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 typically make their products with power-driven machines and equipment. It also includes small and home-based businesses that make things by hand.
Manufacturing also includes small and home-based businesses that make things by hand.
Manufacturing also includes companies that contract with others to make the goods. In the United States, it doesn't include housing and commercial construction. (Source: "Manufacturing, NAICS Code 31-33," U.S. Census. "Industries at a Glance," Bureau of Labor Statistics.)
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.
Manufacturing is an essential component of GDP. In 2016, it was $2.8 trillion. That drove 11.7 percent of U.S. economic output. 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 $1.48 in business growth in other supporting sectors. These include retailing, transportation, and business services.
The United States has 12.5 million manufacturing jobs.That employs 8.5 percent of the workforce.
These jobs pay 12 percent more than all others. In 2015, they earned an average of $82,023 (including benefits) per worker. That's $26.5 per hour. Nevertheless, more than 600,000 jobs are still waiting for workers with the right skills.
Manufacturing used to be a larger component of the U.S. Economy. In 1970, it was 24.3 percent of GDP, much larger than it is today.
America's edge as the world's leading manufacturer has also slipped. In 1985, it produced 28 percent of the world's goods. That's because the industry has only grown 1.1 percent a year since then. That's much slower than the 2.3 average growth rate of the economy as a whole.
It's also slower than our major trading partners: China (9.8 percent), India (5.1 percent), Germany (3.6 percent), the U.K. (2.8 percent), Canada (2.7 percent), and Japan (1.9 percent).
Reasons for Decline
The biggest reason is a shift to a service-based economy. Banking and other financial services began growing after 1999, when Congress reprealed the Glass-Steagall Act.
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 auto worker (Source: "How a Trump Tariff Could Sideswipe U.S. Auto Industry," Chicago Tribune).
But many federal policies also decrease U.S. competitiveness. That makes U.S. manufacturing costs 20 percent higher, even when labor costs aren't included. First, complying with regulations costs $180.5 billion, about 11 percent of total sales.
Second, the tax rate in 2011 was 37.65 percent. That's higher than France (34.1 percent) and twice as much as China (16.6 percent). It's triple that of Taiwan (10.1 percent) with the lowest tax rate.
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. (Source: "Facts About Manufacturing," National Association of Manufacturers.)
Manufacturing is forecast to increase faster than the general economy. Production will grow 3.0 percent in 2017, and 2.8 percent in 2018. Growth will slow to 2.6 percent in 2019 and 2.0 percent in 2020.
Five new forces drive this 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 the 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. For more, see Call Center Outsourcing.
Fourth, companies realize the need to protect home-grown 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 that American label. (Source: "U.S. Economic Outlook Through 2018," Manufactureres Alliance for Productivity and Innovation.)
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's because it's easier to reach the huge North American market. That's better than in 2011 when only 19 percent would choose the United States. (Source: "U.S. to Match China in Manufacturing Attractiveness," Thomas.net, May 9, 2013.)
Unfortunately, growth won't translate into an increase in U.S. manufacturing jobs. That's because of 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.
President Donald Trump promises to bring jobs back to manufacturing. He promised a 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. For more, see Trump's Job Creation Plan.
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 of withdrawing from the Transpacific Partnership and NAFTA. It also recommends the improvement of the science, technology, engineering and math skills of America's labor force. (Source: "Facts About Manufacturing," National Association of Manufacturers.)