. 

Importance of Manufacturing in the U.S. Economy

Manufacturing is an essential component of gross domestic product, which was $2.33 trillion in 2018, and drove 11.3% of U.S. economic output, according to the Bureau of Economic Analysis. Manufactured goods comprise half of U.S. exports.

Manufacturing adds a lot of value to the power of the U.S. economy. Every dollar spent in manufacturing adds $2.74 to the economy, including retailing, transportation, and business services.

According to the Bureau of Labor Statistics, the United States has 12.69 million manufacturing jobs, which employs 7.9% of the workforce as of 2018. Yet, 89% of manufacturers are leaving jobs unfilled because they can't find qualified applicants, according to a 2018 Deloitte report. The skills gap could leave 2.4 million vacant between 2018 and 2028. That could cost the industry $454 billion in 2028.

Trends

Manufacturing used to be a larger component of the U.S. economy. In 1970, it was 24.3% of GDP, double what it was in 2018. America's edge as the world's leading manufacturer has also slipped. In 1970, China was the world's fifth-largest manufacturer. It took the top spot in 2010, replacing the United States. Japan is third at 10%, followed by Germany at 7%, South Korea at 4%, and India at 3%. China produces 20% of the world's goods, and the U.S. produces 18%.

Reasons for Decline

The biggest reason for the decline is a shift to a service-based economy. Banking and other financial services expanded throughout the second half of the 20th century, and the healthcare sector has also grown. Healthcare was 5% of the economy in 1960, but by 2013, it was up to 17.4%. In 1965, the government began subsidizing hospital costs when it created Medicare and Medicaid, which was one reason for rising health care costs. Health care services also responded to the aging baby boomer generation.

The switch to a service sector economy happened to other developed countries for the same reasons, but the U.S. manufacturing industry has lost global market share, while less developed countries, such as China, have increased their manufacturing capabilities.

Another contributor is the high U.S. standard of living compared to other countries. That makes labor costs much greater than in other nations. U.S. manufacturers cannot compete with low-cost products made by lower-paid workers in China, Asia, and Mexico.

Many federal policies also decrease U.S. competitiveness, making U.S. manufacturing costs higher than those of many other countries—even when labor costs aren't included. First, complying with regulations costs $180.5 billion, about 11% of total sales in 2009. Second, the corporate tax rate was 35%, which was higher than France at 34.1%, twice as much as China at 16.6%, and triple that of Taiwan at 10.1%. In 2018, it dropped to 21%, thanks to President Trump's tax plan. Lastly, other countries do better at negotiating bilateral free trade agreements. They lower tariffs and export fees, which lowers their cost of manufacturing because import prices of supplies are less expensive.

Outlook

Manufacturing was expected by to expand in 2020 by the Institute for Supply Management. Manufacturing will be boosted by the tax cuts but could be hurt by Trump's trade war.

It also depends on the strength of the U.S. dollar; if the dollar declines, that's good for exporters. Underlying these short-term developments are five new forces that are driving manufacturing's growth:

  1. Increased productivity
  2. The growing domestic production of domestic natural gas and shale oil
  3. Rising wages in emerging markets
  4. Companies realize the need to protect homegrown intellectual property
  5. The awareness among consumers that "Made in America" means jobs for Americans

According to a 2013 survey from AlixPartners, 37% of manufacturers would prefer to locate in the United States—the same amount that would prefer Mexico, and a figure much higher than 2011 when it was only 19%. It's easier to reach the large North American market if the company is in the United States.

Unfortunately, growth won't translate into an increase in U.S. manufacturing jobs. The reason lies in productivity improvements, including the increased use of computers, robotics, and other efficient processes. The new jobs that are created require sophisticated computer-related skills to manage the robots. 

Trump's Impact on Manufacturing

The National Association of Manufacturers (NAM) applauds Trump's plan to reduce taxes and regulations and supports his strategy to upgrade the quality of infrastructure, but it would prefer he create more free trade agreements. Instead, he has withdrawn from the Trans-Pacific Partnership and has renegotiated the North American Free Trade Agreement.

Article Sources

  1. National Institute of Standards and Technology. "What Is Manufacturing? Why Does the Definition Matter?" Page 2. Accessed June 8, 2020.

  2. Bureau of Economic Analysis. "Industry Data." Accessed June 8, 2020.

  3. National Association of Manufacturers. "Facts About Manufacturing." Accessed June 8, 2020.

  4. Bureau of Labor Statistics. "Employment by Major Industry Sector." Accessed June 8, 2020.

  5. Deloitte. "The Jobs Are Here, but Where Are the People?" Accessed June 8, 2020.

  6. American Enterprise Institute. "The Decline of Manufacturing Is an Inevitable, Global Phenomenon, and That’s Something to Celebrate." Accessed June 8, 2020.

  7. Brookings Institution. "Global Manufacturing Scorecard: How the U.S. Compares to 18 Other Nations." Accessed June 8, 2020.

  8. FDIC. "The Banking Crises of the 1980s and Early 1990s: Summary and Implications," Page 5. Accessed June 8, 2020.

  9. Centers for Medicare and Medicaid. "History of Health Spending in the United States, 1960-2013," Pages 3-5. Accessed June 8, 2020.

  10. Deloitte. "The Services Powerhouse: Increasingly Vital to World Economic Growth." Accessed June 8, 2020.

  11. Northwestern University. "How Much Does It Cost to Manufacture Overseas Versus at Home?" Accessed June 8, 2020.

  12. Manufacturing Institute. "Facts About Manufacturing," Page 6. Accessed June 8, 2020.

  13. KPMG. "Corporate Tax Rates Tables." Accessed June 8, 2020.

  14. Tax Foundation. "Corporate Tax Rates Around the World, 2019." Accessed June 8, 2020.

  15. Frontiers in Physics. "Bilateral Trade Agreements and the Interconnectedness of Global Trade." Accessed June 8, 2020.

  16. Institute for Supply Management. "Economic Growth Continues in 2020." Accessed June 8, 2020.

  17. National Institute of Standards and Technology. "Shale Gas: A Game-Changer for U.S. Manufacturing." Accessed June 8, 2020.

  18. AlixPartners. "U. S. Achieves Parity With Mexico as a Preferred Manufacturing Location; to Achieve Cost Parity With China by 2015." Accessed June 8, 2020.

  19. National Association of Manufacturers. "NAM Statement on Implementation of New China Tariffs." Accessed June 8, 2020.

  20. Atlantic Council. "Trump Restructured Trade Agreements." Accessed June 8, 2020.