Is manufacturing overrated?: Industry Trends & Analysis

It's getting to be a broken record. February was another up month for U.S. manufacturing as output increased 0.4 percent. Output rose 0.7 percent in January after jumping 1.5 percent in December—the biggest gain in 5 years.

April 15, 2012

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It’s getting to be a broken record. February was another up month for U.S. manufacturing as output increased 0.4 percent. Output rose 0.7 percent in January after jumping 1.5 percent in December—the biggest gain in 5 years. Also, U.S. manufacturers added 31,000 jobs in February, on top of adding 227,000 jobs in 2011.

Of course, the big question is how long can this last? In recent months, I’ve written about the positive side of the manufacturing recovery. This month, let’s look at some of the opposing opinions (and some facts). For example, writing in the Chicago Tribune, columnist Steve Chapman takes on what he thinks is the “holy grail” of manufacturing.

“Barack Obama and Rick Santorum probably couldn’t agree that August falls in summer, but on one important issue they are closer than the Winklevoss twins,” he wrote. “Both regard manufacturing as precious beyond words, and both think the federal government should be making special efforts to promote it. Obama favors an array of tax breaks to induce manufacturers to keep jobs in the United States, and Santorum wants to completely scrap the corporate income tax on companies in this particular sector.”

Chapman feels that manufacturing doesn’t need help, noting that its share of gross domestic product has declined only because other industries have expanded more rapidly, and that the U.S. share of global manufacturing has been stable for past 20 years. “For the most part, our leaders take it as normal and sensible to defer to consumer demand, rather than try to dictate it,” he wrote. “Given that, why do they think they ought to rig the tax code to push consumption dollars from services, which Americans want, to goods, which they don’t want quite so much? Why should they divert investment from more popular businesses to less popular ones?”

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Another counterpoint is that the recent increase in manufacturing jobs is bound to end. Jason Lange, writing for Reuters, noted that technological advances could cost thousands of manufacturing jobs in the coming years “Over the long term, factory job creation looks destined to stagnate as technology advances, and manufacturers’ role in the labor market will likely continue a decades-long decline,” he wrote. Indeed, a February U.S. Department of Labor report projected factory employment will drop to 11.5 million workers by 2020 from 11.9 million in January 2012, despite increased production. Manufacturing’s share of the labor market will likely drop to 7 percent by 2020 from 9 percent today.

Finally, in a provocatively titled Forbes blog, Dan Ikenson asked: Does the U.S. need more Boeings or more Facebooks? He stated that both companies are valued at about $50 billion (other valuations place Facebook at $100 billion), and while Boeing may be bigger in terms of revenue and head count, companies like Facebook may be a better economic driver.

He noted that in 2011, service-sector wages, at an average of $19.18 per hour, were higher than manufacturing, at $18.94. While Boeing’s operations support 160,000 jobs compared to 2,000 for Facebook, “is that better for the economy than a company that provides the same value using 1/80th the amount of labor resources?” he wrote. “Of course not. We need economic growth to create wealth and increase living standards. … Facebook is 80 times more productive than Boeing, freeing up 158,000 workers for other more productive endeavors (perhaps 79 more Facebook-type operations).”

A couple of thoughts. On the surface, it doesn’t make sense to favor one industry over another with tax subsidies. But if that’s the case, foreign countries must not have unfair advantages over U.S. manufacturing, as is the case today with China. U.S. trade policies clearly favor manufacturing imports into the U.S. over domestic goods, and that has to stop. Regarding Facebook and Boeing, the U.S. needs both. The best economies have diverse industries, each with a different employment model, that allow skilled workers to move where the need is greatest. So we shouldn’t put manufacturing on a pedestal, but recognizing the good it does for the U.S. has been long overdue. It’s nice to see manufacturing front and center for a change.