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Part I
Summary of the Workshop Sessions

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New Directions in Manufacturing: Report of a Workshop Part I Summary of the Workshop Sessions

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New Directions in Manufacturing: Report of a Workshop 1 Manufacturing in the United States The United States is a prosperous nation. Many of the assets that signal this prosperity are a result of the nation’s manufacturing proficiency. Further, companies in the United States have invented and produced goods used to build this nation and have also provided these goods to the rest of the world. Over the past two centuries, manufacturing in the United States has contributed substantially to a steadily increasing standard of living—including improved education, health, economic security, and more leisure—within the United States as well as abroad. In addition, a strong domestic manufacturing base is essential for maintaining national security, to produce both modern defensive weapons and the equipment needed for homeland security and public health. Manufacturing is crucial to U.S. government operations and has been central to the country’s vision of a high-wage, high-value, and high-skills-based economy. A DRIVER OF U.S. ECONOMIC GROWTH Manufacturing has been a principal driver of productivity growth in the United States. From 1950 to 2000, federal government data show that the average growth of productivity in U.S. manufacturing was 2.8 percent per year. During the past two decades, the growth rate accelerated, with the growth in average manufacturing productivity exceeding that in other sectors by more than 1 percent per year.1,2 In durable goods, productivity surged 39 percent from 1994 to 2001, more than twice the 16 percent growth of the economy overall.3 The high-tech manufacturing sector experienced rapid growth in output per hour throughout the 1990s, accelerating from 9 to 13 percent per year.4 The major improvements and innovations that have occurred in manufacturing processes and that helped power a U.S. economic boom in the 50 years since World War II can be compared in terms of significance with those that took place during the Industrial Revolution. From 1992 to 2000, manufacturing gross domestic product (GDP) grew at 4.6 percent annually, significantly faster than the overall U.S. economy, which grew at 3.6 percent annually. Manufacturing also represented a significant and growing portion of the GDP in the United States, contributing a full 22 percent during this same period. By comparison, the service sector contributed 14 percent to economic growth, while transportation and utilities each supplied 10 percent.5 The contribution of manufacturing to the U.S. economy is also important because of its multiplier effect on economic output. For every $1.00 of manufacturing product sold to a final user, an additional $1.26 of intermediate economic output is generated. The manufacturing 1   Department of Labor, Bureau of Labor Statistics. 2003. Major Sector Multifactor Productivity Index. Available at Accessed November 2003. 2   Chemical and Engineering News. 1996. Chemical Industry Productivity Rose Again. Available at Accessed November 2003. 3   Department of Commerce, Bureau of Economic Analysis. 2003. Analysis of gross domestic product. Available at Accessed November 2003. 4   Department of Labor, Bureau of Labor Statistics. 2002. High-tech productivity gains in 1990s. Available at Accessed November 2003. 5   Department of Labor, Bureau of Labor Statistics. 2003. Employment and unemployment statistics. Available at Accessed November 2003.

