Manufacturing’s Manifest March

A common theme in recent years has been the American manufacturing sector’s gradual decline. Some bemoan outsourcing of lower-wage manufacturing jobs to countries like China and other emerging markets with cheaper labor, while others focus instead on the supposed increasing tendency of high-wage manufacturing jobs to flee the US in favor of countries with increasingly educated labor forces. Some blame increasing productivity and technological innovation in the US for the shrinking need for manufacturing labor. And so on—consider an angle from which to lament US manufacturing’s decline (or gains), and the argument’s undoubtedly been made.

But recent data seemingly don’t support that story line, no matter the particular iteration. Consider the following recent developments:

• Wednesday, the Fed reported US industrial production rose 0.4% in December, meaning fourth quarter production accelerated at an annual rate of 3.1%.
• Recently lean inventories may signal the dominoes are lining up for another strong year in US manufacturing as continued overall economic strength boosts confidence and leads businesses to restock shelves.
• Manufacturing employment in the US has grown faster than in any other leading developed economy since the recession ended.
• And despite concerns about productivity’s potentially negative impact on manufacturing growth, the reality is increasing productivity combined with still-subdued wages in the recession’s wake have contributed to a global edge and boosted US competitiveness.

Consider, too, data like these, which point to a US manufacturing sector whose size rivals that of Japan’s entire economy. And one need go only as far as the top ten US manufacturing firms’ sales revenue to outpace the entirety of Germany’s economy, while the top five nearly surpassed Canada’s GDP. The single biggest US manufacturing industry’s sales (petroleum and coal products) outpaced both Mexico’s and South Korea’s GDPs, as well as the state products of Texas and New York. (HT: Mark J. Perry) Not only that, but global sales from the top 500 US manufacturing firms increased 12.75% in 2011 from 2010 sales. None of which makes it sound much like the American manufacturing sector is either an insignificant contributor to US GDP or in decline—quite the opposite, in fact.

And this isn’t just a recent turnaround, either—the reality is the US manufacturing sector’s exhibited strength throughout the current recovery and expansion (albeit with the occasional—largely to be expected—hiccup).

But even if the US’s manufacturing output were to slow or the sector overall shrink some, that needn’t mean its death altogether. As students of classical economics will remember, when it comes to trade, what matters is comparative advantage, not absolute advantage. Meaning even if the US has the biggest, most productive manufacturing sector in the world, it doesn’t always make economic sense for the US to produce everything on its own—rather, it can focus on those goods it produces more efficiently and trade for the rest. A transaction benefiting not only the US and its consumers, but all participants. And highlighting the fact manufacturing overall likely could shrink some without deleterious consequences—on the contrary, possibly to the US’s overall benefit.

The US produces many things well—and not just in the manufacturing sector, but also when it comes to things like technological innovation and myriad services (financial, business, media, etc.). Making the US a true force to be reckoned with globally—and putting it in the fortunate position of paying much less for things other countries produce relatively more efficiently and cheaply. That the US makes strategic choices about which goods to produce and which to import shouldn’t instill fear manufacturing’s imminent decline is at hand—it should rather inspire confidence in the US economy’s continued strength and resilience, regardless of occasional global headwinds. And would no doubt make David Ricardo proud.