Ignore at Your Own Peril: The Manufacturing Crisis in Perspective

It is a curious thing about human nature. When bad news is repeated often enough, we tend to become numb to their impact. For instance, how many times can you hear that the U.S. manufacturing sector has shed millions of good jobs and still feel outrage at the lack of a policy response? The decimation of manufacturing jobs may be slowing, but not stopping yet, as today’s employment numbers suggest. In January 2004, manufacturing lost another 11,000 in its 42nd monthly decline in a row. There is no excuse for ignoring manufacturing. The sector has experienced an unprecedented decline and it will require serious attention to ensure a sustained recovery.

On the other hand, why should people even care about manufacturing’s decline? Is the destruction of old industries and the creation of new and better industries not part of capitalism’s progress? At the same time, manufacturing’s decline means that a sector that is crucial for productivity growth, employment creation, good quality jobs, and for economic stability is disappearing in many communities. This decline is so far not compensated for by increases in other sectors that could be equally important for the U.S economy. It is important to remember that currently, manufacturing is more productive, has larger employment spill-over effects, pays higher wages, and provides more benefits than other sectors of the economy. Moreover, if the U.S. economy wants to shrink its large trade deficit by increasing exports, it needs to rely heavily on the manufacturing sector since about 70 percent of trade is in manufactured goods. Manufacturing is important for the U.S. economy and there is no real alternative for it. Hence, the prolonged decline in this sector needs to be taken seriously.

Manufacturing has experienced an unprecedented decline for the past three and a half years. Specifically, employment in manufacturing dropped for 42 consecutive months. By January 2004, manufacturing had lost 3.3 million jobs compared to its last peak in March 1998, when manufacturing employed 17.6 million people. Just since the recession started in March 2001, manufacturing lost more than 2.6 million jobs in an accelerated, steep drop. Thus, the decline in manufacturing jobs explains the bulk of the overall employment loss during the recent recession and recovery.

The decline in manufacturing jobs that started slowly in 1998 and gained momentum in early 2001 was an unprecedented phenomenon. Despite a steady decline in the employment share of manufacturing relative to total employment for decades – due to the higher productivity level of manufacturing – the sector never experienced a decline in jobs that was as long or as large as the most recent drop, which cannot be explained by productivity gains alone. From 1984 through March 1998, manufacturing employment was approximately steady around 17 million jobs, before it declined, first slowly and then at an accelerated pace, to 14.3 million jobs by January 2004, its lowest level since July 1950. Back then, the U.S. economy had about one third of the jobs it has today.

There are some indications that the painful slide of manufacturing may be slowing down. Orders for manufactured goods are up and manufacturing firms are using more of its capacity. According to the Fed, capacity utilization in manufacturing rose for seven months and reached its highest level since June 2002 in December 2003.

The latest indication of a slowdown in manufacturing’s losses came in today’s release of the employment figures for January by the Bureau of Labor Statistics (BLS). In the last three months, manufacturing employment declined at its slowest pace in more than three years. If output growth continues to grow at a strong pace and a broad basis, as it did in the second half of 2003, the slowdown of manufacturing job losses will hopefully translate into job gains for the struggling sector.

Due the nature of traditional manufacturing production, many of the job losses in this sector tend to be geographically concentrated. Because the drop in manufacturing employment started before the recession began, manufacturing states had smaller employment gains from March 1998 to March 2001. In fact, employment in manufacturing states grew only by 4 percent compared to 7.5 percent in non-manufacturing states. Similarly, in the recession and the recovery, manufacturing states saw their total employment decline, whereas non-manufacturing states saw a small gain in employment. Consequently, the geographic concentration of manufacturing and of the associated job has aggravated the problems of the "job loss," such as budget shortfalls, prolonged spells of unemployment, and declining benefits coverage.

Just because the job losses seem to slow down in manufacturing is certainly no reason for celebration. Policymakers can ignore the economic pain that the crisis in manufacturing creates at their own peril. The manufacturing sector is a crucial ingredient for generating widespread prosperity in the United States. It is a source of well paying jobs with good benefits, and a generator of strong economic growth due to its above average productivity growth. As an unprecedented three and a half year slump in this sector appears to be winding down, policymakers need to address the crisis seriously to ensure a sustained future for U.S. manufacturing.

  • Manufacturing Employment, 1946 to 2003
    Although manufacturing employment has steadily declined as share of total employment from 1946 to 2003, the decline in the number of jobs over the past three and a half years is unprecedented both in size and in length. From March 1998 to January 2004, manufacturing employment fell by 3.3 million. Job losses accelerated after March 2001. Since then, manufacturing lost 2.6 million jobs.
    Source: Bureau of Labor Statistics, Current Employment Statistics.

  • Average Employment Changes in Manufacturing and Non-manufacturing States , 1998 to 2003
    Employment began to decline in March 1998, but its decline accelerated in March 2001. Consequently, manufacturing states experienced on average smaller employment gains from March 1998 to March 2001. And they experienced actual employment losses from March 2001 to December 2003, while non-manufacturing states registered a small employment gain.
    Note: Manufacturing states are states that had a manufacturing employment share in 1997 that was greater than the average employment share for all states by 0.25 times the standard deviation. These states are Alabama, Arkansas, Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Vermont and Wisconsin. Non-manufacturing states are defined as states that had an employment share that was more than 0.25 times the standard deviation below the average manufacturing employment share. These states are Alaska, Arizona, Colorado, Delaware, Hawaii, Louisiana, Maryland, Montana, Nevada, New Jersey, New Mexico, New York, Oklahoma, Texas, Virginia, West Virginia, and Wyoming. Other states were not classified. Averages are weighted averages.
    Source: Bureau of Labor Statistics, Current Employment Statistics.

Dr. Christian Weller is a senior economist at the Center for American Progress.