“Manufacturers are benefiting from a variety of positive catalysts, including the need to replace a fleet of motor vehicles,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “And we just haven’t got back to the previous peak in inventory that should benefit the sector and the national economy for some time.”
Regional DataRegional reports reinforce the strength of manufacturing. New York-area factories grew in March at the fastest rate since June 2010 and manufacturing in the Philadelphia region expanded the most in almost a year, figures from the Federal Reserve showed.
While companies are investing in new equipment, a stronger labor market is giving households the means to purchase big- ticket items, benefiting companies like motor-home maker Winnebago Industries Inc. (WGO)
“We’re beginning to see positive signs that the economy is improving,” Randy Potts, chief executive officer of the Forest City, Iowa-based company, said on a March 15 conference call. “Consumer confidence has been trending higher and the jobless rate is improving.”
Manufacturing shares have outperformed the market. The Standard & Poor’s Supercomposite Industrial Machinery Index (S15MACH), which includes Caterpillar Inc. and Deere & Co., advanced 16 percent since the end of 2011 through March 30, compared with a 12 percent increase in the broader S&P 500.
Auto SalesLight-vehicle sales in March, set for release tomorrow, may have run at a 14.6 million seasonally adjusted annual rate, the average estimate of analysts surveyed by Bloomberg. It would cap the strongest quarter since the first three months of 2008, according to Ward’s Automotive Group statistics.
A report last week showed orders for non-defense capital goods excluding aircraft — a proxy for business investment in items such as computers, engines and communications gear — increased 1.2 percent in February.
Business spending on equipment and software climbed at a 7.5 percent pace in the final three months of 2011 after a 16.2 percent surge in the prior quarter, according to the latest Commerce Department data on gross domestic product.
The growth helps explain why companies like Deere & Co. (DE) are expanding. The world’s largest maker of agricultural equipment said March 1 that it would invest $70 million to expand tractor production in Waterloo, Iowa.
Fed’s BernankeFederal Reserve Chairman Ben S. Bernanke said last week that while he was encouraged by the recent decline in the unemployment rate, a further reduction will probably require a quicker expansion of business production and consumer demand, which “can be supported by continued accommodative policies,” he said.
Recent “better news” on the U.S. economy has also included strength in manufacturing, Bernanke said. The improvement could contribute to higher consumer confidence and lead to a self-sustaining recovery, he said. “We haven’t seen that in a persuasive way yet,” Bernanke said in a speech in Arlington, Virginia.
USA Manufacturing, Household Spending Rose
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But of course there is nothing new here. Walmart has long prospered as a company that found ways to drive down the cost of stuff that Americans want. And China has long been the place where companies to go to drive down cost.
For several decades, dating back to the post World War II years, relatively unfettered access to the American consumer has been the means for pulling Asian workers out of deep poverty. Japan emerged as an industrial colossus under the tutelage of Edward Deming. The Asian tigers came next. Vietnam and Sri Lanka have nibbled around the edges, while China embraced the export-led economic development model under Deng Xiaoping.
Nobel laureate Joseph Stiglitz argued recently that our difficulties recovering from the 2008 collapse are a function of our migration from a manufacturing to a service economy. While this migration has been ongoing for years, Stiglitz has concluded that the trend is irreversible. His historical metaphor is the Great Depression, which he suggests was prolonged because the nation was in the midst of a permanent transition from an agrarian economy to manufacturing, as a revolution in farm productivity required a large segment of the labor force to leave the farm.
The problem with this deterministic conclusion that America can no longer support a manufacturing sector is that it seems to ignore the facts surrounding the decline that we have experienced. In his recent article, Stiglitz notes that at the beginning of the Great Depression, one-fifth of all Americans worked on farms, while today “2 percent of Americans produce more food than we can consume.” This is a stark contrast with trends in the U.S. manufacturing sector. Manufacturing employment, which approximated 18.7 million in 1980 has declined by 37%, or 7 million jobs, in the ensuing years. However, the increase in labor productivity over that timeframe — 8% in real terms — explains little of the decline. Unlike the comparison with agriculture, where we continue to produce more than we consume, most of the decline in manufacturing jobs correlated with the steady increase in our imports of manufactured goods and our steadily growing merchandise trade deficit.
