The fallacy of more-productive manufacturing

April 5, 2012
Readers who have watched the U.S. economy limp along for the past few years will probably recall one of its few bright spots

Readers who have watched the U.S. economy limp along for the past few years will probably recall one of its few bright spots: The productivity of U.S. manufacturing workers has been rising. In 2010, for example, the U.S. Bureau of Economic Analysis says manufacturing output per worker rose to almost $149,000 from $135,000/worker the year before, a rise of over 10%. That was the largest annual increase in U.S. manufacturingworker productivity since the 1940s and followed a 7.85% increase in 2009.

You would expect rising productivity in manufacturing to make the U.S. a more-competitive place to produce goods. And there are certainly reports in the media that some manufacturing work, indeed, is being reshored. But foreign manufacturers have not exactly been beating a path to U.S. doors, despite initiatives by politicians to promote a U.S. manufacturing renaissance.

There is a good reason our manufacturing base isn’t growing like spring weeds, claims Frank Berlage, CEO of Multilateral Partners Global Advisory Group LLC, an investment firm. In a nutshell, Berlage says there is a problem with the BEA productivity figures. Better manufacturing productivity would be good if it was due to factors such as more automation or smarter workers. But that isn’t the case. MPGAG’s own research shows that 62% of the rise in productivity in U.S. manufacturing between 1995 and 2011 came from the fact that it was highly profitable for U.S.- based factories to assemble components made overseas into finished goods. This is a far different situation than if the economy hosted an integrated manufacturing infrastructure that produced components and subassemblies, as well as finished goods. As such, says Berlage, the productivity gains portrayed by official figures are false.

Evidence of the problem, says Berlage, can be seen in the accumulated U.S. current accounts deficit. A country’s current account is its exports minus imports. A current account deficit means a country imports more than it exports. All things being equal, one would expect a country that was getting better at making goods to import less and export more. That hasn’t happened. BEA data shows an increasing deficit in U.S. international transactions since 2010, after imports dropped during the time of the worldwide financial crisis.

The difficulty with productivity arising from importation of basic components is that it could evaporate if the value of the U.S. dollar drops significantly versus that of other currencies. And this could happen sooner rather than later if U.S. debt continues to mushroom to a point where other countries are no longer interested in financing it.

Nevertheless, the U.S. has plenty of room to boost its production capacity. Today, both Germany and Japan get over 20% of their gross domestic product from manufacturing. In China, the figure is closer to 40%. But only about 10% of U.S. GDP comes from manufacturing. As Berlage puts it, “If the future of the U.S. now depends on my travel agent calling my tennis coach so together they can open a nail salon, we are in serious trouble.”

— Leland Teschler, Editor

© 2012 Penton Media, Inc.

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