Putting U.S. Manufacturing Growth In Perspective

Source: Real Clear Markets

Over the last few years, the U.S. manufacturing sector has been lauded by the media as a primary driver of the nation’s recovery from the Great Recession. And since 2010, the manufacturing sector has been a positive contributor to both new job creation and the nation’s gross domestic product (GDP). But its economic and employment impacts have been, in the context of recent economic history, less than the national media coverage justifies.

According to the Bureau of Labor Statistics (BLS) there were 17,619,000 Americans employed in the manufacturing sector in January 1998; by January 2010, this figure had declined to 11,462,000, or 6,157,000 factory jobs lost in 12 years – an average annual decline of 513,000 jobs and a 35 percent overall decline in manufacturing employment over a 12-year period. Focusing on the last decade, the BLS employment data offer a sobering perspective on the manufacturing sector’s growth in employment in recent years Between 2010-2014, 762,000 new U.S. manufacturing jobs were created over that five-year period, at an annual average rate of 152,400 new jobs. In contrast, during the preceding five-year period (2005 to 2009), 2.8 million manufacturing jobs were lost in the U.S. economy, or an average decline of 562,200 jobs per year. Placed in perspective, this means that only 762,000 and about 27 percent of the 2.8 million manufacturing jobs lost during the five years between 2005 and 2009 were actually recovered in the last five years (2010-2014) of economic recovery. And compared to the start of the Great Recession, American manufacturers employ 1.4 million fewer factory workers today than in December 2007. So while the manufacturing sector has rebounded in recent years, its contribution to economic and employment growth in recent years has been rather muted, lagging behind many other more vibrant sectors.

In September 2012, President Obama announced a national goal to create 1 million new manufacturing positions by the end of 2016. Since that announcement, the US manufacturing sector has created payroll jobs at a rate of only 11,000 per month and fewer than 300,000 jobs in total over the last 27 months. That rate of factory job creation would generate only about 560,000 new jobs by the time Obama leaves office — a 440,000 job shortfall compared to the president’s unrealistic goal of 1 million new factory jobs by the end of next year.

The 2015 Manufacturing Institute and Deloitte Skills Gap Study, released in January of this year, finds that 84 percent of manufacturing executives surveyed agree that there is a talent shortage in U.S. manufacturing. Moreover, six-out-of-ten executives surveyed indicate that open skilled production positions go unfilled due to a talent shortage even when 80 percent of manufacturing companies are willing to pay more than the market wage rates for workforce positions reflecting this talent shortage. The study also projects that, over the next decade (2015-2025), 3.4 million manufacturing jobs will need to be filled due to 2.7 million “baby boomer” retirements and 700,000 new manufacturing jobs expected to be created from the economic recovery. Nonetheless, only 1.4 million manufacturing jobs are likely to be filled over the next decade, leading to an expected shortfall of 2 million manufacturing jobs due to an advanced manufacturing “skills” gap. The well-documented and growing advanced skills gap could limit the ability of the manufacturing sector to expand in the future and restrict that sector’s contribution to US employment and economic growth.

What is crucial in this projection of 700,000 new manufacturing jobs is that it assumes an expansion of an average of only 70,000 new manufacturing jobs per year over the next decade. For December 2014, the preliminary data shows some12.2 million employees in the manufacturing sector. This projection will increase the total number of manufacturing employees in the U.S. manufacturing sector to nearly 13.0 million by 2025. According to projections, almost 80 percent of the new employees to be hired in the manufacturing sector will be to replace retiring employees.

The fact that the total number of manufacturing jobs in the U.S. economy will only increase by 6.6 percent over the next decade should not be surprising. Beginning in the late 1980s, American manufacturers began to replace their employees working in routine production tasks with capital investment in advanced computer technology and robotics. Low- and un-skilled employees are gradually being replaced with more highly skilled and educated employees who now operate the advanced manufacturing technology automating these production tasks. Capital has been replacing labor in the manufacturing sector for several decades and we can expect that trend to continue. As a result of increased automation and advanced robotic technologies, the productivity per manufacturing employee has been increasing, reflecting employees who now are more highly skilled and are more educated than the factory workers of the past.

As those trends continue, we can expect higher manufacturing wages for a stagnant or decreasing number of highly skilled workers. In other words, the future of the US manufacturing sector looks a lot like what has become the US agriculture sector – increased output, increased productivity per worker from investment in labor-saving technologies, and higher wages eventually for a declining number of highly skilled workers as a share of the American workforce.

U.S. manufacturing will certainly remain an important and dynamic sector of the US economy; but we need to be realistic. Team Obama’s goal of adding a million new factory jobs by next year is completely unachievable, we’ll be lucky if we gain 600,000 jobs by next December. Even in that case, factory employment would only return to the January 2009 level of about 12.5 million payroll jobs, which at that time was the lowest level since the late 1940s, and 7 million jobs below the 1979-peak of 19.5 million factory jobs.

So while the future of the US manufacturing sector looks bright in terms of increasing output due to advances in computer technologies like robotics and additive manufacturing (3D printing) and a modest increase in highly-skilled, high-paying jobs, we shouldn’t be unrealistically expecting manufacturing to returns to its prior status as a major job creator. And if the advanced skills gap isn’t addressed, manufacturing sector’s growth could be seriously constrained. Finally, we should probably be somewhat skeptical of the media reports that are being overly optimistic about of the contribution that the factory sector is making to the US economic expansion.