U.S. Manufacturing Renaissance?

By Kathryn Kobe
Economic Consulting Services LLC
Chair, NABE Manufacturing Roundtable

Jim Meil, chief economist of Eaton Corporation, highlighted the strengths of the U.S. manufacturing system as its 1) superior management, 2) deep capital and high labor productivity, and 3) research and development intensity and technology leadership.  Based on this and the fact that the United States has high compensation levels but also high labor productivity, the U.S. manufacturing sector should pursue the sectors where these strengths provide a sustainable competitive advantage and exit the areas where they do not.  He noted that the Stanford, McKinsey LSE study found U.S. management practices rated number one and are pretty consistently good across companies and industries.  One reason may be that the U.S. system is much more likely to have dispersed shareholders and private equity to answer to, whereas in other countries the companies are more likely to be government or family run.

More competition tends to be conducive to better management practices and multinationals (of which the United States has many) are well run worldwide. However, the United States’ lead in this area is narrowing. On a four-point quadrant, with technology intensity on one scale and pricing power on the other, the U.S. industries are trying to migrate toward the upper right hand corner representing intense research and development (R&D) and a fair degree of pricing power. (See Jim’s slide here.) Aerospace and chemicals (including pharmaceuticals) are the two industries that already fall into that quadrant.

David Heuther, chief economist of the National Association of Manufacturers, indicated that manufacturing employment and share of nominal gross domestic product has declined and that tends to make policymakers view the manufacturing sector as a whole as being in decline.  However, in real terms, the manufacturing share of GDP has remained relatively constant in the United States because high productivity in manufacturing has meant competitive pricing, which impacts nominal share but not real share. U.S. manufacturing labor is the most productive in the world. Manufactured exports have helped to keep the United States out of recession so far during the 2007-2008 period by offsetting the housing drag on GDP.

Martha Moore, president of Moore Economics, provided a summary of research she has been involved with on the global shifts in chemical production.  Using the input-output table, the lost chemistry content in the growing trade deficit can be calculated.  The sectors with the larges lost chemistry content are: textiles, leather and apparel; computers and electronics; plastics and rubber products; and transportation equipment.  China has been the largest gainer in production due to these shifts. Using the computer and electronics industry as an example, the largest gains in production have been in Asia.  The United States has lost a small share but the real impact has been in Europe.

During the question-and-answer period, the panelists were asked if there were signals that the shift in the value of the dollar was bringing manufacturing back into the United States.  The panelists agreed that there was no definitive sign of this yet.