The chart below, based on data from the Bureau of Economic Analysis, illustrates the growth in personal spending on manufactured goods in the United States over the past three decades, and the parallel growth in the share of that spending that is on imported goods. These changes happened over a fifty-year period. Going back to the 1960s, we imported about 10% of the stuff we buy. By the end of the 1970s — a period of significant declines in core industries such as steel and automobiles — this number grew to over 25%. As illustrated here, the trend continued to the current day, and we now import around 60% of the stuff we buy.
The notion that American industry, consumers and politicians were co-conspiring in the destruction of the American working class was a discussion relegated to the margins of public discourse, championed among others by union leaders, Dennis Kucinich on the left, Pat Buchanan on the right and Ross Perot, while largely dismissed by the mainstream media.
While Apple has been pilloried from National Public Radio to the New York Times for its effective support of a slave economy, most electronics consumer goods are now imported. The irony of the Apple story is that the Chinese labor content may well not be the cost driver that we presume it to be. As in many other industries, the costs of what is in the box can be a relatively small share of total costs, when product development, marketing, packaging and profits are taken into account.
This, of course, is why China is not particularly happy with their role in the Apple supply chain. When the profits of Apple products are divided up, far more of it flows to Cupertino than to Chengdu. And that is the reality of modern manufacturing. Based on National Science Foundation data on the value chain of the iPad, for example, final assembly in China captures only $8 of the $424 wholesale price. The U.S. captures $150 for product design and marketing, as well as $12 for manufactured components, while other nations, including Japan, Korea and the Taiwan, capture $76 for other manufactured components.
If anything, the NSF data — and China’s chagrine — reflect a world in which the economic returns to design and innovation far exceed the benefits that accrue to the line workers who manufacture the product. This is one part of the phenomenon of growing inequality, and would seem to mitigate the complaint that is often made that America no longer “makes things.” We may not make things, but we think them up and as the NSF data suggests, to the designers go the spoils.
Yet there is no fundamental reason that the decline in man
ufacturing jobs in America should be deemed inevitable and permanent. For all the talk about the number of engineers in China, the fundamental issue remains price. As a friend who is a consulting engineer who works with Apple in China has commented, “Yeah, they have engineers, but the driver is cost, cost, cost. And the labor quality is awful. We lose a lot of product and have to stay on top of everything, but at $27 per day, you can afford a lot of management.”
This argument conflicts with Stiglitz deterministic thesis. Just as manufacturing jobs left the United States, they can come back as economic conditions change. As wage rates rise in other countries, one competitive advantage of outsourcing shrinks. And if nations — from China to Taiwan — migrate away from their practice of pegging their currencies to the dollar, foreign currency risk exposure will offset some of the cost advantages of outsourcing. And today, as newly industrialized nations like Brazil have seen their own manufacturing sectors ravaged by mercantilist competitors, there is a growing understanding for the need for order and fair rules to govern the forces of globalization.
The Apple-Foxconn affair spooked consumers of Apple products — at least for a news cycle or two. Like Claude Rains in Rick’s Cabaret, we were shocked to confront the reality of labor conditions in China. But the story was less about China than about us. That Foxconn could put eight thousand workers to work within thirty minutes to accommodate a last minute design change by Steve Jobs was not — as Jobs suggested in a meeting with President Obama — an argument for why those jobs could never come back to America, but rather it was illustrative of the astonishing narcissism of the Apple world.
It is true, no American factory could deliver for Apple as Foxconn did. But on the other hand, there really was no need to. That story was less about what Foxconn could deliver than what Foxconn’s customer had the audacity to demand.
This story raised the question of whether we care where our products are made. The answer is unclear, however many Americans have long cared about purchasing cars made in this country, and Clint Eastwood’s Super Bowl ad has raised awareness of this question. What is clear is that if Americans care about where their products are made, companies will care. Therefore, even as the president promoted tax credits for insourcing — the new word for bringing those jobs back — perhaps another step would be to build on the power of choice. Perhaps not all Americans care where their products are made, but many certainly do. But even if one does care, it tends to be difficult to find out.
Perhaps a simple step would be for companies to provide that information to consumers. Even if it was voluntary labeling, knowing who chose to provide information to their customers would tell many of us all we need to know. Then we could find out whether the Apple story really changed anything, and whether consumers might be willing to take more into account that the last dollar saved if it enables us to sustain a diversified economy into the future.