The manufacturing emperor's new clothes

By: 
August 26, 2015

It seems that the recent stock market slide is bringing to light some truths that have long been suspected by manufacturers and economists alike: The emperor is naked.

On Monday, August 24, the Information Technology & Innovation Foundation (ITIF) published a critique of the Congressional Research Service (CRS) report, "U.S. Manufacturing in International Perspective," noting that the CRS has got it all wrong when it comes to the U.S. manufacturing sector. "The CRS report mistakenly suggests that U.S. manufacturing is healthy, while dismissing the need for supportive manufacturing," said the ITIF in its introduction to its own report, "A Critique of CRS's ‘U.S. Manufacturing in International Perspective.'"

 

Stuart Miles
Image courtesy Stuart Miles/
freedigitalphotos.net.

The rosy picture painted by the CRS report leads it to deny that American manufacturing is in trouble or that congressional action is capable of helping it, thus concluding that "the plethora of proposed legislation to support U.S. manufacturing is both unnecessary and ineffective." The CRS report, says the ITIF, "consistently errs on the side of ‘all is well' when, in fact, actual U.S. manufacturing performance is declining significantly."

The ITIF points to the huge jobs losses in manufacturing. Measuring these losses from 2003 distorts the picture. Measuring from 2000 to 2003, the U.S. experienced a recession and lost 16% of its manufacturing jobs; unlike other sectors, "this employment was not added back during the recovery. Between 2000 and 2013, manufacturing realized a net loss of 5.2 million jobs." While the ITIF notes that manufacturing jobs should be expected to increase on par with growth in the overall labor force, which grew 3.7% from 2003 to 2013, resulting in "a comparative decline of manufacturing jobs in this period of 20.3%," the actual manufacturing job loss percentage from 2000 to 2013 is 30%, "a sign of decline."

It's also been noted by many reports that American manufacturing productivity has been extremely high, and we've experienced good productivity gains over the past 13 years. The ITIF points out, however, that these gains are driven by just a few industries, including computers and electronic products, motor vehicles and transport equipment, and primary metals. "Since 2005, manufacturing output has shrunk by 2%. And these measures do not account for other factors, such as import substitution price bias, which also appear to have artificially overstated manufacturing output.

"In short, as ITIF has shown, over 33% of America's manufacturing job losses in the 2000s was caused by a fundamental lack of competitiveness and not by productivity gains or sectoral shifts. Despite this, the CRS report asserts that U.S. manufacturing output is at an all-time high."

In its critique of the CRS report, the ITIF says that the report "errs in how it compares U.S. manufacturing output to that of other nations." Rather than being the second strongest in the world, U.S. manufacturing output is smaller than that of other nations with comparable levels of development when examined as a share of GDP. "The U.S. went from producing 29% of the world's manufacturing to just 17% in a little over a decade," says the ITIF.

Clearly, the United States isn't doing well in spite of outperforming some nations such as Italy, Canada, and the United Kingdom from 2005 to 2013, with a gain of just 5% in manufacturing value-added in eight years--"a weak accomplishment at best."

That has been borne out over the past two weeks, as the stock market has dropped, with many calling out China as a major cause. If that seems surprising to many who believed China's strong economic numbers, an article on the front page of the August 25 issue of the Wall Street Journal, "For All Its Heft, China's Economy Is a Black Box," says otherwise. The article, by Greg Ip and Bob Davis, notes that China's "murky politics, unreliable data and opaque decision making" are cause to doubt China's strength. "Economists widely doubt that China grew at a robust 7% in the second quarter, as the country's official statistics say," write Ip and Davis. "Some think the rate might be as little as half that."

Obviously, many economists in the United States doubted the stock market numbers, calling it a bubble and claiming that many stocks were over-valued, noting that the manufacturing sector didn't support these figures. Today, some economists are calling the recent drop a badly needed correction to this bubble, a reality check for those who thought the U.S. economy was booming.

The ITIF concluded that "the health of U.S. manufacturing is much shakier than the Pollyannaish CRS report suggests," and describes as "flawed" the idea that U.S. manufacturing doesn't need any help in the form of tax reform and other measures to make U.S. manufacturers more competitive. The ITIF critique calls on Congress to "proactively advance legislation" to give U.S. manufacturing a boost and help U.S. manufacturers prosper. "Failure to do so will lead to more of the same loss of manufacturing jobs and output, with negative impacts on overall U.S. economic growth."

This report shows us that perhaps we're beginning to see through the manufacturing emperor's new clothes, and discovering the reality of what lies beneath.

Read the full report here.

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