EconSouth (Second Quarter 2006)

John C. Robertson is vice president over the regional group of the Atlanta Fed’s research department. Putting U.S. Manufacturing in Perspective

When I think about the state of U.S. manufacturing, at least two images come to mind: headlines announcing layoffs at manufacturing plants and the “Made in China” label on most nonfood goods purchased at my local discount store. Both of these images are reality. Since 1990, employment in the U.S. manufacturing sector has declined from almost 18 million to around 14.2 million today—a 24 percent decline. This decline is in sharp contrast to the 23 percent increase in employment in the private sector as a whole in that time. Over the same period, the share of domestic spending on manufactured goods accounted for by imports has risen from 38 percent to 45 percent.

What might come as more of a surprise to many is that despite these unsettling trends, the U.S. manufacturing sector is producing more goods today than at any time in the past, and the growth in manufacturing output has generally matched the growth of the U.S. economy overall. Manufacturing output has almost doubled in the past 15 years, and as a consequence the United States remains the largest manufacturer in the world, maintaining its more than 20 percent share of total world production despite the rapid growth in recent years of the developing nations’ manufacturing sectors.

Some U.S.-made goods continue surging
The positive trends for manufacturing production do not tell the whole story, however. For instance, the growth in output from the durable-goods sector—which includes everything from household appliances to airplanes—and especially from producers of information technology equipment, has far outstripped the growth in other industries. The production of computer and communications equipment began to surge in the early 1990s, and apart from the period surrounding the 2001 recession growth has averaged more than 20 percent per year. On the other hand, the beleaguered U.S. apparel industry has experienced declining output since the early 1990s, and the 2001 recession only served to accelerate the decline. This dichotomy in performance illustrates that U.S. manufacturers do not enjoy the comparative advantage they once did in the production of goods that require a large labor input.

The overwhelming price competition from foreign companies that are able to make the same products with much cheaper labor has forced U.S. manufacturing to shift away from labor-intensive endeavors and toward capital- and technology-intensive types of production. At the individual plant level, investment in new technologies often leads to lower per-unit production costs. These lower production costs in turn contribute to a lower price for the product, thus improving the firm’s competitive position. For manufacturing as a whole, lower prices have contributed to higher demand for U.S.-made goods, both domestically and internationally. Investment in new technologies has also tended to increase worker productivity, and in most manufacturing industries this development has translated into the ability to produce more goods with fewer workers.

As gains in worker productivity continue to outpace demand growth, U.S. manufacturing will not be a significant source of net job growth in coming years. Nonetheless, the changing nature of production processes will generate job opportunities. The ongoing transformation of the U.S. manufacturing sector involves investment in new technologies, equipment, and also a skilled workforce that is able to operate ever more complex industrial equipment. As a consequence, the typical manufacturing worker today is much more technologically sophisticated than his counterpart of just 10 years ago, and this trend is likely to continue.

Changes reverberate widely
Developments in the manufacturing sector have also had a significant impact on the U.S. economy beyond the sector’s direct contribution to economic growth. For instance, competition among global and domestic suppliers for the large U.S. consumer market has kept the prices paid by U.S. consumers for manufactured goods in check. Since the mid-1990s, the average consumer price of manufactured goods in the United States has been flat or even declined. Lower prices for goods have served to move the overall rate of inflation lower than it otherwise would have been and contributed significantly to the low-inflation environment that the U.S. economy has experienced during the last decade.

For some, the scenario described here may sound familiar. In fact, it is. The U.S. agricultural sector experienced a similar transformation, but over a much longer period of time. Agricultural employment is now only a small fraction of total employment, yet U.S. agricultural production continues to rise, and agricultural prices remain relatively low. Just like agriculture, U.S. manufacturing is not going away, but neither is the relentless pace of change.

Return to Index