State of Manufacturing in the US

I receive many great emails throughout the day with fantastic economic data and indicators. A friend in the northwest of the US sent me this from his own daily email flow:


"I was putting some data together from the BLS website. This is the number of manufacturing jobs in the US over time. They changed the way they presented the data in 2003 and I think moved some jobs that used to be called manufacturing to somewhere else. So there is a weird drop then. But still, the trend is amazing as the economy and population has grown a ton over this time. A lot of this is the big 3 auto companies, but still. Manufacturing used to employ like 7% of the US population and now it is 3% or something like that. It has gone from 14% of jobs to 8% of jobs. Anyway, I thought you would think this was interesting data. Easy to see why cities in the Midwest are hurting so badly. Population keeps leaving as the jobs leave. Or cities like Detroit just get destroyed with unemployment, crime, etc. Interesting to think what will happen. Will it go to zero? Will this reverse if we get rid of unions? This just cant be good for the US economy."





(You should just be able to click on the graph to see it more clearly.)


I'll take this post to also add a book to the book list. "Running Money: Hedge Fund Honchos, Monster Markets and my Hunt for the Big Score" by Andy Kessler (http://www.amazon.com/Running-Money-Honchos-Monster-Markets/dp/0060740655/ref=pd_bbs_3?ie=UTF8&s=books&qid=1236314094&sr=8-3) is a tale of Mr. Kessler's day to day challenges starting and running an investment firm, but also of his views on technology, product cycles, and the economy in general. It is easy to read and I recommend it.

The reason I bring this book up in reference to the above email and clear deterioration in manufacturing jobs in the US, is because Mr. Kessler spends time outling his thoughts on where those jobs have gone. I believe his answer would be somewhere along the lines of who cares?

He essentially believes that the US has outsourced a lot of the low margin heavy lifting, i.e. manufacturing. However, the US makes up for that by earning higher margins on the "intellectual property" (IP) that goes into the products that then come back into the US. The US consumer benefits due to increased efficiency and product income, as well as income redistribution through the stock market to things like retirement savings, etc.

In other words, some computer scientists in the States develop a microprocessor for which a Chinese computer manufacturer will pay $100 each (note these figures are just for illustrative purposes). There is no export from the US because the US company will license the technology. So for every $100 microprocessor the computer manufacturer pays the US company to license the US company earns 80%, or $80. The Chinese company integrates the microprocessor into the computer and exports the computer to the US for say $1,000 and earns a 5% margin, or $50.

In this transaction the American trade deficit is either $900 or $1,000 depending, I assume, on repatriation. However, the American company has earned 60% more on the transaction, and not only that but the American public is either directly or indirectly (through retirement plans) invested in the microprocessor company, so as it grows profits, Americans are in theory becoming more wealthy.

So does it make sense manufacturing jobs are being pushed offshore? Yes it does. Does it matter? It matters if Americans as a whole cannot innovate and grow businesses the way they have throughout America's brief history. Do I worry about the fact in itself that manufacturing jobs are decreasing? No, because I agree and have witnessed the above thought process in practice. It is also interesting to note the authors' numbers - 7% to 3%. Big percentage difference, relatively small on an absolute basis.

-2outof4