Carpe Diem

The ‘decline of manufacturing’ is an inevitable, global phenomenon, and that’s something to celebrate

worldmfg

The chart above shows manufacturing output as a share of GDP, for both the “world less the USA” and the USA alone, using new United Nations data for GDP and its components at current prices in U.S. dollars from 1970 to 2011.  We frequently hear about the “decline of U.S. manufacturing,” about how nothing is made in the U.S. anymore, and how everything that used to be manufactured here is now produced in China and other low wage countries.  An underlying assumption of most of those claims that the manufacturing base is shrinking in the U.S. (the “hollowing out of U.S. manufacturing”), while at the same time there is an offsetting gain in factory output being captured elsewhere in the world, as manufacturing production and jobs supposedly shift from the U.S. to other countries.

In reality, the chart above shows that the decline in U.S. manufacturing as a share of GDP between 1970 and 2011 is really a global phenomenon.  The manufacturing/GDP ratio in the U.S. fell from 24.3% to 12.7% between 1970 and 2011, while the world ratio fell at almost the same rate, from 26.7% to 17% over the last forty years.

As a share of GDP, manufacturing has declined in most countries since the 1970s.  A few examples: Italy’s manufacturing/GDP ratio fell from 24.3% in 1970 to 14.3% in 2011, Brazil’s ratio went from 24.6% to 12.4%, Germany’s share fell from 30% to 20%, Canada’s from 19 to 10.25%, and Japan’s from 35% to 20%.

Bottom Line: When we hear claims that “nothing is made here anymore,” it’s not really the case that somebody else is making the stuff Americans used to make as it is the case that we (and most countries around the world) just don’t manufacture as much “stuff” any more in relation to the growing levels of national and global output, which the graph above clearly shows.

The main reason that the manufacturing/GDP ratio has declined in the U.S. and around the world is that productivity gains for durable goods have significantly lowered the price of those goods relative to: a) the prices of services, and b) national incomes.  In other words, the declining manufacturing/GDP ratio reflects declining prices for manufactured goods globally, which is a sign of economic progress, not regress.  The standard of living around the world today, along with global wealth, income and prosperity, are all much, much higher today with manufacturing representing 16% of total world output (including the U.S.) compared to 1970, when it was almost twice as high at 26%.  And for that progress, we should celebrate, not complain about the “decline of manufacturing.”

See related CD posts on “the miracle of manufacturing” here, here, and here.

39 thoughts on “The ‘decline of manufacturing’ is an inevitable, global phenomenon, and that’s something to celebrate

  1. Why are your reporting manufacturing/GDP?

    What do the absolute numbers for manufacturing look like?

    Is total manufacturing in the US going down while it goes up in the rest of the world? If it is then people would say you are massaging the numbers to make your point. As it is no one can tell. Are you? You should clear this up.

    Thanks

  2. Like firms in the Agricultural and Industrial Revolutions, firms in the Information and Biotech Revolutions will produce more output with fewer inputs.

    Information-Age firms already make much greater profits, compared to the 1990s, and quality has been rising faster than prices.

    • Of course, maximizing volume, while reducing value somewhat, may not be optimal, e.g. many foods. However, higher incomes and lower prices of many goods allow Americans to buy more non-processed and organic foods.

      • Peak

        Of course, maximizing volume, while reducing value somewhat, may not be optimal, e.g. many foods.

        Being among the wealthiest people in the world, in one of the wealthiest countries in the world, you can afford to hold that opinion. If you lived in the third world on $2/day you might cheer greater volume.

  3. To blatantly steal from John Adams and twist his words in such a way that will make him spin in his grave:

    I must toil in the mines and factories, that my sons may toil in the libraries and studios.

  4. “The standard of living around the world today, along with global wealth, income and prosperity, are all much, much higher today with manufacturing representing 16% of total world output (including the U.S.) compared to 1970, when it was almost twice as high at 26%.”

    Mfrng down ten percent of GDP in the U.S., BUT Healthcare spending has replaced that 10%.

    From Bloomberg: Health Care Spurs Consumer Surge in U.S. GDP.

    Medicare is providing substantial funding for the surge in healthcare spending.

    Profligate federal spending, via Medicare and other health subsidies, is funding much of the GDP % that manufacturing once contributed.

    • Medicaid spending is expected to grow 18% in 2014 when the Affordable Care Act brings in 22 million more people. Source: MedPage Today.

      Medicare and Medicaid spending will then be over five percent of U.S. GDP in 2014.

      Takers are accelerating the usurpation of makers in the makeup of U.S. GDP accounting.

    • Mfrng down ten percent of GDP in the U.S., BUT Healthcare spending has replaced that 10%.

      Hang on, it doesn’t work like that. Manufacturing is production and health care is consumption. Manufacturing could still be 26% of GDP and health care spending increase.

      • Jon, this post references GDP and manufacturing declining share. Consumption has gone up as a share of GDP whilst manufacturing has fallen. Look at the the Bloomberg chart I referenced for healthcare’s(part of consumption) increased % of GDP. Am I misunderstanding?

