- The Washington Times - Tuesday, December 29, 2009

OPINION/ANALYSIS:

Will the Obama administration’s new blueprint for “Revitalizing American Manufacturing” be a case of “better late than never” … or “too little, too late”? Two weeks after the document’s release, the “late” part is the only certain characteristic.

After all, the ongoing economic crisis stems ultimately from chronic U.S. underproduction. Therefore, truly healthy growth (as opposed to the artificial, unsustainable, government-generated variety) won’t return until the nation greatly boosts genuine wealth creation. Manufacturing dominates the segment of the economy that creates real wealth (as opposed to the paper variety to which responsible finance is limited).

But the Obama plan and its presidential-level acknowledgment of manufacturing’s importance comes more than two years after the crisis began and nearly one year after the president’s inauguration. Contrast that delay with the rush to rescue Wall Street, state and local governments, and consumers — moves whose successes are likeliest to reflate a bigger and more dangerous bubble than the one that just burst.

Worse, U.S. manufacturing may be much weaker than even many longtime supporters realize. The latest evidence is a falloff for only the second time on record in the nation’s manufacturing capacity. It sends a message that the administration is still loath to hear: that U.S. industry’s needed revival won’t happen without a total overhaul of U.S. trade policy.

Last spring, the economics and business worlds noticed the plunge in manufacturing capacity utilization to all-time lows since data collection started in 1948. This measure of how much of the American manufacturing base is being used has rebounded since June, but is just re-approaching the previous low of late 1982.

The figures for capacity itself (which also date from 1948) usually are overlooked but appear to be sending a scarier message: The base itself — the stock of factory space and equipment — is shrinking in absolute terms after decades of nearly unbroken expansion.

According to Federal Reserve data, the current drop in manufacturing capacity began in November 2008 — 11 months after the Great Recession’s official December 2007 onset. The recession has officially ended, but capacity’s decline has continued through November and has totaled 1.18 percent.

That may sound trivial, but a falloff of any kind has happened only once before, soon after the short, relatively mild 2001 recession. Then, manufacturing capacity shrank each month from November 2002 through August 2004. But the total 0.29 percent slump was much smaller.

Over the next five years, capacity growth resumed and surpassed its previous high by an impressive 6.4 percent. But the entire economy’s bubbling nature then exposes much of this growth even in relatively bubbleless manufacturing as a fake. Without harmful policy steroids, it would never have happened.

The ongoing decline in manufacturing capacity, despite much greater and possibly more dangerous government stimulus, casts real doubt on the chances of a similar rebound. So does the drop’s extension far beyond the decimated automotive sector. It’s hitting durable goods - the statistical home of the vehicles and parts industries - where capacity in November 2009 was 0.63 percent smaller than during its last peak at the beginning of the year. That supersector’s only previous capacity decline was soon after the 2001 downturn and was much shallower (0.19 percent).

Capacity is also shrinking in the more vulnerable nondurable goods sector — by 1.78 percent since September 2008. This nondurables capacity decline is the third on record and the biggest by far.

Digging deeper into the manufacturing data yields similar stories. Capacity in motor vehicles and parts together has taken a big hit, and the trouble began in October 2006, when capacity began a 5.3 percent decrease. In autos and light trucks alone, the dive has been nearly twice as deep — 9.4 percent — and began a month earlier. Another major trouble spot has been the iron and steel sector, where capacity has cratered by 17.67 percent since late 1973.

Capacity keeps surging in information technology hardware (computer, communications and semiconductor-related products). The November 2009 numbers represent an all-time high, and a nearly 14 percent increase since the recession began. But decline has overtaken other capital-intensive sectors that have long been major sources of innovation and high-wage jobs, especially the broad machinery category, where capacity has shrunk by nearly 4.6 percent since March 2001.

Why do these data reveal the need for a trade policy transformation? Because this overall shrinkage of U.S.-based industry is so recent. By then, it seems, there was the arrival of the full effects of a long string of U.S. trade deals starting with the North American Free Trade Agreement that aimed at spurring the exports of domestic factories, jobs and now labs to very low-wage, regulation-light export platforms such as Mexico and especially China.

During the deep, pre-outsourcing recessions in the 1970s and 1980s, capacity expansion slowed markedly. But it never shifted into reverse except in industries like textiles and steel — which, of course, were victims of earlier trade policies’ failures to tackle European and Japanese protectionism and mercantilism. Although Pollyannas typically portray trends such as capacity shrinkage as hopeful signs of efficiency and productivity, domestic-based industry was strong by those two measures long before this decade. Yet never before had they produced or coincided with an absolute drop in capacity.

The shrinkage of the U.S. manufacturing complex, coupled with a double-digit decline in manufacturing output during this past recession, undermines the nation’s need for a production-led recovery and threatens President Obama’s high-profile hopes of high-wage manufacturing job creation and an export rebound. If Mr. Obama doesn’t deal realistically with the global nature of domestic industry’s challenges, major political change could be the nation’s next leading manufacture.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 1,900 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s Web site: www.AmericanEconomic Alert.org.

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