We’ve all seen the stats. Manufacturing in the US is in trouble.
That’s not news, but with the incessant 24-hour news cycle of Trump, Cruz, Rubio, Clinton and Sanders, we’re hearing a lot more about the state of manufacturing in America.
US manufacturing production growth oscillates month-to-month, but there’s a clear downward trend toward zero.
This flies in the face of multiple assertions about the renewed productivity and increasing competitiveness of the American manufacturing workforce. Despite yeoman efforts by organizations like Harry Moser’s Reshoring Initiative, the fact is that the US is losing ground in the manufacturing race.
Media pundits would have you believe this is entirely due to China, but that’s not the case. India, Southeast Asia, Eastern Europe and even Africa have demonstrated the engineering and management talent for using low wages effectively in the mass production of consumer goods.
It’s a direct consequence of globalization and it’s inevitable, but this doesn’t mean that declining US manufacturing is inevitable.
US manufacturing payrolls are shown here in terms of the change in the number of manufacturing workers, expressed in thousands. The six sharp dips into negative territory are noteworthy, and again the trend is downward.
That’s not surprising given US consumer’s high debt burden and low labor participation rates. A lack of disposable income always translates into a lack of consumption and that affects manufacturing. Even in an economic recovery, consumer sentiment is key to growth of the goods producing sector.
This chart from Investor’s Business Daily measures consumer optimism, with 50 as a baseline neutral outlook:
Note that since 2012, there been only three brief periods when consumer optimism was even slightly positive. That’s not an environment in which the goods producing sector can thrive.
Even the boom years in the auto industry are being driven by record rates of leasing and extremely long term loan commitments. The former is certain to flood the market with used vehicles, suppressing prices. The latter leaves consumers “upside down” on their car loans, further stretching the trade-in cycle.
Similarly, homeownership is at generational lows, and rental housing occupancy is way up. This would be a universally bad picture, except for one bright spot, and it’s a paradox: labor productivity.
This chart is US nonfarm labor productivity since 2006:
Note that it’s up—way up—continuing an almost uninterrupted trend since the Second World War. The average industrial output per worker climbs year-over-year through boom times and recession, mainly as a result of modern management practices and industrial automation.
Increasing productivity is another word for decreasing costs, and combined with flat US worker incomes for the last 30 years, it’s a good news story for manufacturing enterprises in America.
At least it would be, if consumers could be convinced to spend on durables.
With productivity way up, why haven’t wages followed suit?
It’s a complex question, with different answers depending on your political leanings, but the reality is that at current levels of consumer debt, 0% financing on new cars and appliances can’t keep the shell game going forever.
Americans need more money.
Europe has the same problem, and multiple rounds of quantitative easing have seen little impact in the goods-producing or goods-consuming sectors.
That’s why the next helicopter drop may be directly to consumers, either in the form of cheques directly from government, or shovel-ready infrastructure spending on a massive scale.
Large-scale manufacturing employment in the form of high-wage, low-skill line jobs are gone forever, but the consumption they created is an essential part of a healthy functioning economy.
Without it we have deflation, a disease that’s more dangerous than inflation by far and one that has gripped Japan for a decade. So far, markets appear unable to reverse this trend, so some form of central-bank or government action is inevitable.
The politicians may talk about trade deals, import duties and illegal immigration, but the real issue is the lack of disposable income for millions of Americans. Just like the government bailed out the big banks and major automakers, they’re going to have to bail out the American consumer.
Unfortunately, none of the current crop of presidential candidates are willing to explain how they plan to do that.