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Tuesday, Jul 29, 2014
Commentary

Why celebrate a false manufacturing renaissance?


Published:

The repeated claims that U.S. manufacturing is enjoying, or is on the verge of, a renaissance have been undermined again. The latest reality checks were provided by official statistics on manufacturing output.

The Commerce Department's first report on domestic industry's full-year 2012 performance showed an impressive increase in U.S. manufacturers' output. Yet the figures released June 6 were hardly profound, even by the standards of the previous decade, which no one considered a golden age for U.S. industry.

President Barack Obama and other proponents of a manufacturing renaissance got even more bad news June 14, when the Federal Reserve's industrial-production data for May showed that the sector's rebound from the recession had just about stalled. Manufacturing output remains smaller than when the last recession began in 2007, despite the huge government stimulus since then.

Moreover, not only has U.S. manufacturing previously surpassed the 2012 number, it doesn't appear that it will stay at these levels. According to the Fed's May report, industry's real year-on-year growth rate is about 2.4 percent, the worst showing since the recession ended in June 2009. And the momentum has slowed since January.

Manufacturing's robust growth last year did raise its percentage of inflation-adjusted total economic output to 12.5 percent. That's a big change from its nadir of 11.5 percent in 2009. But this improvement is only a return to levels that industry reached regularly during the previous bubble decade, when manufacturing is widely thought to have atrophied in relative terms largely in response to the financial sector's bloat.

In fact, the new statistics - along with the latest monthly results from regional Fed banks and private-sector surveys - show that the manufacturing-renaissance skeptics have been right all along. Industry's recent surge is a direct result of the magnitude of this highly cyclical sector's recessionary decline. From the recession's onset in 2007 through its bottom in 2009, domestic manufacturing output fell almost 15 percent after inflation. Overall output fell, too, but only by 3.9 percent.

Since 2009, real manufacturing production has rebounded by 16.4 percent, more than twice as fast as the 6.4 percent growth for the entire economy. Nonetheless, domestic industry still hadn't quite regained its pre-recession peak by the end of 2012. The full economy, meanwhile, had erased all of its real gross-domestic-product losses by 2011.

The government will need to devise new policies in education, taxes, regulations and research, and provide development.

The U.S. should also press for new international-trade policies. For example, longstanding legislation to strengthen the response to currency manipulation has been reintroduced in the House and Senate. It should be promptly passed and signed by the president. Buy American regulations that govern public-sector procurement should be greatly expanded, even at the risk of violating treaty obligations, and much better enforced. The massive, discriminatory effects of foreign value-added tax systems must be offset by a border-adjustment levy. And new trade deals, such as the proposed Trans-Pacific Partnership, which are modeled on past failures, should be scrapped or reconsidered. Until then, talk of a manufacturing renaissance will remain just talk.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council.

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