The State of Manufacturing (3rd Quarter 2006)

By October 26, 2006Economy

Business is Up With election day looming, the importance of every economic indicator that is released becomes elevated. Next Friday, the Commerce Department will release its advanced estimate of GDP growth in the third quarter, where the general consensus is that the ongoing slowdown in housing will pull down GDP growth below a 3 percent pace for a second-consecutive quarter (the economy grew by 2.6 percent in the 2nd quarter.)

If this estimate is accurate, then the manufacturing sector (which grew at a 4.3 annual rate in the 3rd quarter) will have outpaced overall GDP for 4-consecutive quarters. Manufacturing is driving the expansion. In fact, over the past year, manufacturing output has increased by 6.2 percent — the fastest 4-quarter pace in six years.

The fastest-growing manufacturing sector in the past year has been Aerospace, where output has surged 37 percent. This is followed by computer and electronics (18%), machinery (9%), petroleum products and electrical equipment (both up 8%).

In fact, of the nine largest manufacturing sectors (which account for 75% of manufacturing in America) seven reached record-levels of production in 2006, including food, chemicals, computers, fabricated metals, machinery, plastics and rubber products and miscellaneous manufacturing.

However, all is not sanguine. Of the remaining 10 major manufacturing sectors (which account for 25% of manufacturing in America), seven remain at production levels below their pre-recession levels of 2000 (paper products, electrical equipment, printing, furniture, wood products, textiles and apparel).

So a distinct dichotomy has developed in manufacturing. Sectors that are heavily export-engaged or produce capital equipment have benefited from dual recoveries in business investment and exports over the past several years. However, sectors that compete significantly with imports or are closely aligned with the slumping housing market continue to face very tough times.

While manufacturing production is now at an overall historic high, the recovery to-date has not been as strong as prior upturns. While some of this has to due with the fact that the manufacturing recovery was delayed for a year and a half and did not really begin until mid-2003, it is also true that not all sectors of manufacturing have experienced a recovery.

The challenge to lawmakers post-election is to enhance the competitive position of American manufacturing going forward. And a lot needs to be done. Domestic non-production costs continue to be way too high and have largely offset the incredible advances in productivity that have taken place in manufacturing in recent years. Let’s hope policy makers roll up their sleeves and tackle the major problems that continue to face American manufacturers in the 21st century.