Is manufacturing really leading the economic recovery?

In our last blog, we noted the rebound of manufacturing. President Obama specifically touted manufacturing in his 2014 State of The Union Address. We concluded that he was largely correct that Manufacturing did rebound nicely since 2008, but we questioned whether manufacturing was going to be the answer to employment growth.

So what is manufacturing’s potential impact on future US growth in employment? Does manufacturing deserve the apparent attention that the US government is giving it?

First let’s examine growth in output by major economic sector. The chart below is based on data provided by the US Bureau of Economic Analysis http://www.bea.gov. It is the percent output growth in dollars since 2005 of the major economic sectors.

From this chart manufacturing has only the 10th best growth rate of 14 sectors and just barely beating inflation. The areas that had the best growth were Agriculture, Mining (including oil and gas), Health Care, Professional Services and Government.

The areas that had the worst growth rate were Construction, Utilities, Finance and Retail Trade, with Finance including banking, insurance, and Real Estate. All of these areas are directly related to housing boom and bust.

Based on the percent growth chart, manufacturing would hardly be worth singling out.

The next chart is the percent of total annual output that each segment represents in terms of dollars.

As one can see from the chart above, manufacturing dominates in terms of gross output in dollars, so the impact of manufacturing on the gross national output is significant. That factor may be a major reason that it is consistently brought up as a key sector the US economic growth.

The next chart shows percent employment by sector.

Manufacturing does not dominate in employment the way it does in total output. Currently manufacturing jobs consists of about 8% of total employment. This is a healthy segment but manufacturing lags Government, Professional & Business Services, Healthcare & Services, and Retail Trade in terms of employment. Even at its peak in 1979, manufacturing only consisted of around 11% of total employment.

If one were to combine, employment and growth in terms of ranking sectors, then one could argue that this chart would show which sectors have the largest impact on employment and probably the economy. That chart below simply shows how segments would be ranked if growth rate was factored by percent employment. One could argue that the chart shows what sectors had the largest impact on employment growth since 2005. The chart below compares growth to inflation, if the sector did not grow faster than inflation then it had negative growth.

From the above chart once can see that the sectors that had the largest effect on the current employment growth since 2005 are:

1. Health Care and Social Assistance
2. Professional Business and Services
3. Government

These areas by far and away had a larger impact on employment growth than any other area including manufacturing. So why would manufacturing growth be highlighted as opposed to the other areas? Below are some reasons:

  • Manufacturing did start rebounding at the fastest rate in 2009 so it is correct in stating that Manufacturing led the recovery
  • Manufacturing offers high paying jobs for the lower and middle class
  • Highlighting the Government growth or Health care growth would be politically damaging as the presidents opponents could jump on either of these. No president is going to brag about the growth in government when we have a 17 trillion dollar debt. And the growth in Health Care while probably more related to demographics than any other factor would expose the president to criticism relating to Obama Care.
  • Some would view the growth of Mining as a positive, but certainly not Obama’s political base.
  • Manufacturing growth plays to his union constituents as many union jobs were lost as manufacturing got moved overseas.

Regardless of how manufacturing ranks in employment impact, it is still very important to the economy. In terms of gross dollars, manufacturing has arguably the most significant impact on the US economy. Manufacturing activity drives warehouse and distribution, freight, construction, professional jobs and a host of other sectors. It also has a large impact on exports. You can’t export most of our Health Care output or Government output. The Manufacturing Sector, while not directly providing the employment that it once did, still has one of the largest affects on the US economy.