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The Truth About the Great American Manufacturing Decline

Morgan Housel
February 25, 2011

Danger is when something can be stated as fact, without facts backing it up, and still be accepted by most.

Take, for example, the rampant fear that our manufacturing muscle has eroded over the years. Just yesterday, Sen. Sherrod Brown (D-Ohio) bemoaned that this country "needs a real strategy on making things. We ought to make things in this country." Implying, of course, that we don't.

We hear these comments all the time. So often that they don't need to be questioned. We used to build things. We don't anymore. Manufacturing is dying. That's what we've come to believe.

Problem is, it's not really true.

We're making more things today than almost ever before. Even adjusted for inflation, manufacturing output is near an all-time high. In real terms, we're making more than twice as much today as we were in the early 1970s.

Why such a disconnect between perception and reality?

When people bewail manufacturing's decline, what they really mean is manufacturing employment:

Source: Federal Reserve, Bureau of Labor Statistics, author's calculations. I'll note here that some claim the government's manufacturing numbers are flawed, not accurately taking offshoring into account. BLS, the organization calculating this stuff, strongly disagrees with these claims.

There's no arguing that manufacturing jobs have been tumbling for decades. Not only are they falling, but they're falling at an increasing pace. There were more than 19 million manufacturing jobs in 1980. Today, there are a little more than 11 million. Those numbers looks far worse adjusted for population growth. The decline in manufacturing employment is real. It's bad. And it's getting worse.

So there's another disconnect. Why is manufacturing output so strong while manufacturing employment so frail?

One answer is productivity.

As a 2004 Congressional Budget Office report points out, "Since 1979, the productivity of manufacturing workers has grown at an average annual rate of 3.3 percent, significantly faster than the 2.0 percent growth of labor productivity in the nonfarm business sector overall." It's even faster more recently. Manufacturing productivity surged 4% annually during the 1990s. Everything else averaged half that much.

Simply put, manufacturers have grown incredibly efficient over the past several decades. They're able to build the same amount of stuff with far fewer people.

Take the auto industry. In 1990, the average American auto worker's share of total auto production was 7.15 vehicles per year. By 2010, each worker was producing 11.2 vehicles annually. That's a staggering jump in efficiency, and it means fewer auto workers are needed today than 20 years ago. Now, the auto industry is one sector where domestic output truly has fallen, as Ford (NYSE: F  ) and General Motors (NYSE: GM  ) lose market share to foreign imports. But driving the decline in auto jobs isn't just the oft-chanted devil of offshoring. It's productivity, as manufacturers invest in technology that limits the need for warm bodies on the factory floor.

What got me thinking about this topic was a blog post in The New York Times, where business owner Paul Downs sums up the situation nicely:

Over the last 25 years, my own shop has undergone an incredible transformation as we have introduced technology into the office and shop floor. Our robot does much of the dangerous cutting. We're now making twice the amount of product per person that we were five years ago.

And these stories aren't limited to manufacturing. Since 2007, the New York Stock Exchange has axed 1,000 jobs. Don't blame the stock market for that -- volume over the past year is up almost 40% over 2007 levels. Blame technology.

Don't fear the reaper
As tragic as the loss in manufacturing jobs has been for many, this is how the economy is supposed to work over time. Technology improves, businesses find ways to do things with fewer people, and the world goes on -- changed, but bett