OCTOBER 2005 :: ECONOMICS

Made in the USA

American Manufacturing Is Healthier Than It Seems

By Jessica E. Vascellaro and
Jon E. Hilsenrath
Staff Reporters of The Wall Street Journal

The shelves of Home Depot, Wal-Mart and Best Buy-stocked with imported products-paint a grim picture of the health of U.S. manufacturers, which don't appear to be producing much of what American consumers are buying.

But that isn't the full picture. While American factories are employing fewer people, they are cranking out more products than ever, and they are running closer to capacity than they have in half a decade.

In the past year, the growth in output of high-tech equipment, machinery and aerospace products has outpaced overall economic growth. Even auto production-despite the problems of Ford and General Motors-is growing at a healthy pace, expanding by 8.5% in the past 12 months, as foreign auto makers have increased output at their U.S. factories to win market share. Production of some consumer products-like food and toiletries-is also rising.

"Contrary to the view out there that American manufacturing is dead or dying, [production] is growing at a pretty good clip," says Joseph Carson, an economic researcher at Alliance Capital Management.

Smaller Slice, Bigger Pie

Two larger trends are at play in the increases. The first is continued productivity improvements in the manufacturing sector, which means factories are producing more products with fewer workers. The other is a growing global economy, which allows U.S. producers to expand production even as upstart factories in places like China and Mexico build up market share. U.S. manufacturers may be getting a smaller slice, but the pie is getting bigger.

This past summer, production of business equipment-computers, industrial machinery, tractors, airplanes and other products used by businesses, rather than consumers-was up 8.2% from a year earlier, while output of computer and electronic parts rose 15.6%. Information-processing and defense and aerospace equipment also registered double-digit growth rates.

Meanwhile, factories, mines and utilities were operating at 80% of their capacity. It was the highest level since December 2000, although still below rates seen during much of the 1980s and 1990s.

Some companies say they are feeling the lift. Boeing's orders this year already exceed the total for 2004, thanks in part to orders from overseas. Procter & Gamble says demand for soap, baby-care products and diapers is so strong that it has had to add to its facilities in Pennsylvania and Missouri. Campbell Soup recently said it plans to build an $80 million factory in Everett, Wash. As a result of the move, the company expects its StockPot business, which makes fresh refrigerated soups and sauces for the food-service industry, to boost capacity by 50%.

And amid worries that U.S. manufacturers can't compete with Asian rivals, more of those rivals are looking to produce their goods in America. Hyundai Motor, based in South Korea, in May opened a two-million-square-foot plant in Montgomery, Ala., that has the capacity to produce 300,000 vehicles a year. Toyota, Honda and Nissan are building more of their vehicles here as well.

To be sure, manufacturing isn't expected to reclaim its position as the key locomotive of the U.S. economy, which is increasingly service-oriented. Just as the farm sector did during the Industrial Revolution, manufacturing is shrinking as a percentage of overall economic activity. In 2004, manufacturing was 12.7% of gross domestic product, down from 13.2% in 2001 and more than 20% in 1980. While some companies are boosting production in the U.S., many also are moving some production to low-wage countries.

The sector also faces numerous challenges domestically. Manufacturing profits could reach new highs this year, but at $106 billion in 2004, they were still shy of their 1998 levels, according to the Bureau of Economic Analysis.

Import competition is as intense as ever. High oil prices and rising health-care expenses are pushing up costs for U.S. manufacturers. And the U.S. dollar has started to strengthen against foreign currencies, reducing the competitive edge that exporters enjoyed earlier in the year. It all forces manufacturers to work as hard as ever to control costs and increase productivity.

Shift to the Higher End

Manufacturing payrolls today are 1.6 million smaller than they were when the economic recovery started in November 2001. More Americans are now employed in health care and social services than in manufacturing, where payrolls stood at 14.3 million in June on a seasonally adjusted basis. That was just a little more than 10% of total payroll employment.

"We need fewer and fewer workers for the same amount of production," says Dean Maki, chief economist at Barclays Capital. "That drives the perception of the declining manufacturing sector."

Yet some economists say the manufacturing sector is quietly adjusting to a demanding environment by shifting to higher-end products that might not be on many consumers' shopping lists.

In studies on plant shutdowns in manufacturing during the 1980s and 1990s, J. Bradford Jensen of the Institute for International Economics, Andrew Bernard of Dartmouth and Peter Schott of Yale found that global competition has been hardest on U.S. companies that depend on low-skill workers. Mr. Jensen says these workers tend to be in industries, such as apparel, furniture or leather manufacturing, that make consumer goods sold in stores.

Survivors, by contrast, have tended to be in "capital intensive" industries that rely on expensive machines and skilled workers to operate them. These capital-intensive industries tend to produce business equipment that can't be tossed into a shopping cart at Wal-Mart, such as industrial machines, bulldozers or airplanes. "Most people don't buy these things," Mr. Jensen says.

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