The Post-Recession State of U.S. Manufacturing

Executive Summary
Since the economic recovery started in 2009, the U.S. manufacturing sector generally maintained a 12% share of GDP over the five years ending in 2013. The sector’s performance was impressive when compared with other major advanced countries that experienced similar declines and early recoveries in manufacturing production but quickly lost their growth momentum after 2011 (Figure 1).

Figure 1 – Manufacturing Production in Major Industrial Countries and Regions

Source(s): OECD and MAPI Foundation

Source(s): OECD and MAPI Foundation

A combination of economic forces occurring over the past several years has made the U.S. a more attractive place to manufacture goods, causing some high-profile U.S. corporations to shift part of their overseas production capacities back home. Factors include a significant reduction in energy prices, a dollar that was weakening until recently, fast-rising labor productivity, volatile international shipping costs, and a narrowing wage gap between the U.S. and China. These favorable conditions spurred optimism that the global manufacturing relocation trend will accelerate in the years ahead, signaling the beginning of an American manufacturing renaissance.

Key findings:

  • Manufacturing output surpassed its previous cyclical peak level in 2014, driven almost entirely by the strength in durable goods production. Nondurable goods production is not expected to fully recover until 2015.
  • Manufacturing’s capacity utilization rate recently rose to its pre-crisis peak and the number of plants showed growth on a year-over-year basis for the first time in a decade. The momentum in output and tightened capacity caused U.S. manufacturers to rapidly increase their physical capital expenditures.
  • The jobs recovery in manufacturing was much slower than in the rest of the economy, so its share of total employment has continued its long-term downward trend.
  • The growth in exports has been one of the major drivers of manufacturing’s post-recession recovery, with the share of exports in U.S. manufacturers’ total shipments rising steadily.
  • Recent data on the U.S. share of global manufacturing exports, the imported share of intermediates used in the sector, and the share of global manufacturing value-added indicate that the swift decline in American manufacturing since 2000 may have leveled out.

Prolonged Recovery After a Deep Contraction
Production
U.S. manufacturing production in terms of physical volume peaked in June 2007 before declining 23% over the next two years.Based on the NAICS definition of manufacturing, not the SIC definition that is commonly used in the press. In the subsequent recovery, output did not surpass its previous cyclical peak until June 2014. Compared with the previous five recessions, the Great Recession had the sharpest drop in output and at 59 months, had the longest recovery; the 2001 recession had the next longest recovery, lasting 33 months (Table 1).

Table 1 – Real Manufacturing Output During Recessions

Source(s): Federal Reserve Board

Source(s): Federal Reserve Board

Unlike in the previous five recoveries, this recovery was driven almost entirely by the strength in durable goods production, which surpassed its pre-crisis peak in the first quarter of 2013. The durable goods rebound was concentrated in six industries, among which computer and electronic products grew at a pace several times faster than the other five industries (machinery, medical equipment, motor vehicles, primary metals, and aerospace), even though it did not experience as much of a cyclical decline during the recession.

Computer and electronic products exhibited a robust growth trend for two decades before the Great Recession. Durable goods excluding this industry did not reach its pre-crisis peak until the first quarter of 2014, a testament to computer and electronic products’ growth momentum (Figure 2).

Figure 2 – Manufacturing Production, Durable Goods Production

Source(s): Federal Reserve Board and MAPI Foundation calculations

Source(s): Federal Reserve Board and MAPI Foundation calculations

Nondurable goods production still stands below its previous cyclical peak and is not expected to fully recover until this year. Table 2 shows the change in production levels for 22 manufacturing industries from the fourth quarter of 2007 (the cyclical peak) to the fourth quarter of 2014 (the most recent available data) as well as their shares of value-added in total manufacturing. Only 3 of the 11 nondurable goods industries have entered into an expansion phase and the 7 worst-performing industries—which combined make up more than a quarter of total manufacturing value-added—still have production significantly below their pre-crisis peaks. The continued loss of production to low-cost countries (apparel and textiles), changes in technology and communication channels (paper, printing, and publishing), and changes in material productivity (chemicals) explain the lag.

Table 2 – Change in Production by Manufacturing Industry, 2007 Q4 to 2014 Q4

*NAICS definitions Source(s): Federal Reserve Board and MAPI Foundation

*NAICS definitions
Source(s): Federal Reserve Board and MAPI Foundation

Capacity
Corresponding to the recovery in manufacturing production, the sector’s capacity utilization rate, which measures the operating rate of the nation’s manufacturing capacity, rose to its pre-crisis peak of 79.5% in November 2014. It is still below the long-term average of 82%, which is widely believed to be the highest sustainable output level without incurring inflationary pressure.C. Alan Garner, "Capacity Utilization and U.S. Inflation," Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter 1994, www.kc.frb.org/Publicat/econrev/EconRevArchive/1994/4Q94GARN.pdf.