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New Directions in Manufacturing: Report of a Workshop sector’s multiplier effect is greater than the general multiplier effect of 98 cents for all industries and far greater than that of the service sector, which generates only 74 cents of intermediate activity per $1.00 of final sales.6 The 300,000 businesses that constitute the manufacturing sector directly employ more than 15 million people in the United States.7 According to the 1997 U.S. Census, the payroll of the U.S. manufacturing sector was 14 percent larger than that of the next two largest sectors combined (finance and insurance, and retail trade) despite the sector’s 15 percent fewer employees.8 The multiplier effect of manufacturing jobs is also important: It is estimated that each direct manufacturing job creates or supports between three and nine additional nonmanufacturing jobs. For example, a recent study concluded that more than 8.5 spin-off jobs (trade, service, and indirect manufacturing) were created for every direct automotive manufacturing job.9 The productivity gains in manufacturing over the past 50 years can be attributed to a combination of competitive pressures, the advent of new technologies, and a series of product and process innovations. The U.S. manufacturing sector invested heavily in research and development (R&D) during that period and currently accounts for 62 percent of all research and development performed in the United States.10 In addition, more than 90 percent of all patent approvals originate in the manufacturing sector.11 This is important, as research and development is the single most important source of the technological advances that lead to higher productivity. All of the activities associated with manufacturing—products, processes, and practices—must advance continually for any country’s economy to keep pace in a rapidly changing global economy. MANUFACTURING AT A CROSSROADS The recession occurring between 2000 and 2003 has been fairly short and shallow for the economy as a whole. However, it has hit manufacturing much harder than other sectors, in terms of both depth and duration. Manufacturers began slipping into recession in the third quarter of 2000, well ahead of the rest of the economy. By the time manufacturing output began to increase again in the beginning of 2002, it had fallen by 8 percent over the previous 18 months. While the overall economy grew a modest 3 percent in 2002, the increase for manufacturing output was only 1.7 percent. Finally, the recovery in the manufacturing sector in 2003 was slower than the first year of any recovery over the past 40 years.12 During the recession, the manufacturing sector also faced a more severe job loss than the rest of the economy. Between July 2001 and July 2002, manufacturing accounted for more than 70 percent of the total job losses in all sectors. Between July 2000 and June 2003, 6   Department of Commerce, Bureau of Economic Analysis. Input-output tables. Available at Accessed November 2003. 7   Department of Labor, Bureau of Labor Statistics. 2003. Employment and unemployment statistics. Available at Accessed November 2003. 8   Census Bureau, Department of Commerce. 1997. Company summary. Available at Accessed November 2003. 9   Sean P. McAlinden, Kim Hill, and Bernard Swiecki. 2003. Economic contribution of the automotive industry to the U.S. economy—An update. Ann Arbor, Mich.: Center for Automotive Research. Available at Accessed November 2003. 10   National Science Foundation, Division of Science Resources Statistics. 2003. Research and Development in Industry: 2000. NSF 03-318. Arlington, Va.: National Science Foundation. 11   B.H. Hall, A.B. Jaffe, and M. Tratjenberg. 2001. The NBER patent citation data file: Lessons, insights and methodological tools. NBER Working Paper 8498. 12   Department of Labor, Bureau of Labor Statistics. 2003. Major Sector Multifactor Productivity Index. Available at Accessed November 2003.

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New Directions in Manufacturing: Report of a Workshop manufacturing employment fell by 2 million. By contrast, employment in the rest of the economy grew by 954,000, with a brief, but sharp, drop in employment immediately following the events of September 11, 2001, sandwiched between months of modest employment growth. In August 2003, manufacturing shed an additional 44,000 jobs, the 37th consecutive month of falling employment in this sector.13 The largest employment declines have taken place in the electronics and industrial equipment industries. Each of these sectors has lost more than 350,000 jobs. These high-technology sectors include the manufacture of computers and office equipment, electronic components and accessories, and communications equipment. Services that are linked to manufacturing, such as computer, data processing, and engineering services, have also experienced significant employment losses during this period. The loss of manufacturing jobs has also had a more severe impact on manufacturing than that of previous recessions. During the manufacturing downturn that began in June 2000 and ended in December 2001, 1.4 million manufacturing jobs were lost. This 8 percent decline in the manufacturing employment rolls matches the average decline during the past six recessions. However, for 2002 overall, another 592,000 manufacturing jobs were lost. This stands in stark contrast to the average increase of 352,000 in manufacturing employment that has typically taken place during the first year of previous expansions.14 Manufacturing employment had been in decline even before the recent recession, according to several measures. Manufacturing jobs had decreased as a percentage of total employment in the United States. For example, manufacturing’s share of nonfarm employment decreased from 35 percent in 1947 to 14 percent today. In addition, the absolute number of manufacturing production workers has decreased to the lowest levels since 1947.15 ROOT CAUSES There is substantial agreement that U.S. manufacturing capacity is experiencing a serious contraction that cannot be attributed solely to an economic recession. The U.S. manufacturing sector has experienced tremendous job losses both prior to and during the 2001 recession. However, the reasons for this decline are generally understood to be the result not of a single factor but of a combination of factors. Because the root causes are not understood, it is difficult to predict the timing or extent of a recovery of these jobs. If such a recovery occurs, it will also be impossible to know how to sustain that trend. Certainly, some of the factors responsible for declining employment in the manufacturing sector may be part of the usual process of economic development. First, as the U.S. economy has expanded, the amount consumers spend on service items such as health care and recreation has increased, so the percentage spent on hard goods may also change. Second, there may be a shift in capacity for some goods out of the United States as companies cut their workforce and move commodity industries overseas. This may occur as a result of competitive pressures, a desire to reduce risk or cut costs, or other drives toward optimization. Should such practices become widespread, they are expected to have the net result of job losses in the United States. 13   Department of Labor, Bureau of Labor Statistics. 2003. Labor force statistics. Available at Accessed November 2003. 14   Department of Labor, Bureau of Labor Statistics. 2003. Production labor force statistics. Available at Accessed November 2003. 15   Department of Labor, Bureau of Labor Statistics. 2003. Labor force statistics. Available at Accessed November 2003.

