Reinventing American Manufacturing: The Role of Innovation

The American public has become alarmed about the decline of U.S. manufacturing,¹ although most are reluctant to send their sons and daughters to work in factories. Manufacturing work still brings to the public mind such words as “dumb,” “dirty,” and “dangerous.” Some visualize newsreel clips of Ford’s famous River Rouge plants in the 1930s, belching dark smoke while predawn crowds of grim, cloth-hatted workers pour through tall factory gates armed with lunch pails. But these are old pictures. The repetitive assembly line has disappeared in modern manufacturing plants, replaced by sophisticated equipment controlled by highly skilled technical workers. A typical advanced plant looks and feels much like the interior of a modern office building, except that it is far quieter, less crowded, and cleaner.

Hollowing Out?

And yet, the U.S. manufacturing sector is in decline.

Employment

Over the past 50 years, manufacturing’s share of GDP has shrunk from 27 percent to below 12 percent. For most of this period (1965–2000), the number of manufacturing employees generally remained constant at 17 million, but over the past decade it fell precipitously to just below 12 million, or 31.4 percent.² All manufacturing sectors experienced job losses between 2000 and 2010, but the lower value sectors readily subject to globalization, such as textiles and furniture, were most adversely affected, losing almost 70 percent and 50 percent of their jobs, respectively.³

Investment

Manufacturing fixed capital investment (plant, equipment, and IT) grew in the 2000s at its lowest rate as a percentage of GDP (below 1.5 percent annually) since this data began to be compiled at the end of World War II.⁴ If this number is adjusted for cost changes, manufacturing fixed capital investment actually declined in the 2000s (down 1.8 percent)—the first decade this has occurred since these measurements began in the 1950s. Investment in the 2000s declined in 15 of 19 industrial sectors measured by Bureau of Economic Analysis (BEA).⁵ In contrast, manufacturing investment in the 1990s grew an average of 5.5 percent annually.

Output

While we have assumed from published government statistics that U.S. manufacturing net output as a share of world output has been stable, surpassed last year only by China,⁶ we may have been fooling ourselves. A recent report from the Information Technology and Innovation Foundation (ITIF)⁷ and other economic evaluations suggest that the official U.S. data on output have been significantly overstated.⁸ These data indicate that net output in 16 of 19 manufacturing sectors declined in the 2000s, in many significantly, but they also show that these declines were offset by two sectors, computing and energy.⁹ The ITIF and economists make three arguments. First, the number of foreign components used in U.S. manufactured products has risen sharply and they have not been adequately accounted for, thus U.S. output is overstated. Second, although employment in the computer sector declined by 43 percent, a significant amount of computer production moved offshore, and nominal U.S. industry shipments in this sector barely increased, government data included an inflationary output factor for increased computer quality and performance that caused the computing sector’s output in the 2000s to be significantly overstated. Third, output in the energy sector was similarly significantly overstated. Adjusting for these factors, the ITIF found that net U.S. manufacturing value actually fell by 11 percent in the 2000s.

Productivity

Since output is a factor in productivity, assumptions about strong growth in manufacturing productivity must be scaled back as well, although manufacturing still significantly exceeds service-sector productivity. The ITIF finds that manufacturing productivity grew by 32 percent between 2000 and 2010, not by the BEA’s much higher estimate of 71 percent.¹⁰ As adjusted, the U.S. was 10^th in productivity growth among 19 other leading manufacturing nations.

Many thought the U.S. was losing manufacturing jobs because of increased manufacturing productivity. The ITIF finds, however, that productivity gains accounted for only about one-third of the 5.8 million manufacturing jobs lost in the past decade,¹¹ and a...