During my decades in business-to-business publishing, I have borne sad witness to the gradual export of this country’s manufacturing sector and its many jobs to overseas sources. When U.S. manufacturers realized that labor costs in foreign markets were much lower than in the U.S. in the 1960s and as the 1970s brought new, and often excessively expensive and cumbersome, agency regulations from OSHA and EPA into play, manufacturers began to shut down entirely or transfer their domestic operations to foreign countries.
As a percentage of nominal GDP, the manufacturing sector’s contribution dipped below 25% in the late 1960s; fell to under 20% by 1980; under 15% by 2000; and just under 11% in 2020. In terms of total employment, manufacturing jobs fell from 24% in 1970 to about 8% in total jobs in 2020. One would look at these numbers and feel rather poorly about our domestic prospects of rebuilding this country’s manufacturing presence, both domestically and globally.
But now comes some good news – sort of. If one were to examine the value of manufacturing’s output against real (inflation-adjusted) GDP, the result would be rather flat in a graph against time. Since World War II and through to the present, manufacturing’s share of real GDP has narrowly fluctuated between 11.0-13.5%.
The implications of this are twofold. First, pricing in other segments of the economy outpaced manufacturing by about 1% annually. Second, manufacturing that remained in this country got better at producing goods with fewer employees. In other words, manufacturing learned how to increase the productivity of its capital (and its labor) by investing in computers, robotics, digitization, miniaturization, WIFI, advanced and remote process controls, and other technologies that allowed them to produce with less labor input. The dark side of all this is that the U.S. still lost millions and millions of good manufacturing jobs over the decades, and it lost its global dominance in some basic manufacturing categories – steel production being an illustrative case in point.
Then along came the COVID-19 pandemic. This raised some critical questions about why the U.S. manufacturing sector did not have the capacity to produce the personal protective equipment (PPE) required by frontline healthcare workers to treat their patients safely. Items such as face shields, N95 facemasks, critical-care ventilators and other items were in short supply. To make matters worse, the existing and ordinarily efficient global supply chains made us dependent on foreign suppliers for at least some of these products.
In a recent Harvard Business Review article, author Willy C. Shih describes the situation thusly: “The challenge lies in a combination of how modern supply networks are structured and the operational metrics applied to manufacturers. Taken together, the United States and other advanced industrial economies have evolved a highly efficient and productive product manufacturing-and-delivery system that provides them with a cornucopia of products at relatively low costs. But inherent in that system are dependencies and expectations that the pandemic has called into question.”
In that article, under the subheading of Never Waste a Good Crisis, Shih offers a few bullet points toward better preparedness in the future.
- Plan to diversify sources for critical components and materials.
- Where diversification is not possible, reconsider what levels of safety stock or strategic inventory reserves are appropriate.
- Examine logistics bottlenecks and plan alternatives.
- Reconsider capacity-planning strategies for strategic commodities like medical supplies.
There isn’t much good to be said about pandemic living, but the COVID-19 situation has brought the domestic manufacturing of some important goods to the forefront of business news. As a matter of national security, the repatriation of the manufacture of certain strategic goods – be they medical, military, industrial or otherwise – should become an important agenda item for those who steer the economic and business policies of the United States.