U.S. manufacturing is the transformation of raw materials into new products. The process is mechanical, physical, or chemical. The raw materials include commodities or components. It is the second stage of the supply chain.
Manufacturing businesses include plants, factories, and mills. They make their products with power-driven machines and equipment. It also includes small and home-based businesses that make things by hand. They include bakeries, candy stores, and custom tailors.
Manufacturing also includes companies that contract with others to make the goods. In the United States, it doesn’t include housing and commercial construction.
U.S. manufacturing is the largest in the world. It produces 18.2 percent of the world’s goods. That’s more than the entire economic output of Canada, Korea, or Mexico. But America’s leadership position is threatened by high operating costs. That gives a competitive edge to other countries. First among these is China. Its low-cost factories manufacture 17.6 percent of the world’s products.
Importance of Manufacturing in the U.S. Economy
Manufacturing is an essential component of gross domestic product. In 2018, it was $2.33 trillion. That drove 11.6 percent of U.S. economic output, according to the Bureau of Economic Analysis. Manufactured goods comprise half of U.S. exports.
Manufacturing adds a lot of value to the power of the U.S. economy. Every dollar spent in manufacturing adds $1.89 in business growth in other supporting sectors, according to the National Association of Manufacturers. These include retailing, transportation, and business services.
The United States has 12.75 million manufacturing jobs, according to the Bureau of Labor Statistics. That employs 8.5 percent of the workforce. These jobs pay 12 percent more than all others. In 2017, they earned an average of $84,832 per worker. This includes benefits. That’s $40.79 per hour.
Yet, 89 percent of manufacturers are leaving jobs unfilled. They can’t find qualified applicants, according to a 2018 Deloitte Institute report. The skills gap could leave 2.4 million vacant between 2018 and 2028. That could cost the industry $454 billion in 2028.
Manufacturing used to be a larger component of the U.S. economy. In 1970, it was 24.3 percent of GDP, double what it was in 2018.
America’s edge as the world’s leading manufacturer has also slipped. In 1970, China was the world’s fifth largest manufacturer. It took the No.1 spot in 2010, replacing the United States. Japan is third, at 10 percent. It’s followed by Germany at 7 percent, South Korea at 4 percent, and India at 3 percent. China produces 20 percent of the world’s goods, according to a Brookings Institute report. The United States produces 18 percent, and Japan produces 10 percent.
Reasons for Decline
The health care sector has also grown. It’s grown from 5 percent of the economy in 1960 to 18 percent in 2015. In 1965, the government began subsidizing hospital costs when it created Medicare and Medicaid. It was one reason for rising health care costs. Health care services also responded to the aging baby boomer generation.
The switch to a service sector economy happened to other developed countries for the same reasons. But the United States manufacturing industry has lost global market share. Less developed countries, such as China, have increased their manufacturing capabilities.
Another contributor is the high U.S. standard of living compared to other countries. That makes labor costs much greater than in other nations. U.S. manufacturers cannot compete with low-cost products made by lower-paid workers in China, Asia, and Mexico. For example, a unionized auto worker in Detroit makes $58 an hour, including wages and benefits. That compares to $8 an hour for a Mexican autoworker.
But many federal policies also decrease U.S. competitiveness. That makes U.S. manufacturing costs 20 percent higher, according to the Manufacturing Institute. That’s even when labor costs aren’t included. First, complying with regulations costs $180.5 billion, about 11 percent of total sales.
Second, the corporate tax rate was 35 percent. That’s higher than France at 34.1 percent and twice as much as China at 16.6 percent. It’s triple that of Taiwan at 10.1 percent with the lowest tax rate. In 2018, it drops to 21 percent, thanks to President Trump’s tax plan.
Third, other countries do better at negotiating bilateral free trade agreements. They lower tariffs and export fees. That lowers their cost of manufacturing because import prices of supplies are less expensive.
Manufacturing is forecast to increase faster than the general economy. According to the MAPI Foundation, production will grow 2.8 percent from 2018 to 2021. It will be boosted by the tax cuts but could be hurt by Trump’s trade war. MAPI is an acronym for the Manufacturers Alliance for Productivity and Innovation.
Underlying these short-term developments are five new forces that are driving manufacturing’s growth. First is increased productivity. Partly that is due to new technologies, such as 3-D printing. Second is the growing domestic production of domestic natural gas and shale oil. Low gas prices attracted many industries that use it for manufacturing of other products. Both productivity gains and low oil prices reduce U.S. production costs.
The third reason is rising wages in emerging markets. As standards of living improve throughout the world, local workers demand higher incomes. Some call centers are leaving India for Nebraska because wages have become comparable and service is better. Call center outsourcing used to be the norm. But companies are beginning to source again from home. The costs for call centers in some parts of the United States have become competitive.
Fourth, companies realize the need to protect homegrown intellectual property. Some countries, such as China, allow their factories to copy U.S. manufacturing processes and designs. They use this knowledge to make “knock-offs” that they can sell for less. That’s one reason some manufacturers prefer to remain in America.
Last, and probably least, is the awareness among consumers that “Made in America” means jobs for Americans. On the other hand, U.S. shoppers are very interested in getting the best value for their dollar. They are not willing to pay a lot more for that American label.
According to a survey from AlixPartners, 37 percent of manufacturers would prefer to locate in the United States. That’s equal to those that would prefer Mexico. That figure is also better than that of 2011 when only 19 percent would choose the United States. It’s easier to reach the huge North American market if the company is in the United States.
Unfortunately, growth won’t translate into an increase in U.S. manufacturing jobs. The reason lies in productivity improvements. These include the increased use of computers, robotics, and other efficient processes. The new jobs that are created require sophisticated computer-related skills to manage the robots.
Trump’s Impact on Manufacturing
President Donald Trump promised to bring jobs back to manufacturing. He delivered on his promised tax cut for U.S. manufacturers and higher tariffs for those who build overseas. He must make these incentives equal to the additional cost of U.S. manufacturing. Otherwise, it won’t be enough to bring back jobs. Trump’s job creation plan aims to create 25 million jobs in the next 10 years.
The National Association of Manufacturers applauds Trump’s plan to reduce taxes and regulations. It also supports his strategy to upgrade the quality of infrastructure. But it would prefer he create more free trade agreements. Instead, he has withdrawn from the Trans-Pacific Partnership and has renegotiated the North American Free Trade Agreement. NAM also recommends the improvement of the science, technology, engineering, and math skills of America’s labor force.
Trump’s trade war has hurt some manufacturers. United Technologies said it would lose $200 billion, while Ford said its cost was $1 billion. Mid-Continent Nail in Missouri announced layoffs because steel prices became too high for them to remain profitable. Harley-Davidson announced it would move some production abroad to avoid retaliatory EU tariffs.