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New Directions in Manufacturing: Report of a Workshop Third, because industries become more productive as they mature, over time, fewer people are needed to produce the same amount of goods. Large gains in productivity result in additional capacity that almost always exceeds increased consumption. In a growing economy, excess capacity can be used to produce additional goods for export or it can be phased out and replaced by new processes or products. Increased productivity can enable decreased spending per capita while the functionality of manufactured products is maintained or improved. The fundamental question at the root of each of these observed trends is the quality of the data used to measure them. Much of the data collected today by various government agencies is based on old business paradigms and does not take into account a number of factors. For example, many companies today outsource such services as accounting or security, jobs that were once counted in the manufacturing sector. Another example is extended supply chain integration, where a single end product will have components manufactured in a number of worldwide locations, with the combination of locations varying from lot to lot. This increased flexibility in manufacturing processes makes it very difficult to answer a seemingly simple question on a government survey. Given the lack of robust supporting data, it is not surprising that opinions vary on why manufacturing appears to be hit harder than the rest of the economy. The recession may have its root causes in a collapse of business investment and exports. The decrease in business spending, especially in manufacturing, might be attributed to overinvestment in manufacturing during the 1990s. Weak business investment and weak export growth may have also constrained the recovery for the manufacturing sector, compared with both the rest of the economy and to previous recoveries. Certainly, business confidence has been undermined by a number of events, including the attacks of September 11, 2001; the emergence of several major financial scandals in 2002; and the cost of war in the Middle East. Currency valuation is another influencing factor. The U.S. share of manufactured exports has fallen from 13 to 11 percent since 1997, and part of this can be attributed to the overvaluation of the dollar.16 A strong dollar adversely affects the competitiveness of domestic manufacturers in the international market. Currency movements can have a significant impact on the financial performance of U.S. manufacturers, influencing decisions about where to locate production facilities. The strong dollar makes it more appealing to relocate production overseas, pay for labor with undervalued local currency, and still earn highly valued dollars by re-exports to the United States. The result can be additional losses of domestic jobs and manufacturing capacity. It is possible that adjustment and stabilization of the dollar, as well as more accurate valuation of currencies around the world, is part of a solution to the manufacturing downturn. Finally, the increasing trade deficit adversely affects economic growth. In 2002, the increase in the trade deficit neared 5 percent of the GDP.17 This deficit is a measure of the balance of trade in manufactured goods, or the difference between the amount of goods that are imported and exported. As such, it can be tied directly to the steady decline in U.S. manufacturing as a percent of worldwide capacity. As a nation, the United States borrows $1.3 billion each day to pay for manufactured goods that are consumed but not produced here. Interest must be paid on this borrowed money. In 2001, the United States owed $2.3 trillion, or close to 23 percent of the GDP, as a result of this incurred interest. This figure could grow to 40 percent by 2006 if current trends persist.18 Some economists consider this a serious structural 16   Department of Commerce, International Trade Administration. 2003. Trade and industry data. Available at Accessed November 2003. 17   Department of the Treasury, Bureau of the Public Debt. 2003. Annual historical debt. Available at Accessed November 2003. 18   OMBWatch. 2003. Half of 2004 deficit deterioration due to revenue-reduction legislation. Available at Accessed November 2003.

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New Directions in Manufacturing: Report of a Workshop problem in the U.S. economy. Although there is some agreement that the 2001 recession was caused by a decrease in business investment, there is little agreement about what kind of economic policy would speed up a recovery. There is speculation that the long-term manufacturing downturn was related to increases in productivity (and the subsequent reduction in labor needs) and to competitive pressures (and the subsequent increase in global outsourcing). Both of these trends have resulted in a loss of capacity utilization and jobs in the United States. However, there is disagreement over whether the movement of production overseas has, on balance, a positive or negative effect on U.S. manufacturing. It remains a matter of debate whether manufacturing production capacity is a vulnerable commodity or a strategic asset.