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The Truth About the Great American Manufacturing Decline

By Morgan Housel - Updated Apr 6, 2017 at 11:14PM

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The numbers aren't as bad as they look.

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 better. In 1900, 44% of all jobs were in agriculture. Tremendous improvements in farm productivity pushed that number to 2.4% by 2000. We could, as we do with manufacturing jobs, become nostalgic about the days when farm jobs were aplenty. Don't. Those who would have once plowed fields now work in more productive endeavors -- programming computers, curing cancer, building roads, what have you. We don't want those farm jobs back. A perfect hell is going back to a world where half our labor is devoted to wielding a hoe. Think of manufacturing jobs the same way.  

An even better example comes from 18th-century economic god Adam Smith, who once wrote about the production of metal pins: "One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it." Today, a machine does it all, and those five people work elsewhere. Maybe designing machines that make pins.

The question now is where laid-off manufacturing workers will go next. We already know to an extent: IBM (NYSE: IBM), Oracle (Nasdaq: ORCL), Dell, Hewlett-Packard (NYSE: HPQ), Microsoft (Nasdaq: MSFT), and Intel (NYSE: INTC) collectively employ more than 1.1 million people, up from almost none a half-century ago. That trend will continue, and them some. Where else? Health care. Clean energy. Consulting. Who knows where else they'll go. All we know is it probably won't be where they are today. Technological change will see to it. And that's a good thing.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

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