Although durable goods production has already entered into the expansion stage, its capacity utilization rate is still slightly below the pre-crisis peak. Conversely, the utilization rate for nondurable goods is on par with its previous peak even though production has not fully recovered (Figure 3). The disconnect between the pace of recovery in these two measures reflects the different pace in capacity adjustment across industries (in response to technological innovation and/or business investment). By last December, durable goods’ capacity increased 15% from its previous peak whereas nondurable goods’ capacity declined 8%.

Figure 3 – Manufacturing Capacity Utilization

Source(s): Federal Reserve Board

Source(s): Federal Reserve Board

The steady rise in manufacturing output and the capacity utilization rate has started to reverse the long-term downward trend in the number of manufacturing plants, which contracted 16% in the period of 2001-2012 and showed positive growth on a year-over-year basis in the third quarter of 2013 for the first time in more than a decade. Since then, the number of manufacturing plants in operation increased for four consecutive quarters (Figure 4).

Figure 4 – U.S. Manufacturing Plants in Operation

Source(s): Bureau of Labor Statistics and MAPI Foundation

Source(s): Bureau of Labor Statistics and MAPI Foundation

The growth momentum in output and tightened capacity utilization stimulated U.S. manufacturers to increase their physical capital expenditure to $164 billion in 2012, a 28% increase from the most recent low point in 2010 but still 3% shy of its previous peak in 2008. While investment in structures, which accounts for less than 20% of total capital investment, already surpassed its previous cyclical peak of $30 billion, investment in machinery and equipment was 8% below its pre-crisis peak of $143 billion. As a share of nominal GDP, manufacturing physical investment has gradually climbed since 2009 and reached 1% by 2012, though it is still much lower than the 1.8% seen in 1997 (Figure 5).

Figure 5 – U.S. Manufacturers’ New Physical Capital Expenditures

Source(s): U.S. Census, Annual Survey of Manufactures and MAPI Foundation

Source(s): U.S. Census, Annual Survey of Manufactures and MAPI Foundation

Employment
Unlike in earlier downturns, manufacturing employment never bounced back after the 2001 recession and declined by 20% in the decade leading up to the Great Recession. In October 2010, the year-over-year employment growth in manufacturing turned positive for the first time since 2005, driven primarily by a recovery in production. From then until December 2014, the manufacturing sector created a net 605,000 jobs—a 28% recovery from the 2.1 million manufacturing jobs lost during the Great Recession. As a comparison, the nation gained a net 11 million nonfarm jobs after losing 9.1 million during the recession, a 122% gain in the same period—thanks mainly to the relatively strong job market in the service sector (Figure 6). Therefore, manufacturing contributed only 6% of the total nonfarm jobs created in this period, and its share of employment in the economy continued its long-term downward trend and has been hovering around 8.7% in recent months, down from 10% in 2007.

Figure 6 – Employees on Nonfarm Payrolls

Source(s): Bureau of Labor Statistics and MAPI Foundation

Source(s): Bureau of Labor Statistics and MAPI Foundation

As with output, the employment growth in manufacturing has varied greatly by industry, and durable goods industries contributed almost all of the gains. Durable goods added a net 632,000 new jobs during October 2010 to December 2014, with 85% of the gains in three industries: motor vehicles and parts, fabricated metals, and machinery. Computer and electronic products and aerospace are the only two durable goods industries that continued to cut jobs despite output expansion during the period, likely reflecting even faster productivity growth.

Meanwhile, nondurable goods industries as a whole were not able to reverse the job cuts from the recession and subtracted a net 27,000 jobs from the economy, which is consistent with their sluggish recovery in output. Printing, apparel, and paper products were the worst-performing industries, subtracting a combined 94,000 jobs from the economy. Chemicals; food, beverages, and tobacco; and plastics and rubber were the only nondurable goods industries that added jobs (Figure 7).

Figure 7 – Change in Manufacturing Employment, 10/2010 to 12/2014 (Thousands)

Source(s): Bureau of Labor Statistics and MAPI Foundation

Source(s): Bureau of Labor Statistics and MAPI Foundation

Exports
Even though domestic demand continues to account for more than three-quarters of U.S. manufacturers’ total shipments, the share of export sales has been rising steadily since 2002, reaching 23.7% by 2013. The growth in exports has been one of the major drivers of the post-recession manufacturing recovery. Since 2010, manufacturing exports have been growing consistently faster than the overall economy; by 2013 they reached a record $1.4 trillion, a 51% increase from the most recent low point in 2009, and their share of GDP surpassed the pre-crisis peak (7.6% in 2008), hitting 8.2% in 2013 (Figure 8).

