Fisher Investments Editorial Staff
US Economy, Market Cycles, Media Hype/Myths

Manufacturing on the Mind

By, 03/02/2012

Many folks commonly (and incorrectly, in our view) fret the long-term decline of US manufacturing. The fear is the US and other developed nations are losing their manufacturing edge and, perhaps more importantly, jobs to Emerging Markets. However, the facts don’t seem to support the fears.

A recent spate of positive manufacturing reports actually seem to highlight a healthy global manufacturing sector (and the underappreciated strength of the global economy). For example, the Institute for Supply Management’s PMI for the United States fell from 54.1 to 52.4 in February. Readings above 50 signal growth, thus manufacturing still grew, albeit at a slower pace than in January. Recent regional manufacturing reports—Philadelphia, New York and Chicago—all reflected growth exceeding recent highs. And that isn’t just a domestic trend: releases from Australia, Taiwan and Japan showed similar strength. And yes, China’s manufacturing activity also appears to have strengthened in February—its PMI rose to 51 from 50.5 in February. But China’s manufacturing growth isn’t at the cost of growth elsewhere—the global manufacturing base isn’t a fixed pie. Rather, these data paint a picture of a world that overall continues to grow, hence, manufacturing with it.

Exhibit 1 shows manufacturing output from major developed and developing nations. Note, the US is still the world’s leader in manufacturing output on a real basis. China is gaining fast (and actually surpassed the US by a hair in 2010 on a nominal basis). But the point stands—the US is still a manufacturing powerhouse. Also note, since the cyclical low, manufacturing from the developed-world leaders—the US, Germany and Japan—has rebounded strongly.

Exhibit 1: Total Manufacturing Output (in 2005 US Dollars), 1970-2010

Source: United Nations Statistics Division.

So, the US doesn’t appear to be in any kind of long-term manufacturing decline. Rather, the US (and the rest of the world overall) is growing more diversified. Manufacturing output keeps growing, but its share of US and global GDP continues to shrink as services become a larger share of total output. (See Exhibit 2.) Again, this is a fully global phenomenon.

Exhibit 2: Manufacturing as a Percentage of GDP, 1970-2010

Source: United Nations Statistics Division.

But what about jobs? Isn’t China stealing jobs from the US and other developed world manufacturers? Certainly some US manufacturing jobs shift to lower-cost markets overseas, but a key driver in manufacturing’s falling share of developed world employment is productivity—and that has numerous economic advantages. Productivity gains allow us to continue producing more (goods) with far less (workers.) As Exhibit 3 shows, globally, manufacturing output per employee has grown and looks poised to continue.

Exhibit 3: Manufacturing Output per Employee, 1950-2010

Source: US Federal Reserve.

China too is actually in the early stages of losing manufacturing employment to productivity gains—a perfectly normal economic phenomenon. Exhibit 4 shows increasing output per employee in China.

Exhibit 4: Annual Manufacturing Output per Employee in China, 1994-2011

Source: Thomson Reuters, United Nations Statistics Division.

While manufacturing’s share of employment globally has been steadily falling over the past decades, many of those jobs are shifting over time—mainly to services. This follows a larger historical trend of economies’ locus-shifting from agrarian to manufacturing to service as they develop. Exhibit 5 shows manufacturing’s share of employment falling while the service side grows in the US—a near mirror image.

Exhibit 5: Service and Manufacturing as Percentages of Total US Employment, 1971-2010

Source: US Federal Reserve.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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