Fisher Investments Editorial Staff
US Economy

Melancholy Over Manufacturing?

By, 02/04/2010

Story Highlights:

 

  • US manufacturing activity expanded in January for the sixth consecutive month and at the fastest pace since August 2004.
  • The US's $1.8 trillion manufacturing sector is still the largest in the world.
  • Manufacturing is becoming a less important component of the US economy—and that's fine.

_________________________________________________________________________

The plight of US manufacturing has dogged pundits and occupied headlines for decades now, and this recession has only exacerbated fears for the future. But the manufacturing sector continues to function, evolve, and adapt. In fact, US manufacturing activity expanded in January for the sixth consecutive month—its fastest pace since August 2004—as broadening recovery boosted demand and encouraged inventory replenishment.

And that's not the only good news. Viewed globally, the US's $1.8 trillion manufacturing sector is still the largest in the world—on par with the entire GDP of some of the world's major economies! (As of 2008, Italy's GDP was $2.3 trillion and Russia's was $1.7 trillion.)* Even as US manufacturing gradually cedes domestic economic dominance to service-based industries, broad-based concerns about our nation's manufacturing strength on a global scale are clearly misplaced.

Declining US manufacturing employment has fueled much of the consternation surrounding the sector's continuing viability. But fewer manufacturing jobs doesn't mean less manufacturing. In recent decades, automation has boosted efficiency—which undeniably costs jobs—but activity continues apace. In fact, since manufacturing employment began to trend downward around 1980, industrial production has continued to rise, hitting all-time highs just before the onset of the recession in 2007.

In the wake of this recession, employment fears are inevitably expanding beyond manufacturing—people will mourn jobs lost, assuming they're never coming back. And in many cases, that's true. But new jobs will crop up in their place. A steep downturn forces companies and industries to innovate. Jobs that were cut may become obsolete, but new positions will be created to meet different challenges in the evolving business environment.

Manufacturing presents a microcosm of this phenomenon. A long-term transition is underway from "heavy" manufacturing to high-tech components and products—a normal industry progression, instigated by evolving demand and technological advancement. Over the past year alone capacity is up in semiconductors, communications equipment, and computers, while capacity has been cut in textile mills, printing and furniture.

Gradually, manufacturing is becoming a smaller albeit still integral component of the US economy—and that's fine. Our economy is so well diversified that a declining share in one sector is offset by growth in another. Not only is there no overall adverse effect from such a transition, the economy actually becomes more productive as a result. Natural demand shifts and creative evolution will continue to shape the economic environment for decades ahead, just as in decades past. This is an essential aspect of capitalism. The market doesn't fear it—nor should you.

*Source: IMF, United Nations. All figures as of 2008.

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

Click here to rate this article:



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

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.