The Importance of Manufacturing to the U.S. Economy

Manufacturing has been a cornerstone in this robust growth of the US economy for more than a century. However, in the past few decades, cheaper imports have helped reduce the importance of manufacturing in our economy. The economy has shifted toward services and away from manufacturing as the driving force of economic growth. As a result, returning to strength of manufacturing has turned into an important political issue, especially in the last three presidential elections. This month, we're going to examine some of the important issues facing the manufacturing sector. So, let's take a look at some of the charts.

Chart 1, Part A, 0:53–  Manufacturing employment is highly cyclical, with strong growth during expansionary times and layoffs during recessions. This chart plots the number of manufacturing workers from 1940 to the present. On the far left in the 1940s, you can see that because of the war effort, the number of workers quickly escalated from fewer than 10 million to more than 16 million. With the war's end, the number retreated to about 12 million.

But from that low, in September of 1945 to the late 1970s, manufacturing employment expanded to almost 20 million workers– That's phenomenal growth. It grew for many reasons, the most notable of which was the fact that the United States was the primary manufacturer of the world. The war had caused significant damage to the manufacturing powerhouses in Europe and Asia.

Most importantly for the US economy, the demand for US-made products allowed for strong wage growth, which expanded the middle class in this country. Because prior to World War II, it was pretty much just a two-class society. But these new manufacturing workers with income that grew faster than their expenses allowed for a great deal of discretionary spending.

Thus came the boom in housing, the ability to send children to college, other personal spending, and so on. All of this helped the economy grow faster and become more diversified than other major economies around the world.

Chart 1, Part B, 2:25–  But after hitting a peak in the 1980s, manufacturing employment began a long downward trend. It stabilized in the 1990s despite NAFTA, which was signed in 1992 and took effect in January 1994. As you can see, that didn't impact the number of manufacturing workers.

However, since 2000, the manufacturing sector has undergone a dramatic transformation. On the macroeconomic side, the economy was hard hit by two recessions, the tech wreck in the early 2000s and the global financial crisis from 2007 to 2009. These recessions did cause a sharp decline in domestic spending.

Chart 1, Part C, 3:08– The biggest issue was China joining the World Trade Organization in 2001. Now the WTO facilitates trade between countries by providing a framework for negotiating agreements that eliminate tariffs, quotas, and other restrictions. China had already started to open up its isolated economy to the world, but by joining the WTO, it accelerated that process. This allowed China access to new trading partners at better rates than the current ones.

For China, this membership increased trade and raised the prospects of improved domestic living standards for many of its citizens. For the US, the goal was for China to move away from its communist model to a liberal, democratic capitalistic economy. It hasn't entirely turned out that way. Most notable for the US, industries like manufacturing faced very stiff competition from Chinese imports, which had significantly lower prices than the domestically made products. Customers flocked to these lower-priced items, and companies that had outsourced their manufacturing to overseas– their profitability increased , helping to give a boost to the stock market.

In the end, this led to massive layoffs. From 2000 to the trough of 2010, close to 6 million manufacturing jobs were lost. Most of that decline happened before the global financial crisis. What complicates this more is the fact that manufacturing is highly spatially concentrated. So, when there's a hiring freeze, layoff, or plant closure, it has a significant impact on the community. Many small towns have been hollowed out as 70,000 factories have closed, much of that happening in the Midwest and the South.

In the past decade, there has been a commitment to rebuilding the domestic-industrial base. The goal is to make the United States the world's preeminent industrial power again. There is a focus on reviving strategically essential industries. Now this isn't just tech, but the goal is to export products that have high profit margins and offer high-paying jobs. Meanwhile, the country will continue to import products that have low profit margins and offer their employees lower wages.

Chart 1, Part D, 5:26–  There was one last point on this chart. The light blue line shows manufacturing employment as a percent of all workers. I think it's fair to avoid the aberration of the war years. But in 1946, manufacturing employment accounted for about 1 in 3 jobs. It now accounts for 1 in 12.

Chart 2, 5:46–  Some attribute the lower level of manufacturing jobs to the technological advances that have increased productivity. This concept makes sense –we see it in everyday life.

This chart shows manufacturing employment in the dark blue line on a declining trend, while the light blue shaded area is manufacturing output, which is increasing. For example, since 1980, manufacturing employment has declined by one-third, while manufacturing output has about doubled. But there's a critical nuance here. How statistical agencies calculate the data is a bit misleading. It's most notable in the tech sector.

Take for example, a mobile phone. As each new model comes out, it is more powerful and faster than the previous model, but the price may very well be the same. Government agencies looking at the more powerful phone adjust their value upward so that although phones may be the same price and the number of units produced may be the same, the value is adjusted higher since the phone is more powerful. And with the rapid advancement in the tech sector, the value of the light blue shaded area is boosted higher. Now that only accounts for a portion of what's being created; the rest is clearly a result of automation and other advancements.

Manufacturing is not just making of widgets. Manufacturing fosters technological advancement and ensures the stability of countless supply chains so that consumers can get what they want when they want it, something that we saw disturbed during the pandemic and helped lead to the spike in inflation.

What has been discussed today is just the tip of the iceberg. It doesn't include the workforce that's needed for research and development, logistical operations, marketing, and, of course, corporate management. For example, upstream, there are an awful lot of workers who are employed to get the resources to make steel, glass, plastic, or whatever is needed for the manufacturer. There are workers that are needed to transport these items to the factories.

There are workers who provide electricity and water, which is used to power the manufacturing facilities. Downstream, people are employed to transport the finished product to retailers, for example, and workers to sell it. All of this helps grow the economy. Clearly, manufacturing is a vital portion of this growing economy.