Lately I have been hearing a lot of noise about how the manufacturing industry in the US is dead, thanks primarily to outsourcing of jobs to China and other low-cost countries. Being the natural skeptic that I am, I thought it might be worthwhile to dig into the question a bit. Where better to go than straight to the source, MAPI/Manufacturers Alliance.
A news release from MAPI/Manufacturers Alliance on January 13th, 2011 indicates that the industry’s composite index fell from 77% to 75% in December, 2010. On this index, 50% is the dividing line between expansion and contraction, “a leading indicator of the manufacturing sector,” and it was “the fifth consecutive quarter the index has been above the 50 percent threshold.” Right off the bat, things certainly don’t seem to be all that bad.
The report then mentions that a record low of 21% was recorded in March, 2009. That would seem to be a fairly large improvement in the manufacturing industry in just under two years, and right in the middle of a fairly sluggish “recovery” in the economy.
It doesn’t stop there, though. The report goes on to mention that the percentage of manufacturing companies operating above 85% capacity climbed to 33.3%, an improvement of more than 16% over the rate three months prior in September.
A number of other industry indexes are mentioned in the report, with most of them seeing modest improvements. But what does all of that mean? It doesn’t say anything about the actual size of the industry. Modest gains in a small industry don’t really mean all that much, right?
To answer that question, I had to go a little further back, unfortunately. The New York Times published an article in February, 2009 that asked much the same question I wanted to have answered. In the heart of the recession, The New York Times reported that 207,000 manufacturing jobs were lost in the month of January, 2009 alone, and that the industry was at a 28-year low (just two months before the low point mentioned in the MAPI/Manufacturers Alliance report).
However, the article quickly goes on to mention some surprising numbers. The value of goods manufactured in the US in 2007 was worth $1.6 trillion, and that “for every $1 of value produced in China factories, the United States generates $2.50.” In fact, the US is still the leading manufacturer of goods in the world by value.
So, what happened to the manufacturing industry? Where did all the jobs go, and why are so many factories sitting empty and silent? According to NYT, the manufacturing industry has shifted towards the high-end and high-tech. $80 billion worth of autos and auto parts were manufactured in 2007. “$200 billion worth of aircraft, missiles and space-related equipment.” Most of the “$16.5 billion worth of farming equipment” manufactured by John Deere was sold outside of the US.
The jobs that are being lost to “low-cost” countries are the low-end manufacturing jobs, like clothing and consumer goods. High-end manufacturing is on the rise, according to MAPI/Manufacturers Alliance. But what does all of that mean for the industry as a whole? According to NYT, US manufacturers accounted for 80% of what we consumed thirty years ago. In 2009, that number was down to 65%.
A 15% drop is nothing to laugh about, certainly. Consider this, though: In the last thirty years, how much has the American desire to consume increased? I would not be surprised if it far outstripped our ability to produce everything that we wanted (needed?) to consume.
Where would that leave the manufacturers? If unable to keep up with demand, prices would skyrocket and consumers would go to other sources for their needs. I do not find it surprising at all that when manufacturers found that they could obtain double, triple, or even more capacity in China for the same cost as they could in the US, that they would quickly take advantage of that opportunity. It not only allows them to meet demand in the US at a price that US consumers are willing to pay, but it also allows them to spread their brand and products into one of the largest markets outside of the US.
Outsourcing should not be viewed as a curse. Yes, it can be painful, but instead we should look at it as an opportunity to reinvent our country. We’ve done it before, and we can do it again. I don’t have the answers to help resolve the problem and get people back to work, but if we stopped focusing on where jobs are going and started focusing on how we are going to replace them, we might start to see some progress being made.