Because manufacturing has so many substantial links with so many other sectors throughout the economy, its output stimulates more economic activity across society than any other sector. And a new study suggests the multiplier effect of manufacturing may be much higher than previously calculated.
In recent years, politicians -- among them President Obama in his 2013 State of the Union address -- have publicly acknowledged the economic significance of the manufacturing sector. But their focus is almost exclusively on jobs. The sector does still employ just under 10% of the total workforce, providing jobs with an average compensation level greater than the average for the rest of the business community. But it's also clear that 21st-century automation and productivity gains will prevent manufacturing employment as a percentage of total employment from ever approaching the halcyon days of the 1950s.
Manufacturing Leads Economic Growth
While factory sector employment may not provide politicians the cover they need on the job creation front, they are still correct when they tout manufacturing's crucial role in the economy. That's because no sector does more to generate broad-scale economic growth -- and, ultimately, higher living standards -- than manufacturing.
Nothing demonstrates this more than manufacturing's multiplier. A sectoral multiplier effect tells us which companies and industries give the economy the biggest bang for the buck, literally. Every dollar of output in a sector generates a certain level of economic activity across society -- sales and purchasing transactions that lead to a direct and indirect need for employment and resources within other facets of society.
Because manufacturing has so many substantial links with so many other sectors throughout the economy, its output stimulates more economic activity across society than any other sector. That's a major reason manufacturers play such a critical role in growth. As factory output grows, it requires more inputs from mining and utilities and suppliers and creates job and investment opportunities in all the other sectors that use its products, such as transportation, construction, and retail. It also spurs growth in services such as finance and transportation.
So what's the actual impact? Earlier projections based on Bureau of Economic Analysis (BEA) annual input-output tables have calculated that a dollar's worth of final demand for manufacturers generates $1.48 in other services and production. This is higher than any other sector. The retail and wholesale trade sectors have much lower multipliers, generating 54 cents and 58 cents respectively in other additional inputs for every dollar of economic activity they generate.
And yet, it turns out that those figures underestimate the actual impact that manufacturers have. A new analysis by Inforum, an economic consulting service working out of the University of Maryland, suggests the manufacturing multiplier is much higher -- $1.92, almost doubling the base value of the manufacturing output itself.
No sector does more to generate broad-scale economic growth -- and, ultimately, higher living standards -- than manufacturing.
While Inforum's analysis still uses the BEA multiplier data, it provides a more holistic perspective, taking into account a broader assessment of both upstream suppliers and the supplier's suppliers. So, for example, the group's more comprehensive measure not only identifies the value added of the electricity sector used by manufacturing, but also the value added of the coal consumed making the electricity that manufacturing consumes. Inforum's analysis also takes into account import leakages, or money spent on goods not produced in this country.
Moreover, while BEA data from 2012 shows that manufacturing accounts for about 12.5% of GDP and 9.4% of employment, Inforum's new analysis can also identify the proportion of GDP (11.5%) and employment (10.4%) generated in non-manufacturing establishments for the upstream production of inputs to manufacturing.
Broader and More Dynamic
Many experts believe that, because multipliers can only capture effects quantified by measuring inter-industry transactions, the size of manufacturing's multiplier is even more underestimated than even Inforum suggests. The multiplier does not capture indirect economic activities generated by spillovers -- for example, unintended side effects that benefit other businesses within a supply chain and even competitors when manufacturers invest in research and development.
Politicians should continue to promote the importance of manufacturing to our economy. They just need to understand that while jobs are important, the sector's impact is much broader and more dynamic.