Figure 8 – U.S. Exports of Manufactured Goods

Source(s): Bureau of Economic Analysis and International Trade Commission and MAPI Foundation calculations

Source(s): Bureau of Economic Analysis and International Trade Commission and MAPI Foundation calculations

Almost every industry within manufacturing (except for printing) has seen growth in export value over the period of 2009-2013. As with output, export growth has been largely concentrated in durable goods industries, which were responsible for 62% of manufacturing’s export growth. Motor vehicles, computer and electronic products, and machinery were the top three contributors, accounting for 14%, 9.7%, and 9.4% of the sector’s total increase, respectively.

Although most nondurable goods industries made no more than a 2% contribution to the sector’s total export growth, petroleum and coal products and the related chemical products were exceptions, capturing 17% and 10% of the total gains, respectively (Figure 9).

Figure 9 – Contributions to Manufacturing Export Growth, 2009-2013

Source(s): International Trade Commission and MAPI Foundation

Source(s): International Trade Commission and MAPI Foundation

Signs of Stabilization in U.S. Manufacturing’s Decline
While detailed analysis of macroeconomic data has not yet provided evidence of the U.S. manufacturing renaissance predicted by some optimists, there are some early signs that the swift decline in American manufacturing since 2000 has leveled out.

Share in Global Manufacturing Exports
Manufacturing’s post-recession export growth was impressive from a historical perspective and when compared with other major industrial countries. According to data released by the WTO, U.S. manufacturing export growth outperformed global manufacturing export growth over the period of 2009-2013. The U.S. share of global manufactured exports thus reversed its long-term downward trend in 2010 and expanded gradually to around 9.5%. Japan continued to lose its global share and the EU hasn’t been able to gain additional market share (Figure 10).

Figure 10 – Shares of Global Manufacturing Exports

*Extra=exports to non-members Source(s): WTO, International Trade Statistics and MAPI Foundation calculations

*Extra=exports to non-members
Source(s): WTO, International Trade Statistics and MAPI Foundation calculations

Offshoring
The rapid growth of offshoring, defined as the substitution of imported intermediates from low-cost countries for domestically produced goods and services, is widely believed to be the major cause for the fast disappearance of industrial capacities in the U.S. since 2000. Recent empirical studies have shown that for the decade leading up to the Great Recession, American manufacturers increased the use of intermediates in production and substantially shifted the sourcing of intermediates from domestic to low-cost foreign suppliers.For example, Susan N. Houseman, Christopher J. Kurz, Paul Lengermann, and Benjamin R. Mandel, "Offshoring Bias in U.S. Manufacturing," Journal of Economic Perspectives 25, no. 2, Spring 2011, www.federalreserve.gov/pubs/ifdp/2010/1007/ifdp1007.pdf. Figure 11 shows that over the period of 1998-2008, the imported share of overall intermediates used by U.S. manufacturers increased from 14% to 22%, and the non-energy materials inputs, which make up the majority of intermediates used in manufacturing, saw their imported share rise from 17% to 21% in 2006 before trending down slightly to 19.7% in 2008.

Figure 11 – Imported Share of Intermediate Inputs in U.S. Manufacturing

Source(s): Bureau of Economic Analysis and MAPI Foundation

Source(s): Bureau of Economic Analysis and MAPI Foundation

The offshoring trend might have leveled out given that the imported share of intermediates used in manufacturing declined gradually since 2010 and stood at 20% in 2013; the imported share of non-energy materials stabilized at around 20% in this period as well.

Share in Global Manufacturing Value-Added
While the economic growth in almost all other major economies lost steam in recent years, the U.S. maintained its growth momentum and even gained more strength in recent quarters. With strong export performance and offshoring leveling out, the U.S. share of global manufacturing value-added broke the downward trend observed since 2000 and expanded moderately from 16.6% in 2011 to 17.2% in 2013 (Figure 12).

Figure 12 – Shares of Global Manufacturing Value-Added

Source(s): United Nations and MAPI Foundation

Source(s): United Nations and MAPI Foundation

Meanwhile, Japan continued to rapidly lose share despite a brief period of gaining in 2009-2010; it made up only 7.8% of global manufacturing value-added in 2013, less than half of its level in 2000. Germany’s share also declined but at a much slower pace.

Despite the soft landing in economic growth, China managed to keep expanding its manufacturing sector faster than the rest of the world, and gained more of a share in global manufacturing value-added since the Great Recession, reaching 23% by 2013.

Conclusion
Detailed examination of macroeconomic data reveals that the impressive manufacturing production growth over the past several years is merely a cyclical rebound after a sharp recession. The manufacturing renaissance predicted by optimists is not yet evident despite some early signs that the swift decline in American manufacturing since 2000 has leveled out. Whether or not a manufacturing revival, defined as a significant reversal of the relative weight of manufacturing in GDP, can happen in the coming decade will largely depend on how the ongoing changes in a number of structural factors can influence U.S. manufacturers’ sourcing decisions and how quickly they can increase their shares in the global market.