Dawn of the Not So Dead

Story Highlights:

• ISM’s Index of Manufacturing Activity showed the sector expanded in April—the 21^st straight month.
• Yet many argue manufacturing is dead since jobs have disappeared for decades.
• Most blame outsourcing, but technology and productivity gains have helped firms make a lot more here, for a lot less.
• The US remains the world’s largest manufacturer, responsible for 17% of global output.

Usually, it’s easy to tell if something’s alive: Does it move? Breathe? Talk? Walk? But sometimes, it’s less obvious. Take US manufacturing: The sector grew again in April, as ISM’s Index of Manufacturing Activity showed expansion for the 21^st straight month. In fact, US manufacturing has been, in many ways, growing at a terrific clip since mid-2009. Yet, talk of the death, demise or decline of American manufacturing persists. Why the disconnect?

Most who argue American manufacturing is a relic tend to base their views on manufacturing employment, which has indeed declined over time. This goes back much farther than layoffs resulting from the 2007-2009 recession, but as unemployment remains high, it’s a hot-button issue. In fact, it’s not unusual for politicians to use this as stump material, vowing to “bring jobs back home.”

But, therein lies the rub—that sentiment assumes all American manufacturing jobs went overseas. True, some may have. Production often goes where labor costs are cheapest as firms seek to cut costs. Yet, many more jobs weren’t outsourced but made redundant by productivity gains brought by improved technology—a trend extant since World War II and proven true globally. You read that right: Manufacturing jobs have declined as a share of total employment globally for decades.

Yet the very same force reducing these jobs is generating a massive amount of production. Technology has allowed firms to produce more in the US, with less people, as real manufacturing output per worker has skyrocketed. Hence, the US remains the largest manufacturer on the planet, responsible for 17% of total manufacturing output. The sector produced over $1.7 trillion in 2010—if US manufacturing were a country, it would be the world’s ninth biggest single-country economy. If US manufacturing is truly dead, it has a funny way of showing it.

Death has a pretty specific definition, and we’re rather sure it doesn’t include “producing more with less.” That’s not even mostly dead—it’s just “working smarter.” A good thing, though it can carry a negative impact for individuals who lost their jobs as productivity rose. We certainly don’t downplay the impact of job losses on those directly affected, but a healthy industry has to adapt to a changing competitive environment and adopt improved technology, otherwise it’s likely the industry...well...actually dies.

Claims of a dead US manufacturing sector are probably more politically driven than anything else. After all, touting a healthy industry (or blaming job losses on technology) doesn’t let politicians grab the zeitgeist—they’ll get more traction by rallying folks around a common cause. But this rhetoric truly belies the reality of a more productive and competitive industry—which, last we checked, was something most people (politicians included) probably want. For investors and those who seek a reasoned view of the state and economy around them, it’s key to look beyond political rhetoric and assess cold, hard facts.