With 2019 halfway over, it’s an excellent time to take stock of American manufacturing: has it continued with the gains it made over the course of 2018? Data indicates otherwise: the manufacturing recovery has actually weakened this year. What do the data tell us about the slump, and what are the implications of that slump for the broader economy?
Declining Job Rates
A strong indicator of growth in a sector, and of that growth being shared throughout the economy, is the number of jobs that sector adds over a given period of time. In this regard, 2018 was a banner year for the manufacturing industry, with manufacturers adding more jobs in 2018 than they had in the previous two decades.
But 2019 has been a different story. Since January of 2019, the sector has added just 28,000 jobs, compared to 126,000 in the first six months of 2018. The monthly job creation rate in manufacturing now badly trails the rate achieved in both 2016 and 2017. In June, factories delivered their best employment month since January, but this uptick does not allay underlying concerns about this critical aspect of the U.S. economy. The sector’s growth has fallen off in other respects as well: there has been a notable dip in production in 2019, and a fall in exports of most industrial supplies, cars, and consumer goods (from March to April 2019, according to the latest Bureau of Economic Analysis data).
The Midwest, whose industrial past and present has been so important both for the region’s workers and the nation’s economy, has been hit hardest by this jobs drop. By mid-2016, the critical manufacturing states of Michigan, Ohio, and Wisconsin were leading the country’s post-Recession manufacturing recovery. But since then, Ohio (only 16,000 jobs added since 2017) and Wisconsin (nearly unchanged since 2016, with just 2,000 more factory positions) have fallen out of the top ten states, in terms of sectoral job gains, altogether. Manufacturing growth in Michigan has slowed as well, with the state falling behind California and Texas. As cited in a recent New York Times article, this phenomenon has particularly played out in smaller-sized communities in Michigan, Wisconsin, and Pennsylvania.
Top Ten States for Manufacturing Growth
Source: Authors’ analysis of Bureau of Labor Statistics data (through May of 2019).
Manufacturers themselves are starting to express pessimism. The widely cited ISM index, which measures manufacturing owners’ confidence in their own business prospects, has been declining throughout this year, from its peak of 61 percent last August to 52 percent this June. This hovers just above the 50 percent mark, which draws the line in the index between indicating growth for the industry or decline. Furthermore, in a quarterly survey fielded by the National Association of Manufacturers, the percent of manufacturers who were optimistic about their company’s outlook dropped from 89.5 percent in the first quarter of 2019 to 79.8 percent in the second quarter.
Signs of a Broader Economic Decline
Which policies have been contributing to this year’s decline in manufacturing? And, knowing that they’ve been encouraging a decline in this sector, how have they been affecting the economy as a whole?
A great place to start in discussing policy’s impact would be Lordstown, Ohio, where General Motors’s assembly plant rolled out its last Chevy Cruze in March, shutting its doors thereafter. About 1,400 people lost their jobs. These employees, and many industry advocates, have pointed to the 2017 Tax Cuts and Jobs Act as a key factor. This piece of legislation was championed by the Trump administration as a way to bring factory jobs back to the United States, chiefly by lowering the corporate tax rate. In fact, it gave General Motors ample incentive to move production outside the country: the corporation has decided to produce its new Blazer auto model in Mexico, rather than retool the Lordstown plant so that it could do the work. As the Institute on Taxation and Economic Policy explains, in addition to the corporate tax cut, the legislation lowered the tax rate on offshore profits held as cash, from 35 percent to 15 percent. Under the previous tax law, profits were taxed at the same rate whether they were earned overseas or in the United States. Now, under the new so-called territorial system, companies will only have to pay a minimum tax of 10.8 percent on new overseas profits, compared to a tax rate of 21 percent on U.S. profits.
Recent changes in U.S. tariff policies have also been a factor. Earlier this year, the concern most voiced by manufacturers was how to find more skilled workers; now, the concern is trade uncertainties. This shift in concern mirrors the Trump administration’s shift from targeted tariff policies that protected American steel and aluminum—an approach with origins in long-standing complaints from business and labor interests in the sector—into broad national tariffs that cover not particular products, but international trade in general. It’s one thing for users of steel and aluminum to adapt to higher prices; it’s quite another for closely integrated supply chains, in auto and machinery manufacturing for example, to not only account for higher prices across the board, but also to redesign the logistics of their entire supply chains.
Several economic authorities, both at home and abroad, have called out the strain of these tariff policies as harbingers of a worldwide slowdown. For months, China has seen a significant slowdown itself, with Chinese workers experiencing the impact of plant closures as well. And European Union leaders are seeing indications that the feared union-wide slowdown is about to come true: the International Monetary Fund (IMF) reduced growth forecasts to well below 2 percent in March of this year. Citing tariffs as a major reason, the IMF also reduced the growth forecast across the global economy to below 3.5 percent a month later in April. Meanwhile, our own Federal Reserve Bank has recognized the possibility of a slowdown, curtailing the interest rate increases it had set to come out later this year.
Out of the months that have posted the lowest five job-creation figures in the past five years, two of those months have occurred since this February.
The Fed’s interest rate deliberations aren’t the only indicator that a slowdown in national economic growth is in the offing. According to the Bureau of Economic Analysis, private business inventories grew more in the first quarter of 2019 than in the first three quarters of 2018 combined. Additional purchasing is likely being done in anticipation of the price tag increases that could follow any new tariffs, meaning that GDP growth is likely to fall from its solid 3 percent gain from the first quarter of 2018. Out of the months that have posted the lowest five job-creation figures in the past five years, two of those months have occurred since this February. And while corporate profits have soared, average year-over-year wage growth for working Americans has still only reached around 3 percent, well below economists’ targets and gains in previous periods of economic growth. Indeed, the most recent Labor Department report indicated that wage growth has fallen off: whereas February’s report indicated a 3.4 percent growth since the previous February, this month’s report logs a wage growth of 3.1 percent since the previous June. In an economy heavily dependent on consumer spending, few things are as important as maintaining the momentum of wage growth. (And to make things more complicated, the simplest policy fixes for slow wage growth, like raising the federal minimum wage, remain a point of contention).
June’s manufacturing job numbers indicate some potential for strength in the job market, after a slow spring. But one month of strong numbers aren’t enough to annul overall worrying indications about the health of the country’s—and the world’s—economy in the near future.