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U.S. Manufacturing “Red Hot”? Dream On

Economics / US Economy Mar 02, 2011 - 06:20 AM GMT

By: Ian_Fletcher

Economics There is an article in the Huffington Post today which, before apparently being retitled, asserted in its headline that U.S. manufacturing is now "red hot," and whose text quotes a financial analyst (apparently approvingly) who asserts that it is.

This is based on a report from the respected Institute for Supply-Chain Management which reports that manufacturing output in the U.S. has expanded for 19 months straight.


Sounds like things are looking up, no?

Well, no.

As I explained in detail in this article, upticks in American manufacturing output, or even the fact that manufacturing output is at record levels (as it is), do not prove we have a healthy manufacturing sector.

The reason is that the appropriate standard for how much manufacturing output America should have is not "more than yesterday," which is what all the joy over reported increases implies.

Instead, the right standard is defined by the simple fact that Americans must either produce what they wish to consume, or produce something we can exchange with other nations that do produce it.

If we don't, we can only finance consumption by either a) selling of existing assets or b) going into debt. That's what a trade deficit is.

This implies that if America runs a trade deficit in manufactured goods (we do, and it's huge) and our exports of raw materials and services aren't big enough to cover the gap (they aren't), then our manufacturing output isn't large enough.

Forget raw-materials exports saving us. That idea drowns in the ocean of foreign crude oil we suck in every year--which causes us to run a deficit, not a surplus, in this sector.

Granted, we could hypothetically export more soybeans to pay for our imports without loitering around the global pawn shop. But our agricultural exports are a tiny fraction of the size of our deficit, so that's unlikely.

Our situation in services is a bit better, but our surplus in services is going down, not up, thanks to offshoring, which isn't going away.

Therefore, it's pretty much up to manufacturing to balance our trade, which gives us two choices: either export more Boeings and Caterpillars in return for all those Hyundais and BMWs, or produce more Fords and Chryslers here so we don't need to import so many Hyundais and BMWs.

Either choice would requires more American manufacturing output, so no, our manufacturing output isn't high enough.

And it certainly isn't "red hot."

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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