U.S. manufacturing is the transformation—either mechanical, physical, or chemical—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 (GDP). In the third quarter of 2020, manufacturing accounted for 11% of the overall U.S. GDP. According to the Chamber of Commerce, manufactured goods accounted for 82% of all exported merchandise in 2019.
Manufacturing adds a lot of value to the power of the U.S. economy. The National Association of Manufacturing estimates that every dollar spent in manufacturing adds $2.74 to the economy, including retailing, transportation, and business services.
According to the Bureau of Labor Statistics (BLS), there were 12.22 million manufacturing jobs in the U.S. in January 2021. That's about 8.5% of the total nonfarm workforce.
While manufacturing has made up roughly 11% to 14% of real GDP since the '40s, manufacturing's share of employment in the U.S. economy has seen a steep decline in recent decades. In the early '50s, more than 30% of all U.S. jobs were in manufacturing. Since the mid-'50s, that share of employment has steadily decreased before leveling off below 10% around 2010.
As the U.S. job market shifted to other sectors, America's edge as the world's leading manufacturer slipped. In 1970, China was the world's fifth-largest manufacturer, according to the Brookings Institution. It took the top spot in 2010, replacing the United States.
Some 89% of U.S. 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.
Reasons for Decline
The biggest reason for the decline is a shift to a service-based economy, including banking and healthcare. 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.
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 who increase pay to keep up with the standard of living cannot be as profitable as companies who don't pay their workers as high of wages.
In addition to the higher standards of living, there are also tax implications to consider. While U.S. corporate tax rates don't make the list of the world's highest, they also aren't among the lowest rates. Companies seeking the lowest possible tax burden may seek out opportunities in other countries with the absolute lowest rates.
The U.S. corporate tax rate has declined sharply in recent years. The corporate tax rate was 35% before President Trump's tax plan dropped to 21% in 2018.
Lastly, other countries have been more aggressive in seeking out free trade agreements in recent years. These kinds of deals lower tariffs and export fees, which lowers the costs of manufacturing because import prices of supplies are less expensive. Trump's trade war has seen tariffs and export fees increase.
The BLS expects employment in production-related fields to decline by 4% between 2019 and 2029. However, this is a broad estimate that covers many different aspects of production. Zeroing in on some specific manufacturing careers paints an even more dire picture. Metal and plastic machine workers are expected to experience a 7% decline in employment between 2019 and 2029. Assemblers and fabricators are expected to see 11% of their jobs disappear by 2029.
Manufacturing trends also depend on the strength of the U.S. dollar. If the dollar declines, that's good for exporters because U.S. products become cheaper overseas. Despite declining in 2020, the dollar's strength has generally held fairly steady since late 2014.
Unfortunately, manufacturing growth doesn't necessarily 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 may require sophisticated computer-related skills to manage the high-tech machinery on the manufacturing line.
Trump's Impact on Manufacturing
President Trump talked a lot about manufacturing during his time in office, but his policies were met with mixed reactions. For example, while corporations applauded the Trump administration's tax cuts and deregulatory efforts, the National Association of Manufacturers urged Trump to support free trade agreements and remove tariffs. In addition to imposing tariffs on certain products, Trump withdrew from the Trans-Pacific Partnership, which could have increased trade. However, he also renegotiated the North American Free Trade Agreement, so the administration's policies were a mixed bag for manufacturers.