The Reckoning

Is Obama Playing Politics With Export and Manufacturing Statistics?

Barack Obama speaks to workers at the Master Lock factory in Milwaukee, Wisc.

Photo by Scott Olson/Getty Images.

Over the past several years, as so much of what passes for American economic vitality appeared to leak away, the steady growth of the long-suffering U.S. manufacturing sector has provided a silver lining that many have rallied around.

Here’s how the Institute of Supply Management put reported March numbers for the manufacturing sector: “[E]conomic activity in the manufacturing sector expanded in March for the 32nd consecutive month,” it said, adding that “of the 18 industries included in the survey, 15 are experiencing overall growth.”*

This kind of news has become the norm rather than the exception. It should cheer all Americans, but it particularly comes as music to the Obama administration’s ears. On the surface at least, these data provide evidence that progress is being made on two goals the president has stressed throughout the long post-crisis doldrums: doubling American exports by 2015, and helping engineered a “comeback” in US manufacturing – written off by most since the 1970s as a slowly dying dinosaur.

First, on exports: It is absolutely true that exports have grown during the recession, and as the U.S. economy slumped, that led to an improvement in our trade deficit (though never anywhere near its elimination). But the current 16 percent annual growth in exports (and Obama’s pledge to double) is measured from the low base of 2009 – the depth of the crisis. Whether that pace can be sustained for three more years is debatable.

So what about manufacturing?  This is a more complex picture. The steep decline in the sector that took place from 2000-10 appears to be over. The loss of just under 7 million jobs in that decade – some 33 percent of the entire sector – was worse in percentage terms than the losses suffered during the Great Depression, according to a new study by the Information Technology and Innovation Foundation.

Today, the economy is adding jobs in manufacturing. Labor Department numbers show that the U.S. economy has added 429,000 “factory jobs” since the spring of 2010. But do a few years of steady growth make for a comeback?

It all depends on definitions. If “victory” is defined in terms of economic activity, congratulations, you’ve won.

But if we look at jobs created, then it remains a very dim light at the end of the tunnel. Even if U.S. productivity and rising costs associated with producing abroad close the gap that lead to “offshoring” in the first place, the march of technology will continue to make many jobs redundant. Much of that vaunted productivity, after all, grows out of the increasing automation of US industry. 

The latest projections (February 2012) from the Bureau of Labor Statistics (BLS) demonstrate this clearly. The BLS updates its numbers regularly on the number of jobs various sectors will create over the next decade.

Right now, the BLS has some good news: Its data project that the rapid erosion in manufacturing jobs that took place in the first decade of the 21st century will reverse itself during this decade. Happily, during this decade, jobs in what BLS calls “Good-producing, non-agricultural” industries will grow – but only amount to about 1 percent. BLS statistics show that employment in this “good-producing” sector went from about 24.5 million in 2000 to just 17.7 in 2010, but that this will recover to 19.4 million by 2020.

Moderately encouraging, I suppose, but 19 million people will still be smaller than the population of Shanghai in 2020. How, under these circumstances, can anyone be speaking of a “renaissance” in American manufacturing? That still leaves a sad story over several decades for manufacturing in America – a decrease, in terms of the percentage of GDP represented by factory output, from 25 percent of GDP in 1970 to just over 11 percent today. The decrease in manufacturing employment as a percentage of the whole is slightly steeper, thanks, again, to automation.

But talk of a “rebirth” is not all hooey. If the goal is to create sustainable manufacturing jobs, the story may be slightly better. Jobs on the low end of the skills scale or where environmental concerns make production in high income countries prohibitively expensive will never come back. Many rote assembly lines, textile and steel mills and industries like rare earths have found their new homes abroad.

But the further up the skills scale you go, the more the gap between a U.S. workforce and its Asian and Latin American competitors closes.

And at the top – aerospace, Intel’s “wafer” factories, genomics and other biotechnology plants – the US and a handful of other hyper-efficient developed economies retain important advantages. As a sector-by-sector analysis of manufactured products on sale in the United States in 2011 found, American manufacturers are either competitive or hold an advantage in 94 percent of all goods sold in the United States. That was up from 91 percent of all good sold in 2009.

It is important to understand that the results pertain to goods produced for consumption in North America, not for export, where lower prices and added transportation costs change the math considerably.

But the study, by management consulting firm Booz & Company and the University of Michigan’s Tauber Institute for Global Operations, suggests that for the first time in decades, moving production offshore is no longer a ‘no-brainer’ for the vast majority of companies producing for the U.S. domestic market.

In industries like aerospace, medical equipment, chemicals, and food and beverages, the study says, the United States can produce products that compete or dominate the competition in the domestic American market. But production for the US sale of low “value added” products, including textiles, furniture, toys, and some components of electronics and computers, simply won’t pay.

Given these results, it isn’t surprising that Obama’s team – and some people usually on the other side, like the U.S. Chamber of Commerce, the National Association of Manufacturers and others, claim to see a factory-based version of “morning in America.” The anecdotal data is compelling and has the additional benefit of being easier to relate to. And so we get a great deal of talk about the “reshoring” trend, which many hope will accelerate as wages, the costs of environmental and labor regulations and other political and regulatory risks continue to climb in Asia.

The good news is real. For instance, Whirlpool decided in 2010 to spend $120 million on a new washing machine in Cleveland, with a net gain of one hundred and fifty jobs, rather than expand operations again in Mexico.

Even more striking are moves by Whirlpool competitor, General Electric. Two years after announcing it would move production of energy-efficient refrigerators abroad, GE reversed itself in January 2011 and decided on a $93 million upgrade to its plant in Bloomington, Indiana, saving over seven hundred jobs. GE did the same thing in Louisville, Kentucky, investing $80 million in modernizations for a water heater facility rather than moving its four hundred jobs overseas.

Jeff Immelt, GE’s CEO and the head of President Obama’s panel on US competitiveness, conceded this week that the Louisville move was “as risky an investment as we have ever made.” He knows his career will depend on the success of these plants. And neither GE nor Whirlpool have stopped creating jobs outside the US – in a world where middle classes are exploding in the emerging markets, that would be stupid. But you can’t accuse Whirlpool of putting politics first in Cleveland.

Nor Caterpillar, is building a $120 million plant to make giant earthmovers in Victoria, Texas, including some models that were previously built in Japan; nor Dow Chemical, the cash register company NCR, Sauder Woodworking, lock maker Master Lock, and the machine tool firm GF AgieCharmilles. All of these companies have brought overseas production back to the US market in the past three years.

If the main factors in these corporate decisions were cheaper labor costs and the weak dollar, the victories would be Pyrrhic. “Inputs”—energy, transportation, raw materials, and other production costs—will fluctuate. Overall, the case for arguing that manufacturing has come roaring back in America simply is not there – an Obama has over sold that case.

But, political aside, even if the current, more benign trends only manage to keep manufacturing at about 10 percent of GDP, it will be a victory of sorts – one that few economists would have dreamed of five years ago.

* The 15 manufacturing industries that are growing, listed in order, are: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Primary Metals; Petroleum & Coal Products; Paper Products; Machinery; Miscellaneous Manufacturing; Wood Products; Furniture & Related Products; Transportation Equipment; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Fabricated Metal Products; and Electrical Equipment, Appliances & Components.