Manufacturing’s Share of GDP Will Recover and Hold Steady

The employment picture is bleak: Many jobs will never return, part of a long-term trend.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

July 13, 2009

Will U.S. manufacturing ever come back? Output, yes, will regain its previous highs. Jobs won’t. Many of them are gone for good.

It’ll be 2012 before production recovers, clawing its way back to prerecession levels. Next year will see a modest gain of 2%, then pick up speed in 2011. But this year’s jaw-dropping 12% decline, on top of a dip of 3% in 2008, spells a contraction considerably worse than in the recessions of 1980-1982 and 1974-1975.

About 66% of the 2 million jobs lost since January 2008 will return by 2013 in the manufacturing sector. For the rest, largely in automaking or industries tied to either autos or housing, such as textiles, plastics, fabricated metals, furniture, appliances and so on, the recession was simply the last, fatal squeeze in a long wringing out process.

Relentless automation and the globalization of labor intensive industries began before the recession and will continue after. Says Lawrence Mishel, president of the labor backed Economic Policy Institute think tank: “It’s wrong to write off manufacturing. But it is going to be smaller.”

Leading the way back will be the production of sophisticated, high-tech goods: medical equipment and defense electronics, satellites, some advanced machinery, biotechnology, Internet routing equipment and the like.

Then, as foreign economies improve, the stalwarts of U.S. manufacturing will perk up: aircraft, farm and construction equipment and other big-ticket export goods.

And there’ll be gains, too, in new fields: production of solar panels, wind turbines and other green technology products, in cybersecurity and in health information technology plus all the equipment and gear needed to bring high-speed Internet to small towns. “We have to count on new products that are sophisticated,” says Norbert Ore, chairman of the monthly survey of manufacturing purchasing managers at the Institute of Supply Management.

As a share of the U.S. economy, manufacturing will hold steady, at about 13% of gross domestic product, despite the decline in employment. Since 1979, manufacturing has lost about 250,000 jobs a year on average, while production has risen about 2% a year.

Are we headed too far down a road of fewer manufacturing workers and too many service jobs? Mark Zandi, chief economist of Moodys’ Economy.com, doesn’t think so. He says, “The value of an iPod is in the music, the technology to download the music, the advertising to attract people to the service. We don’t want to make the iPods, we want to do the things that add value.”

Typically, productivity leaps following a recession, as employers wring more output from reduced workforces and benefit from any increased automation adopted during the downturn as a cost cutting measure. That’s good for profits, and eventually for wages, enabling employers to raise pay without increasing prices.

The process can be tough on workers, since manufacturing jobs, particularly in the making of durable goods like autos and appliances, tend to pay better than jobs in service industries. And right now, falling home prices make it especially hard on those out of work, limiting their ability to move to find employment.

And the concerns of businesses go beyond this recession and when it will end. They’re nervous about talk in Washington regarding health care reform, new environmental policies and the prospect of higher taxes to reduce rising federal budget deficits. Kendig Kneen, chief executive officer of Al-Jon Inc., a maker of equipment for use in processing scrap and solid waste, says, “I’m as nervous as anyone else about what Washington is doing. They’re adding costs to workers and adding costs to manufacturers.”

For weekly updates on topics to improve your business decisionmaking, click here.