Manufacturing Is Not the Answer

It's a mistake to think that manufacturing can do much to revive the economy. For good reasons, it is declining in importance.

January's job numbers confirm that manufacturing is the bright spot in the economy. President Obama and others say that with a little help from Washington, this sector is the key to a broader recovery.

But that's a pipe dream. Manufacturing will account for only a tiny fraction of the jobs to be created over the next five years, whether or not government programs promote hiring in that sector.

This isn't defeatism, or a misunderstanding of the important role that manufacturing still plays. It simply recognizes that structural changes in the United States over 40 years have promoted services over manufacturing for a very good reason. When all costs are considered, productivity is rising much more quickly for services and other nonmanufacturing businesses than for manufacturing businesses -- two to three times faster since 1987 for sectors adding jobs the fastest: health care, information and computer services, transportation, retail and finance. That's brought faster growth and higher wages and living standards for workers in service industries.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail.

Sign up

Manufacturing jobs and output are now enjoying a temporary surge, mostly because of the depth of their plunge in the Great Recession. Factory employment fell nearly twice as sharply as private-sector employment, and factory output dropped 20%, compared to 5% for gross domestic product.

The resulting postrecession rebound, adding about 500,000 jobs over the next five years, will simply put manufacturing employment roughly where it would have been without the shock of the Great Recession -- on a long-term downtrend since 1979, when the number of manufacturing jobs hit its peak of 19 million. Half a million manufacturing jobs may sound like a lot, but it represents only about 4% of the 12 million jobs that the U.S. will need to create in the next five years to manage even modest economic growth.

In fact, most of the 2.5 million factory jobs lost during the recession will never come back. By 2015, manufacturing will account for less than 10% of total employment and GDP.

In part, that's because output per hour of labor continues to grow, with fewer workers producing a growing volume of goods. But it's also because when all input costs, including capital, are considered, manufacturing is falling behind the rest of the economy in improving efficiency. The shrinking share of value added on the assembly line and the relatively high capital costs for keeping U.S. factories competitive in a global economy mean that American manufacturing can't be as efficient as other sectors of the economy.

Total manufacturing output (volume) continues to rise, but more slowly than the output of other sectors. As a result, manufacturing's contribution to GDP is steadily declining. In 1953, when American factories produced half of the world's manufactured goods, manufacturing accounted for 28% of GDP. By 1968, it was down to 25%, then 20% in 1980 and 11% in 2009. Following the recession, it ticked back up to 11.7% in 2010 and perhaps a bit higher in 2011. But the long-term trend will reassert itself in the next few years, with manufacturing’s share of GDP slipping below 10% by 2015.

None of this, however, is the picture one gets from the president or other politicians who know that promoting manufacturing employment makes good politics. But those who hope America can return to its manufacturing past are looking at the cup as half-empty. Many more jobs are being created outside manufacturing because that is where America's comparative advantage lies today, and not, as in decades past, in labor- and energy-intensive industries. In the Information Age, more value is added in the design, marketing and selling of goods than on the assembly line. The iPad has created many more well-paying jobs in America than in China, where factory wages for Apple’s main iPad contractor are $1.11 an hour

Education and innovation are now more important to America’s economic success than industrial might. That doesn't mean manufacturing will disappear. The U.S. will continue to make a variety of products, such as medical devices, airliners and high-tech machine tools, where much more of the value added is in the design and programming than the assembly. Likewise, we will create service jobs that use information more productively than is possible in most manufacturing jobs.

From the Model T to the iPad, America will continue to create revolutionary products and benefit from those inventions, even if the physical assembly of those products continues to move to less productive parts of the world. That’s not losing something precious. It’s gaining more opportunity and higher living standards for American workers.

John Maggs
Senior Economics Editor, The Kiplinger Letter