Even though manufacturing output dropped during the recession, it has jumped back up to $1.993 trillion by the end of 2012. From the point of view of economists, owners and managers of the Fortune 500 companies, manufacturing is growing. For them profitability has been good, stock prices are up and they are producing almost as many goods and services with 5 million fewer workers. Life is good!
It’s also true that the total employment in manufacturing grew until 1979, but has been declining steadily since this peak and declining precipitously since year 2000. Since 1979 manufacturing has lost 8 million jobs. Since each manufacturing job produces one to two other jobs, the economy has effectively lost another 16 million jobs. When defined from the perspective of the employee, manufacturing is still declining.
Investment in the U.S.
Since working class and middle class incomes are shrinking, there has not been enough spending to trigger growth in our consumption-oriented economy. The only other macro-economic answer is to offset this weakness with increases in capital spending on buildings, equipment, R&D and new products. But this isn’t happening.
Robert Samuelson of the Washington Post says, “Corporate America is husbanding its profits. It invests mainly in the safest projects. From 2007 (the previous business cycle peak) to 2012, domestic corporate profits climbed 35 percent while investment in plants and equipment rose only 2.6 percent. American companies had accumulated a huge cash hoard of $1.8 trillion at the end of 2012.”
The big companies will argue that they won’t make these capital investments because consumption is not high enough. But since the middle class can’t buy more because of falling incomes, the economy continues to limp along with low growth.
President Obama created the Council on Jobs and Competitiveness in 2011 with the goal of creating one million manufacturing jobs. He appointed General Electric’s Chief Executive, Jeff Immelt, as the council’s chairman. This was a big surprise to me because General Electric had been one of the biggest exporters of jobs, reducing their total manufacturing jobs in the U.S. from 125,000 to 50,000 people from year 2000 to 2010.
In 2012, Immelt announced that GE was bringing back its line of water heaters made in China and creating 230 jobs in Louisville KY. But, what he didn’t say was that the union had to agree to a new wage of $13.50 an hour, which is $8 less than the original $21.50 wage.
Similarly, Hoover announced it was bringing its Eden Pure product line back from Mexico to its old North Canton, OH plant. But employees would not make the $20 per hour wage that they used to make at the plant. Instead, they would be paid $7.50 per hour.
We should not delude ourselves into thinking that any of the large corporations will create jobs for any other reason than cost reduction, and wage concessions will be part of the outcome. The problem isn’t more jobs. The problem is decent wages.
What is the Reality?
The reality is that today’s big corporations are really only focused on three things — cost reduction, profitability and increasing returns to their investors. They are not moral, patriotic, loyal, or immoral and we cannot and should not depend on them to devote anything more than lip service to the plight of the middle class or the decline of American manufacturing. Despite the multi-national companies wonderful publicity campaigns that are designed to make them appear to be loyal to the country, concerned about the environment and supportive of employees, they are giant money-making machines that get 60 percent of their revenues from foreign markets.
Even with all of this talk about a Manufacturing Renaissance and reshoring of jobs, the fact is manufacturing employment is still down more than four million workers, we are still offshoring jobs, imports from China are setting new records, the trade deficit is getting worse, the number of factories are still down, the percentage of GDP is still low and R&D expenditures are being off-shored. We are not even close to President Obama’s goal of doubling exports by year 2016 or his goal of creating one million manufacturing jobs. All of these things taken together make up the critical mass that it takes to support innovation in our economy.
In 2003, the National Association of Manufacturers sponsored a research paper titled “Securing America’s Future,” authored by Joel Popkin. The paper said, “U.S. manufacturing is the heart of a significant process that generates economic growth and has produced the highest living standards in history. But today this complex process faces serious domestic and international challenges which, if not overcome, will lead to reduced economic growth and ultimately a decline in living standards for future generations of Americans. America’s manufacturing innovation process requires a critical mass to generate wealth and higher standards of living. If the U.S. manufacturing base continues to diminish at its present rate, that process may deteriorate beyond repair and, with it, the seedbed of our industrial strength and competitive edge. Once that mass has diminished below its critical value, the process by which prosperity has been generated may never be recovered. If that is permitted to occur, the growth rate of the U.S. economy may drop to half its historical average.”
It has been ten years since NAM issued this report and Joel Popkin’s projection was accurate. Critical mass is more than just job growth. It includes the skilled people, R&D investments in the U.S., basic research funded by the Federal government, a solution to the trade deficit and a system that is dedicated to fuel innovation. In my opinion, we are losing the critical mass of manufacturing and are now transitioning to a post industrial economy.
Part three of this series will describe solutions that might allow American manufacturing to rebound.
Mike Collins is the author of the Growth Planning Handbook for SMMs. You can find him on the web at www.mpcmgt.com.