Friday, February 21, 2014

The Health of US Manufacturing

The future the U.S. manufacturing sector is a matter of legitimate concern. After all, manufacturing accounts for a disproportionate share of research and development, innovation, and the leading-edge industries of the future. A healthy manufacturing sector not only supports well-paying jobs directly, but also supports a surrounding nimbus of service-sector jobs in finance, design, marketing, sales, and other areas. On the world stage, manufacturing is still most of what is traded in the world economy. If the U.S. wants to downsize its trade deficits, a healthier manufacturing sector is part of the answer. But perceptions of U.S. manufacturing, along with the reasons for concern, vary across authors.

Oya Celasun, Gabriel Di Bella, Tim Mahedy and Chris Papageorgiou focus on the perhaps surprising strength of U.S. manufacturing in the last few years in the immediate aftermath of the Great Recession, in "The U.S. Manufacturing Recovery: Uptick or Renaissance?" published as an IMF working paper in February 2014. They note that this is the first post-recession period since the 1970s when manufacturing value-added rebounded starting a couple of year after the end of the recession.

In addition, they note that while U.S. manufacturing as a share of world manufacturing was falling from 2000 to 2007, in the last five years the U.S. share of world manufacturing seems to have stabilized at about 20%. Interestingly, China's share of world manufacturing, which had been the rise before the recession, also seems to have stabilized since then at about 20%.

How does one make sense of these patterns? The IMF economists emphasize three factors: a lower real exchange rate of the U.S. dollar, which boosts exports; restraint in the growth of labor costs for U.S. manufacturing firms; and cheaper energy costs and expanding oil and gas drilling activity which matters considerably for many manufacturing operations. They write: "The contribution of manufacturing exports to growth could exceed those of the recent past,  fueled by rising global trade. U.S. manufacturing exports have proven resilient during the  crisis. Further increases will require that the U.S. diversify further its export base towards the  more dynamic world regions."

The Winter 2014 issue of the Journal of Economic Perspectives has several articles about U.S. manufacturing, with the lead-off article by Martin Neil Baily and Barry P. Bosworth, "US Manufacturing: Understanding Its  Past and Its Potential Future." (Full disclosure: I've been Managing Editor of the JEP since 1986.) They point out that when measured in terms of value-added, manufacturing has been a more-or-less constant share of the U.S. economy for decades. The share of U.S. employment in manufacturing has been dropping steadily over time, but as they write:
"The decline in manufacturing employment as a share of the economy-wide total is a long-standing feature of the US data and also a trend shared by all high-income economies. Indeed, data from the OECD indicate that the decline in the share of US employment accounted for by the manufacturing sector over the past 40 years—at about 14 percentage points—is equivalent to the average of the G -7 economies (that is, Canada, France, Germany, Italy, Japan, and the United Kingdom, along with the United States)."

Of course, there are reasons for concern, as well. For example, manufacturing output has held its ground in large part because of rapid growth in computing and information technology, while many other manufacturing industries have had a much harder time. But Baily and Bosworth argue that the real test for U.S. manufacturing is how well it competes in the emerging manufacturing industries of the future, including robotics, 3D printing, materials science, biotechnology, the "Internet of Things" in which speeds and interconnections of machinery and buildings are hooked into the web. It also depends on how how U.S. manufacturing interacts with the recent developments in the U.S. energy industry, with its prospect of lower-cost domestic natural gas. In terms of public policy, they argue that the policies most important for U.S. manufacturing are not specific to manufacturing, but instead involve more basic policies like opening global markets, reducing budget deficits over time, improving education and training for U.S. workers, investing in R&D and infrastructure, adjusting the U.S. corporate tax code, and the like.

In a companion article in the Winter 2014 JEP, Gregory Tassey offers a different perspective in "Competing in Advanced Manufacturing: The Need for Improved Growth Models
and Policies." Tassey's focus is less on the manufacturing sector as a whole and more on cutting-edge advanced manufacturing. He notes: ""One result has been a steady deterioration in the US Census Bureau’s “advanced technology products” trade balance (see http://www.census .gov/foreign-trade/balance/c0007.html) over the past decade, which turned negative in 2002 and continued to deteriorate to a record deficit of $100 billion in 2011, improving only slightly to a deficit of $91 billion in 2012."

In Tassey's discussion of advanced manufacturing, he discusses "how it differs from the conventional
simplified characterization of such investment as a two-step process in which the government supports basic research and then private firms build on that scientific base with applied research and development to produce “proprietary technologies” that lead directly to commercial products. Instead, the process of bringing new advanced manufacturing products to market usually consists of two additional distinct elements. One is “proof-of-concept research” to establish broad “technology platforms” that can then be used as a basis for developing actual products. The second is a technical
infrastructure of “infratechnologies” that include the analytical tools and standards needed for measuring and classifying the components of the new technology; metrics and methods for determining the adequacy of the multiple performance attributes of the technology; and the interfaces among hardware and software components that must work together for a complex product to perform as specified.

Tassey argues that "proof-of-concept research" and "infra-technologies" are not going to be pursued by private firms acting alone, because the risks are too high, and will not be pursued effectively by the public sector acting alone, because the public sector is not well-suited to focusing on desired market products.  Instead, these intermediate steps between basic research and proprietary applied development need to be developed through well-structured public-private partnerships. Further, without such partnerships, he argues that many advanced manufacturing technologies which show great promise in basic research will enter a "valley of death" and will not manage to be transformed into viable commercial products.

Of course the various perspectives described here are not mutually exclusive. U.S. manufacturing could can be benefiting from a short-term bounceback in cars and durable goods in the aftermath of the Great Recession, as well as from a weaker U.S. exchange rate and lower energy prices. It could probably use both broad-based economic policies as well as support for public-private partnerships. But the bottom-line lesson is that in a rapidly globalizing economy, a tautology has sharpened its teeth: U.S.-based manufacturing will only succeed to the extent that it makes economic sense to do the manufacturing in the United States.