America, we often hear, doesn't make things any more. The drop in manufacturing is sometimes blamed on free trade agreements and is seen as part of our long-term economic decline. In a fascinating article, Noam Scheiber connects the decline to the fact that our top business talent increasingly goes into the financial sector. But there's just one problem with that story: manufacturing in the U.S. continues to grow.
In fact, manufacturing still accounts for around 11% of the our gross domestic product (GDP). In real terms, the country's manufacturing output has grown fairly steadily over the last 50 years. It declined during the last recession—when global trade fell a stunning 12%—but is already beginning to recover. Part of what accounts for the sense manufacturing has declined is that it accounts for a smaller percent our economy than it used to. At its peak in 1953, manufacturing accounted for more than 28% of our GDP. It was around 15-16% throughout the 1990s, but fell as a share of our economy over the last ten years. That's not entirely surprising, since manufacturing tends become a smaller part of developed economies as they mature. But it is a substantially smaller share of our economy than it is of other developed countries. Manufacturing's share of the GDP has fallen in part because of the growth of finance and health care sectors. But it also reflects an imbalance in the trade of manufactured goods—the fact that we import more than we export.
Perhaps the main reason it seems we no longer make things is that manufacturing employment has declined dramatically—by almost 6 million jobs—over the last ten years. At FiveThirtyEight, Hale Stewart argues that manufacturing employment has declined mostly because gains in productivity have outstripped the demand for manufactured goods. One problem with that argument is that government statistics may overstate gains in manufacturing output and productivity. Because many of the goods we produce are made with parts manufactured overseas, we're able to produce finished goods more efficiently partly because of improvements in the productivity of foreign factories. Another problem with Stewart's argument is that, as Robert Scott shows, manufacturing employment has fallen not so much because productivity has increased, but because the value of the goods we sell has leveled off. That's partly a consequence of the trade imbalance, which in a real sense represents manufacturing jobs that might otherwise have remained at home.
America's share of the world's GDP has been fairly constant over the last 40 years. Our manufacturing industry is not in decline. But its failure to keep up with the growth of our other industries is a problem. As Clyde Prestowitz points out, the manufacturing sector is a major source of both innovation and high-paying jobs. With productivity growing faster than sales, the manufacturing jobs we lost in the latest recession may not be coming back. That doesn't mean we can no longer make things in the U.S. Manufacturing would certainly rebound if China and other Asian countries could be convinced to stop keeping the value of their currencies artificially low, in effect dumping their goods on us in order to gain market share. In the long run, however, we'll need to shift our investment to new technologies—like alternative energy and nano-technology—where our scientific and technical expertise continues to give us an advantage.