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ITIF: U.S. Manufacturing Losses Worse Than Thought

April 5, 2012
Sharp Declines Not Only in Employment, But Also Output

The erosion of American manufacturing in the past decade has been far more severe than commonly recognized, with sharp declines not only in employment, but also in output. That's the finding of  a report by the Information Technology and Innovation Foundation (ITIF), a non-partisan research and educational think tank that aims to formulate and promote public policies to advance technological innovation and productivity.

"Worse Than the Great Depression: What the Experts Are Missing About American Manufacturing Decline" debunks widely held myths about productivity gains, restructuring and a manufacturing renaissance, and reveals the stark reality of a historic decline in U.S. competitiveness and unprecedented deindustrialization. The report explains that what the U.S. is experiencing is not merely another boom-and-bust cycle, but a structural decline more akin to what the U.K. experienced in the 1960s and 1970s when it lost its industrial leadership.

"What we discovered flies in the face of nearly all the reporting and commentary on manufacturing and reveals a disturbing truth," said Robert Atkinson, ITIF president and the report's chief author. "U.S. manufacturing jobs have been lost not simply because the sector is more productive. It is producing less. And unlike some high-wage nations, America is not replacing low-value-added manufacturing with high-valued-added manufacturing or opening new plants to replace closed ones. There is a difference between restructuring and decline. American manufacturing is in decline."

From January 2000 to January 2010, the U.S. lost one-third — almost 5.5 million — of its manufacturing jobs. This is likely the highest rate of manufacturing job loss in American history, exceeding even the rate of loss in the Great Depression. In addition, economy-wide job losses in the past decade were far more concentrated in manufacturing than during the Great Depression. But unlike the period after the Depression or in the recoveries from recessions after World War II, the recent rebound in manufacturing has been far weaker than portrayed by recent news reports, and comes off the steepest decline of any post-war recession.

In the face of these unprecedented losses, expert opinion has attributed the massive job loss to manufacturing's superior productivity performance. That view is based almost entirely on one number: change in real manufacturing value added as a share of GDP. But the ITIF report finds that U.S. government data significantly overstates this macro number, in part by vastly overstating value-added growth in the computer and electronic products sector and by miscalculating the price of imports of intermediate manufacturing inputs.

According to the U.S. Bureau of Economic Analysis, growth of output in the computer and electronics sector accounted for more than all the output growth in U.S. manufacturing. In other words, collectively the other 18 U.S. manufacturing sectors produce less today than they did in 2000. When measured accurately, ITIF said, real manufacturing output declined by 11% in the past decade, at a time when the overall economy grew by more than 11%. That compares 35% or more manufacturing growth in prior decades.

The report also refutes the view that other industrialized high-skill nations are also falling behind in manufacturing. While nations such as Austria, Germany, Korea, the Netherlands and Sweden have seen increased or stable manufacturing output growth, only the U.S. and a handful of other nations (e.g. Canada, Spain, Italy and the U.K.) have seen outright losses.

The report shows these losses have not been caused by declining demand for manufactured goods, but a decline in U.S. production of those goods as the manufacturing trade deficit has soared.

Despite the sobering findings, the report also emphasizes that manufacturing is still critical to America's economic future. Manufacturing still adds $1.6 trillion to GDP, employs 12 million people and is a traded sector, which means when we lose a manufacturing job because of foreign competition it is not automatically replaced by the market.

ITIF emphasizes that policy changes like a more competitive corporate tax code, increases in funding for manufacturing-focused R&D and programs to train manufacturing workers, and increased efforts to fight unfair or illegal trade practices can stem the tide and help restore the U.S. manufacturing base.

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