The US Manufacturing Industry’s Global Fight

The United States manufacturing sector generated 1.4 trillion dollars in 2013. This is significant because manufacturing represents three fourths of private investment in research and development, and, according to AMNPO, manufacturing has the largest multiplier effect of any major economic activity. As a point of reference, manufacturing represents eight percent of total US GDP and around 20 percent of GDP in other industrialized countries, such as Germany and Japan.

The US share in global manufacturing output has demonstrated a relatively continuous decline during the last three decades, which includes four recessions—in the early 80s, the early 90s, the early 2000s, and the Great Recession from 2007 to 2009. This pattern changed after the last recession, when the US share in global manufacturing stabilized around 20 percent. This was the first significant recovery in the share of manufacturing value added to total US GDP since the early 1980s.

What can macroeconomic data tell us about this apparent recovery? A new International Monetary Fund (IMF) Working Paper called “The U.S. Manufacturing Recovery: Uptick or Renaissance?” attempts to provide an answer.

The authors decompose the recent manufacturing rebound into several recent trends which could have motivated the recovery. These drivers include a competitive real exchange rate, a decrease in US cost of labor vis-à-vis emerging markets, and a reduction in domestic energy prices. In order to assess the importance of each of these factors, they use a panel regression on data from G-7 countries for the period 1990-2010.

Through their research, the authors find that all of the factors listed above are important in helping to explain manufacturing activity in the United States. According to the model, the most important factor contributing to the manufacturing recovery was the decrease in US labor costs. A one percent decrease in labor costs, in relation to those of other G-7 countries, resulted in an increase in US industrial production of about 0.8 percent.

The authors argue that, during the period studied, the reduction in US labor costs was the result of pressures of cyclical unemployment in the United States during the recession and global reallocation of production to emerging Asian countries during the 90s and the 2000s. These factors pushed down the unit cost of US labor relative to the international cost of labor.

In turn, just as the depreciation of a currency makes exports more competitive, the study shows that a one percent depreciation of the US dollar boosted production by 0.2 percent. Weak demand and high cyclical unemployment may have contributed to a depreciation of the US dollar against emerging market currencies.

Finally, a doubling in the price of gas between the US and other G-7 countries increased US production by 1.5 percent. The development of drilling technologies (including shale gas) resulted in the increase in natural gas production in the US in recent years, and hence a reduction in domestic prices, which are currently one fourth of those in Asia and Europe.

Due to a combination of these trends, the manufacturing export sector has proven resilient post-crisis. While manufacturing decreased as a share of US GDP, manufacturing exports remained constant. To assess the impact of the manufacturing sector in the long term, the authors develop a panel regression using data from G-20 countries (which include the largest developed and developing economies) for the period 1990-2010.

The authors tried to model the dynamic of the US and its main competitors. They used manufacturing-to-output ratios, which tend to increase in early stages of development and decline and stabilize as income per capita grows. Their results suggest that emerging markets are unlikely to lose significant ground in the manufacturing sector, as most still have very small levels of GDP per capita in relation to developed countries. This finding indicates that their manufacturing-to-output ratios are likely to increase in the near future.

On one hand, competitive US labor costs, and, to a lesser extent, competitive energy prices and dollar depreciation, allowed US manufacturing exports to stay strong and surpass the last recession. On the other hand, however, emerging markets manufacturing exports will most likely continue to grow and gain more ground in the future.

If the US does not lose ground against these strong emerging markets, the authors forecast that it could add up to 0.4 percentage points of growth per year through 2020. The size of the impact of the manufacturing sector will depend on its ability to become more competitive by diversifying manufacturing exports toward more dynamic world regions, including emerging markets in Asia and elsewhere around the world.

 

Featured Article: Celasun, Oya, Gabriel Di Bella, Tim Mahedy and Chris Papageorgiou. 2014. “The U.S. Manufacturing Recovery: Uptick or Renaissance?.” IMF Working Paper. WP/14/28

Featured Photo: cc/(Chrysaora)