US Manufacturing Update: Separating Fact From Fiction

Here is a very interesting update on the state of US manufacturing.

Guess what? Contrary to mainstream expectations, US manufacturing has once again regained the world's supremacy.

This quote from Business Insider's liberal author, Mr. Vicente Fernando who calls it, ``American Manufacturing Making A Mockery Out of Skeptics" (bold emphasis mine)

Mr. Fernando quotes Noah Weisberg @ Goldman: "And within that global cyclical recovery, it may come as a surprise to many that the US is not obviously lagging – what Exhibit 3 shows is that the US manufacturing ISM index level is now among the highest across the world, higher than Europe, but also higher than BRICs. In other words, at least for the time- being the US manufacturing recovery is among the paciest, and the most recent round of quarterly earnings results also seemed to support this with both domestically and globally exposed companies reporting solid results."

"The U.S. ISM is shown by the thin purple line below, which has risen higher than even the BRICs (the dotted black line)."

"Hate to deliver good news, but last week, the U.S. ISM manufacturing index blew away expectations and generally killed it."

"While high U.S. unemployment remains a pressing problem, investors need to differentiate between leading and lagging economic indicators. Yes, there are a lot of economic data sets out there with dubious predictive value, but the ISM manufacturing index is one of best regarded and most reliable leading indicators for the U.S. economy. Employment, meanwhile, is a lagging indicator -- it improves way after everything else does. (Which is of course unfortunate for those who are unemployed, who must wait)."

Well this is should be a reminder for those who subscribe to the reductionist perspective, which tends to tunnel onto a single or select variables (e.g. wages), usually glosses over other very important and relevant interactive factors, especially in a highly complex economy as today. Hence generalizations premised on these frequently leads to wrong conclusions.

For purposes of additional discussion, here is Professor Mark Perry on the alleged but exaggerated state of "depressed" US manufacturing.

Manufacturing’s Death Greatly Exaggerated

By Mark J. Perry

(all bold emphasis and underscore mine)

Here’s some pretty grim news about the U.S. manufacturing sector—manufacturing employment in the United States fell below 12 million this year for the first time since 1946, and is now at the lowest level (11,648,000 manufacturing jobs in November) since March of 1941 (see chart, data here). Since the recession started in December 2007, manufacturing employment has fallen for 24 consecutive months, as the U.S. economy shed an average of 89,000 manufacturing jobs each month for the last two years. From the peak manufacturing employment of 19.5 million jobs in 1979, the American manufacturing workforce has shrunk by more than 40 percent, as almost 8 million manufacturing jobs have been eliminated over the last 30 years, with almost 6 million of those losses taking place just since 2000. And there’s nothing to suggest that the trend won’t continue, so we can expect even more manufacturing job losses in the future.

But here’s where the news about the manufacturing sector gets a little better. According to the Federal Reserve, the dollar value of U.S. manufacturing output in November was $2.72 trillion (in 2000 dollars), which translates to $234,220 of manufacturing output for each of that sector’s 11.6 million workers, setting an all-time record high for U.S. manufacturing output per worker (see chart below). Workers today produce twice as much manufacturing output as their counterparts did in the early 1990s, and three times as much as in the early 1980s, thanks to innovation and advances in technology that have made today’s workers the most productive in history. So at the same time that manufacturing employment has been declining to record low levels, manufacturing output keeps increasing over time, and the amount of output that each manufacturing worker produces keeps rising almost every month to new record high levels.

And here’s some more good news. For the year 2008, the Federal Reserve estimates that the value of U.S. manufacturing output was about $3.7 trillion (in 2008 dollars), and the nearby chart shows how the U.S. manufacturing sector compares to the entire Gross Domestic Product of the world’s five largest non-U.S. economies in 2008 (data here): Japan ($4.9 trillion), China ($4.3 trillion), Germany ($3.7 trillion), France ($2.9 trillion), and the United Kingdom ($2.7 trillion). Amazingly, if the U.S. manufacturing sector were a separate country, it would be tied with Germany as the world’s third-largest economy.

Bottom Line: As much as we hear about the “demise of U.S. manufacturing,” how we are a country that “doesn’t produce anything anymore,” and how we have “outsourced our production to China,” the U.S. manufacturing sector is alive and well. Despite declines in employment, the productivity of manufacturing workers has never been higher, and the United States is still the world’s largest manufacturer."

End quote

My additional Comments:

Let me add that if people buy for different reasons, not limited to the lowest prices with other considerations such as quality, familiarity or trust in the provider or brand, reputation (social status), social motives (charity, gifts, donation), keeping up with the Joneses', charisma of the salesperson and etc..., the obverse side is that investors don't invest only because of low wages. Otherwise we'd see Zimbabwe and African nations as the largest exporters or manufacturers, since they have the cheapest currencies due to the lowest standard of living which redound to the lowest labor costs.

On the other hand, there are many other factors that determine investments; particularly hurdle rate, access to finance or credit, access to capital, access to workers, access to markets, access to raw materials, access to energy, access to information or connectivity, transportation costs, security of property rights, transaction costs, political stability, labor productivity, labor skills, labor hiring and firing statutes, tax rates, legal or regulatory compliance costs or burdens, sanctity of contracts, economic freedom and others.

World bank classifies some of them into the cost of doing business (see methodology in link).

Essentially you can classify them into comparative advantages and division of labor.

And guess what? The common characteristics of these top exporters other than China is that they are highest ranking in terms of the global standings in economic freedom (heritage) and have also the lowest costs in doing business (World Bank).

Mental shortcuts are favorite instruments for the conveyance of political propaganda/manipulation, ergo we should be leery of them.