How meaningful is manufacturing's rebound?

For the tenth month in a row, economic activity in the manufacturing sector expanded, according to the May 2010 Manufacturing ISM Report on Business. In fact, 16 of 18 sectors within manufacturing reported growth, including paper and wood products, as well as electrical equipment and food, beverage and tobacco products.

Several factors fed into the increase. The new orders index was at 65.7, the same as April, but up from 61.5 in March. The employment index inched up to 59.8 in May, the sixth month to show growth. Similarly, both the order backlogs and new export orders indices showed slight increases in May.

That’s not to say that all is rosy. Inventories contracted in May, although they remain at a level consistent with expansion. While the Prices Index dipped to 77.5 in May, down from 78 in April, anything above 49.3 generally is consistent with an increase in manufacturers’ prices. In fact, 60 percent of respondents indicated that they paid higher prices during the month.

So, if manufacturing activity is expanding, does that mean the economy overall is, in fact, recovering? To be sure, manufacturing’s role in the economy has declined for the past few years. Its contribution to GDP dropped by 5.9 percent in 2009, on top of a 2.5 percent drop in 2008, according to the U.S. Bureau of Economic Analysis. However, these drops follow average annual increases of 2.3 percent between 1998 and 2002, and 4.6 percent between 2002 and 2007.

And, while the perception prevails that manufacturing is dying a slow, protracted death, that’s not entirely accurate. According to information from the National Association of Manufacturers (admittedly, not an impartial source, but they’re working with data from the BEA), manufacturing’s share of GDP has “kept pace with the overall economy,” since the late 1940s. Between 1947 and 2008, both manufacturing’s GDP, or the value it brought to the economy, along with overall GDP, increased about seven-fold.

To be sure, employment in the sector has fallen. In January 2000, about 17.3 million people were employed in manufacturing; that fell to 11.6 million in January of this year, according to the Bureau of Labor Statistics. However, the raw numbers may overstate the drop, says Ernie Goss, professor of economics at Creighton University. That’s because of the growth in outsourcing. When a manufacturer outsources, for instance, its maintenance department, the shift appears in the employment statistics as a loss of manufacturing jobs, he says. However, the number employed directly in manufacturing hasn’t actually changed.   

Even so, manufacturing employment is likely to continue to decline, Goss says. However, “the primary reason for this reduction will be productivity growth – not outsourcing,” he adds. In fact, the BLS’ productivity index for manufacturing has risen steadily over the decade, increasing from 139 in 2000 to 184 in 2009. 

That’s good news, of course. However, given the reduction in manufacturing employment, the sector’s contribution to this wobbly economic recovery will be limited.