The Reality of American “Deindustrialization”

Manufacturing in the United States has not disappeared but has been transformed and very much remains a vital part of the country’s economic fabric.

October 24, 2023 • Publications

• Despite rhetoric from some politicians that decades of unfettered globalization have hollowed out the U.S. industrial base, the United States remains a manufacturing powerhouse, accounting for a larger share of global output than Japan, Germany, and South Korea combined. In key industries such as autos and aerospace, the United States ranks among the global leaders and is the second‐​largest manufacturing economy overall.
• That manufacturing employs fewer Americans and accounts for a lower percentage of gross domestic product than in decades past is not cause for serious concern, unique to the United States, or primarily owed to globalization. These trends have instead been largely driven by productivity gains and shifting consumer preferences in favor of services.
• The premium placed by policymakers on manufacturing employment is misplaced. Unlike most of the post–World War II era, jobs in this sector now provide lower compensation than similar roles elsewhere in the economy, while the diversified nature of the U.S. economy is a source of economic resiliency, not weakness.

An unfortunate perception among many commentators and political leaders is that the United States “doesn’t make anything anymore.” According to this narrative, the country is a former manufacturing titan brought low by the forces of globalization that have left the rusting hulks of once‐​humming factories in its wake. Instead of producing their wares in locations such as Pittsburgh and Peoria, some globalization critics claim U.S. corporations have shifted their operations to take advantage of vastly lower wages in China, Mexico, and elsewhere. Factory closures, these critics insist, have forced American workers to trade well‐​paid work on the assembly line for less financially rewarding jobs in the service sector. In this telling, trade liberalization’s legacy is one of industrial decline, wrecked lives, and ruined communities.

Reports of American manufacturing’s death, however, are greatly exaggerated. While it is undeniably true that certain manufacturing industries—particularly labor‐​intensive, low‐​tech ones—are no longer primarily located in the United States, many other, more advanced ones have flourished. Thus, factories producing consumer staples such as textiles and furniture, for example, have made way for facilities that produce products less often found in retail stores, such as chemicals and machinery. At the same time, productivity gains unleashed by automation and other technologies have enabled manufacturing output to remain near record highs even as direct manufacturing employment has declined. Many other Americans, meanwhile, still work in manufacturing or are involved in the manufacturing process through the design of new products, even if their employers don’t operate actual factories.

In short, manufacturing in the United States has not disappeared but has been transformed and very much remains a vital part of the country’s economic fabric.

Deindustrialization Worries Are Nothing New

Politicians have sought to advance and capitalize on worries of industrial decline for decades. During his 1984 presidential campaign, Walter Mondale told steelworkers in Cleveland that President Ronald Reagan’s policies were “turning our industrial Midwest into a “rust bowl”—a turn of phrase soon modified and popularized by the media as “Rust Belt.” This region’s misfortunes—and the broader alleged plight of American manufacturing—have been an enduring feature of the political discourse ever since.

Some of this focus is the natural result of politicians’ and the media’s long‐​standing attraction to bad news and nostalgia: Factory closures make news (or even movies); factory expansions don’t. And the industrial Midwest’s long‐​standing importance to the U.S. presidential election means that the region will always receive outsized political attention, regardless of economic realities elsewhere in the country.

Yet certain statistics also lend a superficial plausibility to claims of domestic manufacturing’s dire state. U.S. manufacturing employment peaked in 1979 at 19.5 million employees, stood at just over 17 million in 2000, and has since dropped to approximately 13 million as of January 2023. In relative terms, the percentage of workers employed in manufacturing has more than halved since 1980 as did its share of gross domestic product (GDP) from 1978 to 2018.

Such declines also correlate with a growing embrace of trade liberalization over this period via such initiatives as the North American Free Trade Agreement, conclusion of the Uruguay Round of trade negotiations and agreement to establish the World Trade Organization (WTO), and China’s accession to the WTO (although the decline was already underway when each of these took place).

No great effort is therefore required to grasp why many Americans believe that the country’s industrial sector—and the well‐​paying jobs that go with it—has received a hammer blow at the hand of globalized commerce more generally and China in particular. But that doesn’t mean it’s true. A fuller and more accurate picture reveals a sector in remarkably good health whose indications of decline are far less worrisome when placed in proper context.

What Is Manufacturing?

Before delving into the state of U.S. manufacturing, it is worth examining what the industry entails. Although the term may conjure images of glowing hot steel or new automobiles rolling off the assembly line, manufacturing runs a wide gamut of activities. According to the Bureau of Labor Statistics, manufacturers are “… establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products.” These include not only the production of heavy machinery and sophisticated devices but also other items, such as fruit and vegetable preserves, stationary, and beverages. By this definition, Coca‐​Cola is every bit the manufacturer as Boeing, General Motors, or U.S. Steel.

But the dividing line can sometimes be ambiguous. U.S.-headquartered Nike, for example, engages in the design and marketing—key parts of the manufacturing process—of footwear, apparel, and sports equipment. The actual production of these items, however, is outsourced to independent contractors. Global semiconductor leader Nvidia follows much the same approach. Should these “factoryless goods producers” be considered manufacturers? So far, the government’s answer is no. Nevertheless, such firms are key contributors to the manufacturing process and generate considerable value, jobs, and innovations.

The United States Remains a Manufacturing Powerhouse

Regardless of how one defines manufacturing, the United States is clearly one of its heavy hitters. In 2021, it ranked second in the share of global manufacturing output at 15.92 percent—greater than Japan, Germany, and South Korea combined—and the sector by itself would constitute the world’s eighth‐​largest economy. The United States was the world’s fourth‐​largest steel producer in 2020, second‐​largest automaker in 2021, and largest aerospace exporter in 2021.

That the United States has achieved these rankings with a relatively small industrial workforce is a testament to its world‐​beating productivity: the country ranks number one in real manufacturing value‐​added per worker by a large margin. With value‐​added of over $141,000 per worker in 2019, the United States bested second‐​ranked South Korea by over $44,000. The gap with China was over $120,000 per worker (Figure 1).

Manufacturing output has also remained strong in historical terms, at only 5 percent lower than its all‐​time high achieved in the final quarter of 2007 (Figure 2). Measured by real value‐​added, the sector reached its highest level in 2022 (Figure 3).

Read more here: https://www.cato.org/publications/reality-american-deindustrialization#united-states-remains-manufacturing-powerhouse