Academic journal article Federal Reserve Bank of St. Louis Review

U.S. Manufacturing and the Importance of International Trade: It's Not What You Think

Academic journal article Federal Reserve Bank of St. Louis Review

U.S. Manufacturing and the Importance of International Trade: It's Not What You Think

Article excerpt

The public often gauges the strength of the U.S. economy by the performance of the manufacturing sector, especially by changes in manufacturing employment. When such employment declines, as has been the trend for many years, it is often assumed to be evidence of the slow death of U.S. manufacturing and an associated rise in imports. This article outlines key trends in U.S. manufacturing, especially the strong performance of manufacturing output and productivity, and their connection to both exports and imports. The authors use ordinary regression, causality, and cointegration analyses to provide empirical evidence for the positive role of imports in boosting manufacturing output. Policies to bolster exports at the expense of imports would significantly harm U.S. manufacturing. (JEL 04, F4, E3)

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The public and economic commentators often gauge the strength of the U.S. economy by the quantity of automobiles, airplanes, and other manufactured goods produced over any given period of time. This sentiment perhaps harkens back to the nation's leadership in the Second Industrial Revolution, when the mass production of consumer and industrial goods flourished. This rapid growth spurred a migration in the workforce from the farm to the factory. In the past 50 years, though, the share of the nation's employees in manufacturing has steadily declined. Just after World War II, employees in manufacturing represented slightly less than half of the total number of employees in private industry. This share has since declined to about 11 percent today. Manufacturing employment peaked in June 1979 at around 20 million and then fairly steadily declined to about 11 million in January 2010.

To the layperson, the increasingly smaller share of U.S. employees in manufacturing is a cause for concern. In recent years, such concern may have been exacerbated by the large-scale movement of domestic production of certain goods to lower-wage countries such as China or Mexico. Affected industries that readily come to mind are textiles, furniture, and certain electronic goods (e.g., televisions). The popular consensus is that manufacturing employment trends reflect an absolute decline in manufacturing output and the notion that America no longer produces tangible goods. (1) In this view, imports are bad because they represent the offshoring of domestic jobs and the death of U.S. manufacturing.

The most recent recession reinforced the death-of-manufacturing view for many analysts. Manufacturing employment peaked in December 2007 and fell by over 2 million jobs by January 2010. Industrial production declined by about 21 percent during the recent recession (December 2007 to June 2009, according to the National Bureau of Economic Research). This decrease was much larger than in the average recession (6.7 percent). The recovery period has also been unusual. Typically, deep recessions are followed by strong recoveries, but real gross domestic product (GDP) growth during the current recovery has been weaker than normal. (2) Nonetheless, the manufacturing sector has enjoyed a fairly robust recovery. Exports have been a key factor fueling the strong recovery in manufacturing. Moreover, some anecdotal evidence has suggested that increasing costs overseas, such as in China, have spurred some manufacturers to return part of their foreign production to domestic facilities. This development has been termed "onshoring."

Accordingly, many policymakers have advanced the idea that exports are one of the best elixirs for the manufacturing sector. (3) This notion seems perfectly reasonable, since slightly more than 70 percent of U.S. exports are manufactured goods. However, the manufacturing sector also depends heavily on imported intermediate products.

This article outlines key trends in the U.S. manufacturing industry, especially the outstanding performance of manufacturing output and productivity, and then discusses their connection to international trade, both exports and imports. …

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