        • Citizen B,

          Writers who compare healthcare consumption to the nation’s production (GDP) have greatly misled those who may not understand the difference between consumption and production.

          U.S. consumption of healthcare goods and services is not a part of GDP. But U.S. production of healthcare goods and services is. The two concepts represented by those last two sentences are very different.

          Alcon Labs manufactured ophthalmic surgical equipment at its Irvine, CA, technology center in 2012. That medical equipment will be included in the U.S. manufacturing GDP for 2012. But the consumption of that 2012-produced equipment – its use by U.S. opthalmic surgeons – will be included in U.S. healthcare consumption over the next 20 years. Some of that equipment will be exported, and never included in U.S. consumption.

          Bristol Myers created millions of Onglyza pills in New Jersey in 2012. Those pills are all part of U.S. 2012 manufacturing GDP. Of those 2012 pills, the ones I purchased in November will be part of U.S. healthcare consumption. The Onglyza pills created in new Jersey but purchased by a Canadian consumer in November will not be included in U.S. healthcare consumption.

          Citizen B, do these two examples help you understand why you should not equate production and consumption?

          • John Dewey, thanks. Your explanation go me started into looking at what GDP means. I then found this article titled “Consumer Spending is *Not* 70% of GDP.

            The author explains this salient point:

            “First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

            At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.” and…

            “So we have grown used to thinking of “spending” as “production”—after all, that’s the way it is presented. (I’m not blaming the BEA, by the way. This is the way that GDP was designed from the beginning, 70 years ago).

            I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis. “

            It appears that I am not in the minority in seeing “spending” as “production”. Yes; no?

          • Spending is not production, Citizen B.

            Many people get confused because of this little equation:

            GDP = C + I + G + (X – M)

            where
            C = private consumption
            I = gross investment
            G = government spending
            X = exports
            M = imports

            Even economics students – at least, those who do not pay attention to what professors are telling them – often believe that those five variables in the equation make up GDP, or the production of a nation.

            the above equation is a tool for ESTIMATING GDP by looking at the other side of the production and consumption cycle. This equation represents the expenditure approach to estimating GDP. But those elements are definitely not production.

            What Jon was trying to tell you above is that you can use either expenditure items or production items to estimate GDP. But you cannot mix amd match them. You have to use one or the other.

            Please remember that GDP is supposed to represent the production of a nation. So the production variables represent GDP directly. The expenditure variables represent GDP indirectly.

          • Cit B: “It appears that I am not in the minority in seeing “spending” as “production”. Yes; no?

            Yes, you are not in the minority. No, you are not in the minority. That has been a source of confusion for me also.

            Thank you John Dewey.

      • this is a natural consequence of becoming wealthier.

        when you are very poor, you consume mostly food and shelter. there’s not much left for other things. a quick trip to the suburbs of cairo will show you all you will ever need to know about that.

        as you get richer, food drops off sharply as a % of gdp. you eat as much (or more) but your earnings go up faster.

        we see this in virtually every economy as it develops.

        the next shift is to manufacturing. with a little free cash, you start to buy stuff. you want more clothes, a car, a couch, a TV, a dishwasher, etc.

        then you get rich enough that you have most of those things.

        then free cash goes toward services (and entertainment). you hire a housecleaner, someone to mow your lawn, someone to fix your car or paint your house.

        it also frees up money for healthcare.

        this is the natural and inevitable trend as a country gets rich. we should applaud it, not see it as some sort of crisis.

  5. People who whine about the ‘decline in US manufacturing’ are stunningly dumb.

    US manufacturing dollar output never went down. It has only gone up and up. A chart at Carpe Diem showed this just a couple of days ago.

    Productivity gains cause job loss, but the remaining jobs all become higher paying.

    People are ignorant, and thus they think this is a bad thing.

  6. Mfrng down ten percent of GDP in the U.S., BUT Healthcare spending has replaced that 10%.

    The official policy of the United States is to create cushy jobs for women, at the expense of jobs that women don’t want to do (that men lose these jobs is unimportant, since men are far less valuable than women).

  7. People are ignorant, and thus they think this is a bad thing“…

    No disagreement toads but its kind of hard for a person that find his/her way of making a living redundant due to technological advances to feel at all good about it…

    • Well, sure. But technological advances have been eliminating jobs for at least 300 years. Anyone who still believes their current job is guaranteed is stupidly ignorant.

      Of course, technological advances are responsible for creating millions – or perhaps billions – of different jobs over those same 300 years.

      Life is a damned struggle. The boundaries of that conflict have changed, but the battle to survive is still with each one of us. Smart people STFU and deal with their new environment.

      • John

        Life is a damned struggle. The boundaries of that conflict have changed, but the battle to survive is still with each one of us. Smart people STFU and deal with their new environment.

