- - Tuesday, September 18, 2012


A single monthly economic data point does not a trend make. Half a dozen of them in rapid succession? Much more convincing. That’s why the prospects for American domestic manufacturing and by extension for the minimalist economic recovery itself have just gotten considerably dimmer. For a string of recent cringeworthy statistics indicate that the manufacturing slowdown that began this past spring has become a new industrial downturn.

Last week, government economic agencies reported that inflation-adjusted manufacturing in August suffered its worst decline (0.75 percent) since March 2009 — during the last recession. Such manufacturing output has now fallen for three of the first eight months of this year, and these Federal Reserve Board figures have been revised downward for the last three months. On a calendar-year basis, manufacturing’s growth rate has slowed from 6.40 percent in 2010 to 4.25 percent in 2011 to a barely breathing 0.75 percent annual pace this year.

Also last week, Census Bureau data showed that the manufacturing trade deficit hit an all-time high of $63.93 billion for its last reporting month (July), as well as a new record for this shortfall’s three-month moving average. The previous monthly record came in October 2006 during a year when the economy grew by 2.70 percent after inflation. The deficit’s higher level today, when growth is less than two-thirds as fast, can only mean that imports keep grabbing shares of American manufacturing’s home market — the market that should be the one they know best, and that’s the world’s largest by far. Conversely, U.S. manufacturing exports aren’t remotely offsetting these losses.

Domestic manufacturing fared no better the week before. According to the disappointing Labor Department jobs report, the sector lost 15,000 jobs in August — the first decline since last September and the biggest since December 2009. Even if this year’s employment growth fades no further, after regaining 117,000 jobs in 2010 and 181,000 in 2011, domestic manufacturers are on course to add only 165,000 net new positions in 2012.

Those mistrustful of government data will find no consolation in the main private sector manufacturing statistics. Three days before the jobs report’s release, the Institute for Supply Management announced that its closely watched survey of manufacturing purchasing managers revealed a third consecutive month of contraction for American industry. Prior to June’s negative finding, the survey had shown manufacturing growth consistently since August 2009 — when the economywide recovery had just officially begun.

And this Monday, the New York Federal Reserve Bank’s index of manufacturing in the Empire State, northern New Jersey, and southern Connecticut, dropped to its lowest point since April 2009. As with the ISM report, the data on new manufacturing orders were especially weak.

The obvious reason for concern about the manufacturing slowdown concerns the sector’s role as the early recovery’s growth leader. In 2010, industry produced more than 41 percent of that year’s increase in real gross domestic product, despite representing just under 12.50 percent of the economy. In 2011, manufacturing’s performance was nearly as stunning, generating more than 36 percent of inflation-adjusted economic growth despite amounting to only 12.77 percent of the economy. This year, manufacturing is a growth laggard once again, and few adequate substitutes are in sight.

The less obvious reason for concern stems from the economy’s crying need for a fundamentally new business model. The last decade’s bubbles, their disastrous bursting, and the ensuing recession, teach above all that growth produced by reckless borrowing, asset price inflation, and financial gimmickry must be replaced with growth based on turning out manufactures and other Main Street goods and services, and on earning income.

President Obama calls the goal an economy “built to last.” That’s not achievable without a manufacturing revival that lasts, and indeed strengthens.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 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 website, www.AmericanEconomicAlert.org, and Tweets at @AlanTonelson.



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