There are a lot of things to be unlearned from conventional wisdom. We've all come to believe that if we have declining manufacturing employment, this would necessarily equate to some combination of the U.S. losing its relevance in the world, the rise of China and jobs going overseas, or imminent economic weakness. We believe that imports are inherently "bad" for the economy and that more imports somehow hurt exports in tandem. And we believe that if the U.S. dollar falls in value, all will be fixed, that exports would blossom while imports wither, and our manufacturing sector would bloom, just like that.
None of that is true, however. Recent research from the St. Louis Fed sheds light on manufacturing, imports, exports, currencies and many other variables. There are a number of interesting takeaways that might change how you view trade and the manufacturing sector.
First, one usually thinks of the growth of manufacturing employment equaling the health of the broader economy, but it really isn't the best barometer. For starters, just after World War II, manufacturing occupied half of the total number of employees in private industry. Now that figure is 11%. Put another way and looking more recently, manufacturing employment peaked in June 1979 at around 20 million and declined steadily to about 11 million in January 2010.
But that ignores the fact that manufacturing has evolved over the years to need fewer employees. Productivity gains have been much higher in manufacturing than in other industries, so there is less of a need to hire more workers to increase production. While some manufacturing has moved overseas, manufacturing productivity has increased by an average of 3.7% annually from 1996 to 2012, compared with 2.3% for all private businesses (including manufacturing). Since the end of the recession in 2009, manufacturing productivity has advanced at a 4.2% rate.
Unless manufacturing output grows by more than productivity gains, there will be little need for hiring in the sector. Thus, a lack of payroll gains in manufacturing does not portend economic weakness. And manufacturing had a strong 15.2% return on capital from 1999 to 2010, higher than the 13.5% for all industries, indicating a profitable use of capital.
Exports and manufacturing aren't as linked as imports and manufacturing are, the researchers found. First, exports have been growing, by the way. Since 1990, U.S. exports to China have increased 20-fold, while exports to the rest of the world increased three-fold. Interestingly, the researchers determined that there is actually a near-zero correlation between exports and manufacturing output.
However, imports are more important to the manufacturing sector than are exports, because many of the high-value-added products assembled here use lower-value-added parts made abroad. A reliable source of lower-cost parts, even if imported, means a healthier manufacturing sector, as those lower-cost parts boosts profit margins whether sales are made in the U.S. -- often the sector's largest market -- or abroad.
The researchers used the example of the Boeing (BA) Dreamliner. It is made here, but 30% of the content for the airliner comes from abroad. Efforts to make imports more expensive would make the Dreamliner less profitable. The Dreamliner example is consistent with a broader trend, where nearly 34% of the intermediate materials and parts for U.S.-made goods were imported in 2006, up from 25% in 1998.
What all of this boils down to is that attempts to promote exports to the exclusion of imports are misguided. In other words, politicians should not meddle in trade, such as berating China over manipulation of its currency or enacting any tariffs or the like. After all, more expensive Chinese parts mean higher input costs and a less-competitive U.S. manufacturing sector.
And perhaps the most surprising result of the research is that the value of the U.S. dollar has no discernible relationship to the health of U.S. manufacturers or manufacturing output. There is zero correlation, the researchers found.
So if the Federal Reserve were to engage in a campaign to lower the value of the dollar through quantitative easing, or if China were to revalue the renminbi, it wouldn't much of an effect on manufacturing. Considering how important imports are to U.S. manufacturers, it would probably even out when it comes to the expenses one incurs for parts from abroad vs. the revenue from overseas customers who buy our finished goods.
So you see, manufacturing employment probably isn't the best metric for understanding our economic health, given the role of productivity gains on staffing levels. And manufacturing needs imports as much as we need exports, so currency changes don't have much of a net effect. For the long term, the sector isn't doing as poorly as some might portray it to be. Instead, I worry that any meddling by policymakers might cause unintended harm.