No, American Manufacturing Isn't Really Booming

Employment in manufacturing peaked in the U.S. in June 1979, at almost 19.6 million jobs. This September, that was down to 12.3 million (these numbers are seasonally adjusted).

That fall in employment tells us a lot about today's American political and economic life. It helps explain why regions that were heavily reliant on manufacturing have been struggling so much, why older Americans without college degrees are so cranky, why labor unions are so weak. But does it mean that American manufacturing is in decline?

An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output has actually kept growing. A recent example, from Binyamin Appelbaum of the New York Times:

Because of automation, there are far fewer jobs in factories. But the value of stuff made in America reached a record high in the first quarter of 2016, even after adjusting for inflation. The present moment, in other words, is the most productive in the nation’s history.

He's not making that up. The relevant data don't go back as far as the jobs numbers, but here, courtesy of the Bureau of Economic Analysis, is real U.S. manufacturing output since 1997 (measured in terms of value-added).

Current manufacturing output is 41% higher than back in the happy days of 1997. That doesn't sound like a decline!

There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., points out, about half of the growth in U.S. manufacturing output since 1997 has been in just one sector: computer and electronics manufacturing.

If it weren't for computers and electronics (which includes semiconductors), manufacturing output would still be well below its 2008 peak and only 21% higher than in 1997 (first-quarter 2016 numbers aren't available for these narrower industry categories, but it's unlikely that one more quarter of data would make much difference here).

This of course seems a little like saying that, if it weren't for John Lennon, the Beatles wouldn't have been very good--perhaps true, but of dubious relevance. Except that, in this case, the way those computers-and-electronics numbers are arrived at is worthy of a closer look. The key factor is the adjustment for inflation -- or in this case, deflation. Here are the value-added numbers for the industry in 2009 dollars and in unadjusted current dollars.

Without adjusting for deflation, value added in computer and electronics manufacturing is up 45% since 1997. With the adjustments, it's up 699%! What's happening here is that the Bureau of Economic Analysis has been trying to account for vast improvements in the processing capacity and thus quality of computers, semiconductors and other electronics equipment. I am of the opinion that government statisticians should make adjustments for quality improvement in calculating inflation. But if you're trying to assess the health of U.S. manufacturing, these tweaks may actually confuse more than they enlighten. Writes Houseman:

Such quality adjustment ... can make the numbers difficult to interpret. Because the computer and semiconductor industry, though small in dollar terms, skews the aggregate manufacturing statistics and has led to much confusion, figures that exclude this industry ... arguably provide a clearer picture of trends in manufacturing output.

As it stands now, those trends don't look impressive. U.S. manufacturing output has held up a lot better than manufacturing employment. But it definitely isn't booming.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

By Justin Fox