        You may be correct about smart people dealing with their new environment, but I see little evidence of STFU-ing. :)

      • Of course, technological advances are responsible for creating millions – or perhaps billions – of different jobs over those same 300 years“…

        Absolutely agree john dewey, no doubt about it…

        Smart people STFU and deal with their new environment“…

        Therein lies the problem, not everyone is smart…

  8. Using thw http://www.measuringworth.com site, nominal GDP in 1970 was $1.038300B, in 2011 $15.094000T, or a nominal increase of 14.53X. The 1970 nominalGDP per capita was $5062.68, 2011 $48372, an increase of 9.55x. Over that time period, the US population increased 50%. Maybe loss of manufacturing jobs is not the sole cause, but incomes are certainly not keeping up with reported GDP, suggesting to me that gross financial leverage in the economy is overstating the sustainable level s of living standards over time..dh

    • I had not considered that point, Richard. Very interesting in that we indeed have seen a proliferation of financial leverage since the 1970s due to the introduction of financial derivatives, far higher levels of debt in capital structures due to advances in the finance field, etc. Interesting point.

      • Certainly corporations – and individuals – have become much more sophisticated in their use of financial leverage. But there is nothing “unsustainable” about higher leverage.

        I remember a few recruiters at Wharton in the early 1980s who bragged that their very large corporations had no debt. They emphasized that, unburdened by debt service, those corporate giants would never have to lay off any employees.

        Looking back, now, I realize that those corporate executives were sacrificing higher returns to shareholders in order to guarantee permanent employment. Of course, those particular corporations were not able to guarantee permanent employment over the long run. Furthermore, that thinking is a sign of weakness, IMO. If a corporate executive admits up front that he cannot manage even moderate levels of financial leverage – leverage which would allow him interest tax shields and enable him to take advantage of even more opportunities than his equity capital would allow – perhaps he shouldn’t be managing a large corporation.

  9. As touched on in several of the comments, ALL government SPENDING is considered part of GDP. So, every time the Feds (and the States and counties and cities) borrow more money so they can spend more, the GDP goes up.

    US government spending as a % of US GDP has steadily increased since WW2. The economists of the Austrian school remove government spending to calculate Gross Private Product. So the real question is how much manufacturing has fallen as a % of GPP. Although, since all of these “gross” numbers are done in money, if TVs can be produced for lower cost, then the contribution to GDP (and GPP) from TV manufacture goes down even if the total number of devices goes up.

    We’re Americans. We have more money than we know what to do with and more opportunites to buy stuff than we know what we want. I heard that tickets to the Rolling Stones concert are going for $400 each. Selling “musical entertainment services” must be a big chunk of GDP.

    • Government spending is not part of GDP. Government spending is one of five variables used to ESTIMATE gdp by looking at the expenditure side of the production and consumption cycle.

      Using this equation:

      GDP = C + I + G + (X-M)

      to try and determine relationships between the various sectors of production is wrong, wrong, wrong.

  10. Everything fits together perfectly in the GDP equations. If you consumed $100 of health care, then someone else produced $100 of health care.

    • Yes, someone does eventually consume almost all items produced.* However:

      1. goods produced by a U.S. factory often get consumed in another country;

      2. goods consumed in the U.S. are often produced in another country;

      3. many goods produced are not consumed immediately (a highway or an MRI machine may be consumed over decades; even non-durables may sit in inventory until the next year or longer before being consumed)

      Although many items do “fit together perfectly”, we cannot assume that a nation’s production in a single year is consumed by that same nation in the same year.

      * I have read that some new housing produced in Arizona was eventually bulldozed without being consumed.

      • I failed to distinguish between “consumption” and “expenditure”. An infrastructure investment such as a highway – or a durable good such as an MRI machine – is consumed over many years. But the capital expenditure for such a good is usually made over a much shorter period.

        Peak’s statement would be more correct with a slight alteration:

        “If someone made a $100 expenditure for health care goods or services, then someone else produced $100 of health care goods or services.”

        But it is still important to note that part of dollars which consumers pay for health care services are reimbursement to the owner of the health care equipment. And the production of that equipment generally occurred years before the end consumer (or medicare/Medicaid) paid for its use.

  11. Healthcare is consumed by a vast extent (50% +) by the elderly. From a productive viewpoint, although venerable, the elderly are statistically much less productive. Spending in housing is not associated to the elderly, but to younger generations, still productive (who is not thinking of a family when they get three kids? they will move to a bigger house). Education is mostly consumed by the younger ones; from a productive viewpoint education of the young aims at making them more productive/competitive.
    As long as western society viewpoints stem from productivity perspectives, Healthcare spending will be regarded as negative, whereas will be taken as positive for Education and Housing.
    When western opinions are not driven by productivity issues, the above will change.

    • That’s an interesting perspective, bert. Consider these points:

      1. Absent government interference, younger people would save in order to pay for healthcare in their senior years.

      2. One form of such saving might be pre paid health insurance – much like the long term care policies which middle-aged people purchase to cover unexpected long term care requirements over the rest of their lives.

      3. On a different subject, much of the most expensive health care spending decisions are not made by the elderly but by their children. End of life care and assisted living care can be extraordinarily expensive. Elderly patients are often not able to decide how much of such care they will consume. For such patients, the consumption of healthcare is actually done by younger and productive relatives on their behalf.

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