A country’s manufacturing sector is most critical for economic stability and crucial to a nation’s economic competitiveness, whether it be a capitalist economy, which is a market-oriented economy; a Marxist/collectivist type of economy, where the manufacturing sector is controlled by the respective government; or a modern economy, in which the industry is controlled by limited or extensive government regulations.
America’s manufacturing sector could be considered a hybrid economy, as it is on the one hand market-oriented and on the other hand also controlled by a number of government regulations.
“Manufacturing is critically important to the American economy. ... The strength or weakness of American manufacturing carries implications for the entire economy, our national security, and the well-being of all Americans,” a 2011 report by the Center for American Progress states.
The U.S. manufacturing sector no longer is the bread and butter of the economy that it used to be, as over the years, most of America’s manufacturing capabilities have been outsourced to third-world countries in an effort to eliminate labor costs and boost earnings, according to a number of economists.
As stated in a March report by the Information Technology & Innovation Foundation (ITIF), between 2000 and 2010, close to 5.5 million manufacturing workers lost their jobs.
“The U.S. manufacturing sector has undergone a decline as a percent of real GDP from 27 percent in 1957 to 12.8 percent in 2010,” according to a recent article on the American Enterprise Institute (AEI) website.
The ITIF report suggests that between 1970 and 2010, U.S. manufacturing operations declined from 22.7 percent to 11.7 percent as a percentage of the Gross Domestic Product (GDP). The GDP is the composite of all goods and services produced in a country.
According to ITIF, U.S. policies and regulations, and not just the cost of labor, were unfavorable for keeping manufacturing in the United States. Unemployment analysts lament that moving jobs offshore did not take into account that those losing jobs wouldn’t have the money to buy the products coming into the country from the companies that took their operations to foreign shores.
“The loss of U.S. manufacturing is not due to some inexorable shift to a post-industrial economy; it is due to a failure of U.S. policies (for example, underinvestment in manufacturing technology support policies and a corporate tax rate that is increasingly uncompetitive) and the expansion of other nations’ mercantilist policies,” the ITIF report said.
Optimism and Pessimism Concerning Manufacturing Sector
“Whether one is in the policy camp of manufacturing ’resurgence‘ or ’decline,' proper government support for a thriving U.S. manufacturing sector is critical for the nation’s long-term economic growth, a higher standard of living, and for national security purposes,” according to the AEI article.
As of late, market analysts and economic experts suggest that the U.S. manufacturing sector is experiencing a revival, having outpaced the growth of the overall U.S. economy by 4.7 percent, while the U.S. economy grew only by 1.7 percent during 2011.
Experts can be found on both sides of the aisle, with each one trying to prove that either a manufacturing revival is underway or just the opposite. Those on the negative side suggest that the U.S. government hasn’t reported factual numbers and is keeping the populace in the dark about the manufacturing sector’s lack of growth.
Disputing the U.S. Bureau of Economic Analysis (BEA) statistics, ITIF suggested that the BEA overstated its 2000 to 2010 manufacturing productivity numbers. ITIF calls the BEA’s overstatement a statistical bias that resulted in a 55 percent higher productivity number, distorting reality. ITIF maintains that the overstatement should have been removed by taking the biases into consideration.
“There are serious problems with how the U.S. government measures manufacturing output that cause it to significantly overstate output and, by extension, productivity,” according to the ITIF report.
Much emphasis is given by analysts to technological discoveries and improvements, which increase productivity, and thus affect manufacturing employment. ITIF suggests that the productivity claim is nonsense, given the outsourcing of manufacturing jobs, and is put forward to cover up the real issues hindering a manufacturing revival.
“The conventional wisdom that U.S. manufacturing job loss is simply a result of productivity-driven restructuring (akin to how U.S. agriculture lost jobs but is still healthy) is fundamentally flawed,” according to ITIF.
ITIF not only points to productivity, but also to capital investment trends, which is anything needed to produce products, suggesting that it has not yet found companies truly investing in anything that would result in a revival of the manufacturing sector.
“An analysis [of fixed capital investments, such as equipment, software, and buildings] by year shows that the annual rate has generally declined in the 2000s, going under 1.5 percent for several years for the only time since 1950,” the ITIF report said.
One other indicator pointing to a loss of manufacturing capabilities in the United States is the decline in manufacturing research and development (R&D) expenditures. R&D expenses have decreased in eight industries, including the electrical and computing industries, while they have increased slightly in seven industries, including the pharmaceutical industry.
“U.S. manufacturing sectors perform even worse when R&D expenditures are viewed as a share of GDP. By this measure, for example, R&D expenditures fell by 57 percent between 1998 and 2007,” according to the ITIF report.
Keen on Revival of U.S. Manufacturing
“American manufacturers are hiring again, creating jobs for the first time since the late 1990s. ... We will not go back to an economy weakened by outsourcing,” said President Barack Obama in his 2012 State of the Union address.
Obama stated that American manufacturers in general should receive larger tax cuts, while high-tech manufacturers who produce their products in the United States should receive double the present tax deduction.
An article on the TopForeign Stocks website suggests that rising labor costs in India and other countries are putting a nail in the coffin of outsourcing and hastening a revival of the U.S. manufacturing sector, given that U.S. labor costs have become more competitive with that of foreign workers.
“Hence many companies are actually building factories in the U.S. and some are even moving their overseas factories back to the U.S. in a new trend known as ’re-shoring,'” the TopForeign Stocks article said.
Caterpillar Inc. announced in its first quarter 2012 earnings release that it closed its Electro-Motive Diesel plant in London, Ontario. The TopForeign Stocks article states that the jobs were moved to Muncie, Ind., where labor is willing to accept a much lower salary.
According to a 2012 report on the U.S. Chamber of Commerce website, Sauder Woodworking Co., NCR Corp. (National Cash Register), Wham-O Inc., Otis Elevator Co., and many more companies have shifted manufacturing jobs back to the United States.
“The increased competitiveness of America’s industrial sector in recent years has brought manufacturing production and employment back to the United States and this reallocation of global production is expected to continue in the future. ... The reallocation of global manufacturing could possibly create 3 to 4 million new manufacturing jobs in the United States over the next decade,” according to the U.S. Chamber of Commerce report.
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