Reasons To Be Bullish About American Manufacturing

In the wake of financial turmoil, manufacturing takes a more central role in the economic growth potential of the United States.

As I approach the end of a dozen years leading the Manufacturers Alliance/MAPI, I am seeing compelling reasons to support the idea that U.S. manufacturing has a bright future and will continue to be a key to the domestic economy.

The stress and turmoil of the last few years has clearly failed to knock manufacturers to their knees, and instead has served to show the remarkable resilience of the sector. Not only has the American share of global manufacturing output held at around 20% of the total, it has done so by relentless attention to innovation, productivity enhancement and expanding the value proposition. In 2010, for instance, U.S. manufacturers achieved 6.7% growth in productivity and cut their unit labor costs by 4.4%.

This translates directly into a higher standard of living, as the inflation rate for manufactured goods fell 0.8% between 2000 and 2010, while total U.S. inflation grew 22%.

As we continue to recover from the "Great Recession," manufacturing is likely to enhance its role as one of the principal engines of growth. In the first place, capital goods production is one of the pillars of domestic manufacturing, and recent underinvestment will be reversed and contribute to growth for years to come. The average age of the U.S. automobile fleet is at record highs, and heavier transport and construction vehicles have not been replaced at a normal rate. The same observation holds true for factory capital equipment. One clear sign of underinvestment is that in 2009, for the first time since the Great Depression, the total capital stock in the United States declined when taking into account depreciation as well as new investment.

Moreover, we are competitive in booming global markets, enjoying a trade surplus in important subsectors like aerospace; construction machinery; semiconductors; mining equipment; industrial machinery; basic chemicals; paper; and engines, turbines and power transmission equipment. Presuming the United States sheds the protectionist impulses of the last few years, we should do well in fast-growing Asian, Brazilian and Indian markets.

In the current recovery, policymakers are beginning to realize that the financial and construction sectors are unlikely to play the same role in the GDP growth tables that they enjoyed in the last few decades. Likewise, government spending cannot continue to support growth through unrestrained borrowing. Moreover, the trend toward global outsourcing is slowing because of new concerns about supply chain reliability and cost rebalancing. The only other major sector of the domestic economy to be expanding robustly is agriculture, but it is too small to drive total growth.

In these circumstances, manufacturing will be leading the recovery for years to come. Coupled with the fact that it still is the source of over 60% of research and development, a vast majority of patenting activity, and of innovation, there is a powerful case to be made for public policies that support this sector. These policies are well known: lowering tax rates on the industrial sector to at least international norms; a lighter hand of regulation; a more aggressive trade-opening strategy; and continued improvement of the education and basic research capacity of the United States. Finally, the difficult events in recent decades in the Middle East, along with the rise of China as a global economic and military competitor, should also contribute to public understanding of the need for continued strength and technological leadership of the U.S. manufacturing sector.

Readers of this column will not be surprised by any of the themes outlined above. What is different from recent years, perhaps, is that because of the nature of the recent financial crisis, manufacturing is again playing a more central role in the economic growth potential of the United States. As this is my last column in this series, I am happy to be ending on a positive note.

Dr. Duesterberg is a senior adviser and former president and CEO of the Manufacturers Alliance/MAPI Inc., an executive education and business research organization in Arlington, Va.

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