Death of U.S. Manufacturing Exaggerated as Free Trade Deferred

By Michael McKee

Nov. 2 (Bloomberg) -- Manufacturing in the U.S. is alive and well. It just needs fewer workers.

Increasing factory productivity has kept America the world’s largest industrial economy, accounting for more than one-fifth of global output, almost twice as much as China, according to the United Nations. That is helping to boost shares of hardware and software companies that make factories more efficient, including Milwaukee’s Rockwell Automation Inc., Dover Corp. of New York, and Minneapolis based Graco Inc.

Rising productivity also means companies need fewer workers, a trend economists say will continue. The number of Americans employed in factories has fallen 40 percent since peaking in 1979, according to the Labor Department. In response, unions are pressuring President Barack Obama to protect jobs by pursuing policies that include erecting trade barriers.

“The U.S. is still a manufacturing giant,” said Marc Chandler, an international economist and global head of currency strategy for Brown Brothers Harriman & Co. in New York. “If you don’t understand that, you can make bad policies. And you can miss investment opportunities.”

The Institute for Supply Management’s manufacturing index rose in August above 50 -- the dividing line between expansion and contraction -- for the first time in 18 months. The gauge will increase in October to 53 from 52.6 in September, according to the median forecast of 62 economists surveyed by Bloomberg News. The figures will be released at 10 a.m. New York time today.

Continuing Drop

The administration is weighing that improvement against a continuing drop in industrial payrolls. The economy has lost 7.8 million factory jobs from a high of 19.6 million in June 1979, as output has risen by one-third, or almost $1.1 trillion, Fed data show.

The Labor Department will report on Friday the loss of another 46,000 manufacturing jobs in October, according to the median estimate of 17 economists in a Bloomberg News survey. The unemployment rate will rise to 9.9 percent for the month from an 26-year high of 9.8 percent in September, according to the median projection of 61 economists surveyed by Bloomberg News.

Obama’s challenge is that “people tend to associate the strength of a sector with its employment level,” said Dave Huether, chief economist of the Washington-based National Association of Manufacturers.

The president agreed to a “Buy American” provision in the $787 billion economic-stimulus program adopted in February and sided with the United Steelworkers last month against tire makers such as Findlay, Ohio-based Cooper Tire & Rubber Co. when he imposed 35 percent tariffs on tires imported from China.

‘Standing Up for Jobs’

“All we’re doing is standing up for jobs,” said Leo Gerard, president of the Pittsburgh-based union, which has 1.2 million active and retired members, according to its Web site.

Imposing trade barriers to protect employment misses the main reason manufacturing has stayed strong while employment has contracted, economists say.

“Because of productivity growth, we have been able to produce more output with fewer workers,” former Federal Reserve Chairman Alan Greenspan said in an telephone interview from Washington. “That’s the source of higher standards of living. If employment was moving up exactly in line with output, it would mean that productivity and standards of living had stalled.”

American factory-worker output per hour has grown an average of 3.2 percent a year since the Labor Department began keeping records in 1987. That compares with a 2.1 percent average for the economy as a whole. In 2008, manufacturing productivity grew 1.2 percent, making the U.S. one of only five industrialized countries that saw an increase, according to the Bureau of Labor Statistics.

Foreign Competition

Those gains have helped keep U.S. production at historically high levels, even in the face of increasing foreign competition that’s driven down prices and profits. The value of American output, in constant dollars, has grown to $1.54 trillion so far in 2009 from $1.46 trillion a decade ago, a 5 percent increase, according to UNIDO, the UN’s Industrial Development Organization.

The increase has come even though the U.S. share of global manufacturing has fallen to 22.3 percent from a peak of 27 percent in 1999 as other countries expand their own manufacturing capabilities. Even so, the U.S. share is equal to the combined output of Brazil, Russia, India, and China -- the largest emerging economies, UNIDO data show.

Developing Countries

“Growth rates are much higher in developing countries because they start from such a low base,” said Shyam Upadhyaya, the chief statistician at the Vienna-based organization. “But in absolute terms, the value of U.S. manufacturing continues growing.”

Companies in the Standard & Poor’s 500 Index that make industrial machinery have outperformed the broader measure, rising 28 percent so far this year, compared with a 15 percent increase for the entire S&P 500.

Shares of Rockwell, which makes industrial-automation equipment, have risen about 26 percent since the beginning of the third quarter to $40.95 on Oct. 30.

Dover, a specialized manufacturing-equipment maker, is up about 15 percent to $37.68. It reported profits 10 cents higher than analysts forecast for the most recent quarter, as it cut costs and improved productivity to overcome a 24 percent recession-driven drop in sales.

‘Trended Upward’

Profits at Graco, which makes systems to manage fluids such as paints, were 29 cents a share in the most recent quarter, 49 percent higher than analysts’ estimates. While business conditions “continue to be challenging,” sales “generally trended upward” through the period, chief executive Patrick McHale told analysts on an Oct. 22 conference call. Its stock has risen 25 percent since the beginning of the third quarter to $27.54 on Oct. 30.

Rising productivity has also been a benefit for Americans as a whole. Per-capita income has risen 72 percent, to $32,214 from $18,744, since manufacturing employment began declining in 1979, according to the Commerce Department’s Bureau of Economic Analysis.

While productivity has played a major role, the U.S. has also moved up the manufacturing ladder, creating and making more sophisticated, technologically advanced goods while losing lower-skill, lower-value industries, such as toys and textiles, to countries where wages are a fraction of those in America.

The change has boosted the average weekly pay of manufacturing workers by 26 percent, to $733.60, during the past decade, according to the Bureau of Labor Statistics.

Earnings, Productivity

The administration has taken note, White House economic adviser Lawrence Summers suggested in an Oct. 29 speech to the Economic Club of New York. “Ultimately what workers earn is dependent on their productivity,” Summers said.

Still, the administration has put free-trade deals with Panama, Colombia, and South Korea on hold, partly because unions pushed for stiffer labor provisions.

“We’re frustrated,” said Bill Lane, director of government affairs for Peoria, Illinois-based Caterpillar Inc., the world’s biggest maker of construction equipment. “We need to start generating U.S. jobs. And the best way to do that is by promoting exports and opening foreign markets.”

At the same time, the U.S. must do more to retrain manufacturing workers who have lost their jobs and improve the education system to prepare workers for a more high-tech economy, Greenspan said.

“It is essential that we move workers from obsolescent industries into those with cutting-edge technologies,” he said.

Increasing Sophistication

Still, the idea that job losses mean U.S. manufacturing has hollowed out is a “myth,” said William Overholt, a senior research fellow at Harvard University’s John F. Kennedy School of Government in Cambridge, Massachusetts. All industrialized and industrializing countries go through the same process as their manufacturing becomes more sophisticated and productivity increases.

The U.S. lost 2.6 million factory jobs from 1994 to 2004, while China lost 25 million, according to a study Overholt did for the Santa Monica, California-based Rand Corp.

“The familiar views of the fate of U.S. manufacturing are basically a combination of paranoia and propaganda,” Overholt said. “The idea that America’s manufacturing economy is dying is the silliest nonsense.”

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net.