The Myth of U.S. Manufacturing

The current status of the manufacturing sector of American business furnishes a cogent example of the recognition lag in economic life. The industrial production index for the U.S. economy declined from a peak of 113 in July, 1981, to a low of 100 in October, 1982--or back to the level of 1977, the base year for the index. During this period, a cottage industry developed based on the simplest relationship known to quantitative analysts: Two points determine a straight line.

A brigade of doom-and-gloom forecasters began bemoaning the demise of American manufacturing and the stagnation of the economy generally. After all, by connecting the number for 1981 (for almost any series except unemployment) to the corresponding number for 1982, they observed a downward sloping trend line.

But they were caught off guard by the economic upturn that began in 1982. Late that year saw the beginning of the longest peacetime expansion in American history. By the end of 1988, the rate of industrial production was 24% above the previous cyclical high. The manufacturing sector today contributes about the same proportion of the output of the American economy that it did three decades ago.

However, the good news was often reported as bad news. Rising productivity enabled the industrial economy to produce more with less labor. But to those who measure the health of a sector by its inputs rather than its output, the results were devastating. Manufacturing employment never recovered to its peak of more than 21 million, achieved in 1979.

Those who bemoan the shift in the economy from manufacturing to services forget that this is not a recent development. The crossover from manufacturing to services as employment leader occurred in the 19th Century. By 1900, service employment exceeded manufacturing employment by a ratio of 8 to 5. That recognition lag again!

The total number of jobs in manufacturing is not likely to grow much--if at all--in the coming decade. But their complexity and pay will continue to rise. The United States possesses the capabilities necessary to maintain leadership in many industrial areas. No other nation devotes as much to basic research. R&D; performed in the United States each year exceeds the combined totals of Japan, West Germany, France, the United Kingdom and Sweden. No other country possesses comparable capability in computers and software. No other economy has the depth, breadth or scope of technical-industrial infrastructure that can translate basic discoveries into useful products and processes in a relatively short time.

Moreover, the United States is still the world’s largest market with a common language and a strong entrepreneurial culture. The domestic availability of capital resources to finance new investment--not just in leveraged buyouts and hostile takeovers--is awesome.

While the wailing goes on about the supposed erosion of our manufacturing base, three key forces are laying the groundwork for a strong industrial sector in the years ahead: Numerous company actions are reducing the cost of producing goods and services in the United States. American workers and managers are showing a new awareness of their personal responsibility for the quality of what they produce. Private investment in R&D;, the basic fuel for innovation and technical progress, is continuing to grow.

Nearly every sector of manufacturing--automobiles, steel, chemicals, textiles and machinery--has been aggressively cutting costs. The specific actions range from changes in production methods to basic restructuring of entire businesses. The changes in the labor market are dramatic.

Strike activity is at its lowest point since the Labor Department first started collecting the numbers. For all of 1988, the number of work stoppages involving 1,000 employees or more totaled 43--compared to 300 a decade earlier. Despite the growth in the labor force, the 121,400 workers who were idled by strikes in 1988 represented a small fraction of the annual average of 1.4 million recorded during the 1970s. The new attitude reflects rough on-the-job economic education. Competitive reality has especially impacted workers in companies that were unusually generous in granting increases in wages and fringe benefits.

The economizing strategy is leading to important structural changes. The horizontally integrated firm, producing virtually every product in the markets in which it operates, is becoming less prevalent. Many companies are finding it preferable to focus on specific product niches that are more secure against foreign competition.

The payoff from higher quality is larger than generally realized. It comes from the savings realized by doing the job right the first time and avoiding the costs of reworking and repairing. The most effective quality controls involve a shift in the locus of responsibility--from the inspectors in the quality control department to the people who actually do the work.

It has become commonplace to state that short-term thinking by American business shows up in cutting back on outlays for research and development. Commonplace, yes. True, no. The 1980s witnessed a substantial growth in R&D; financed by government mainly for defense purposes. According to traditional wisdom, civilian R&D; should have declined as scientific and technological resources were being hogged by the military.

But for the first time since the National Science Foundation began gathering the data, business outlays for R&D; in the 1980s exceeded government R&D; spending. In eight of the 10 years, the private sector was a larger source of financing for R&D; than the public sector.

Consider the implications. Before 1980, most R&D; projects were sponsored by government and business responded to public sector priorities. But since 1980, most R&D; work performed by American companies has also been financed and sponsored by them. Thus, the results are far more geared to commercial markets than in the past.

There is an excellent chance that, contrary to general expectations, we will see more product and process innovation in the United States in the years ahead. A word of warning: These positive developments do not guarantee future success. Overseas competitors will not run in place while U.S. companies try to catch up.

The chances of a strengthened manufacturing sector also will be influenced by changes in public policy. A new round of government regulation would raise the cost of compliance and deter companies from investment and innovation. Further use of “social mandates” to finance social objectives off budget--such as higher minimum wages, compulsory health insurance, compulsory personal leave--would increase the cost of doing business in the United States.

Enhancing the competitiveness of American industry is not a question of how much government should do for manufacturing, but how to get it to do less to manufacturing. Ultimately, however, the future of manufacturing will be determined by the business sector. The future lies with those executives who make the tough product, market and financial decisions that are at the heart of increasing productivity and maintaining competitiveness.