Evaluating US Manufacturing Sector

By Heide B. Malhotra, Epoch Times
April 12, 2013 Updated: April 13, 2013

The U.S. manufacturing sector is of great importance to the U.S. economy, according to discussions by industry experts, and many of those experts are concerned about the state of that sector.

The manufacturing industry pays higher wages and provides workers with better benefits than any other U.S. industry.

A report from the Congressional Research Service (CRS), released in February, states that Congress continues to be apprehensive over the state of the U.S. manufacturing sector.

The CRS suggests that by the end of 2010, the United States was the country with the largest manufacturing production, although more recently some contraction of the sector has been noted.

The factors contributing to the decline in manufacturing output include technological advances, changing consumer preferences, and a number of macroeconomic factors.

As a component of Gross Domestic Product (GDP), U.S. manufacturing and services was still number one globally in 2010, with a 28.1 percent share of GDP worldwide, according to World Bank data included in JPMorgan’s Global Manufacturing & Services PMI report. In second place was Japan, with a 12.1 percent share of GDP. GDP is the market value of all goods and services produced in a country at a given point in time.

Upward Trend

A review of the latest U.S. manufacturing sector reports indicates that the sector continues its upward trajectory.

Different indices and measurement methodologies that assess the sector agree that the manufacturing industry is improving. Some state that the sector is moving steadily upward, while others suggest a slower pace.

As of the end of March, new orders have increased, production is on an upward trend, inventories are shrinking, and suppliers to the manufacturing industry are servicing their customers at a faster pace, according to the Manufacturing ISM Report on Business.

The Purchasing Managers Index (PMI), which is a yardstick of the manufacturing sector’s economic condition, decreased from 54.2 in February to 51.3. This decrease still indicates growth in the manufacturing sector, although at a slower rate, according to an April 1 report by the Institute for Supply Management (ISM).

The five components that are used to calculate the PMI are new orders, inventory level, production, supplier delivery, and employment situation. When the PMI is greater than 50, the manufacturing sector is experiencing expansion. When the PMI is lower than 50, the sector is shrinking.

Out of 18 industries within the manufacturing sector, petroleum, coal, chemical, and machinery production reported a slowdown.

According to a March U.S. Census report, “New orders for manufactured durable goods in February increased $12.4 billion or 5.7 percent.” This is after a 3.8 percent decrease in January.

The U.S. Federal Reserve (Fed) reported on March 15 that the industrial production total index increased in February to 99.5 percent, up 0.7 percent from 98.8 percent in January. The manufacturing sector increased by 0.8 percent after a 0.4 percent drop in January.

Compared to last year, industrial production, which measures the productivity of firms in sectors such as manufacturing, mining, and utilities, rose by 2.5 percent in February over the same month in 2012, according to the Trading Economics website, using numbers reported by the Fed.

“Historically, from 1920 until 2013, the United States Industrial Production averaged 3.91 Percent reaching an all time [sic] high of 62 Percent in July of 1933 and a record low of -33.70 Percent in February of 1946,” a note on the Trading Economics website states.

Reinventing Itself

The U.S. manufacturing sector never stays downtrodden for too long when facing competition, but instead develops inventive ways to climb back up.

America’s manufacturing firms have become more cost effective by keeping salaries at sustainable levels and increasing productivity. They are thus more competitive. For example, U.S. wages have increased by 3.1 percent annually since 2000, while in 17 comparable countries, salaries have increased by 5 percent yearly, according to a March 7 article on the Advisor Perspectives website.

Using statistics from the U.S. Bureau of Labor Statistics (BLS), the Advisor Perspectives article states that productivity by U.S. manufacturers increased by 5.2 percent since 2000. Only Taiwan and Korea report better productivity numbers.

Since mid-2009, the American manufacturing industry has grown by 5.5 percent, more than two times the improvement in the country’s GDP, according to the Advisor Perspectives article.

In 2012, 28 percent of products shipped from the U.S. manufacturing industry were destined for foreign countries, compared to 18 percent in 2000. Close to 58 percent of these shipments were destined for emerging economies, an increase of 15 percent when compared to 2000.

“By sharpening its competitive edge, the US manufacturing sector has removed a serious handicap in the international marketplace,” the Advisor Perspectives article reports.

Manufacturing as Wealth Creation Tool

Ignoring naysayers, including some academics, and pointing to what manufacturing could mean to the United States, such as creating wealth for the U.S. populace, a manufacturing resurgence report, released and published in March by the Aspen Institute, states that by 2025 the sector would grow to 15.8 percent of GDP.

The article speaks of a resurgence scenario that could create 3.7 million new manufacturing jobs and reverse the existing trade deficit in manufacturing. At the same time, exports could increase by 8.1 percent annually.

In order to achieve the desired results, government policies need to be revised, including signing more trade agreements, addressing energy and regulatory policies, and changing tax policies, especially those regarding investments.

All in all, the U.S. manufacturing industry, despite intermittent weakening, still “produces $1.8 trillion of value each year, or 12.2 percent of U.S. GDP. For every $1.00 spent in manufacturing, another $1.48 is added to the economy, the highest multiplier effect of any economic sector,” according to an entry on the National Association of Manufacturers website.