For the fifth month on a row, U.S. industrial production contracted in December reflecting a number of challenges including trade tensions, dollar strength and a general slowdown in global production.
The Institute for Supply Management monthly gauge of factory activity fell to 47.2 for the final month of 2019, the lowest reading since June 2009. The ISM measure is a “diffusion index,” calibrated such that a level of 50 is neutral. Readings above 50 indicate expansion, while values below 50 reflect declines in output. By this and other measures, U.S. manufacturing has been in recession for some months now.
Yet headlines trumpeting “U.S. manufacturing activity falls to lowest level in a decade” were misleading at best. To be sure, the ISM index is the lowest in a decade. But real U.S. manufacturing output adjusted for inflation stands today just below the all-time record level set at the end of 2018 and near the previous pre-recession peak in 2007. Manufacturing real output has actually increased by 70% since 1987.
This is important, because while not as prominent as it once was, industrial production remains a significant component of economic activity and an important leading indicator of future growth. Manufacturing contributed nearly $2.4 trillion of added value to the economy in 2018, representing 11.4% of GDP. Roughly half of that production was exported to our trading partners. And accounting for ancillary activity in support of manufacturing from industries like transportation and distribution, it is estimated that each dollar of manufactured goods adds an additional $1.82 to the overall economy.
Manufacturing employment in the United States has no doubt declined markedly. On the heels of WWII, one third of the workforce was engaged in industrial production; today it is just 8.5%. The greatest factor driving the sharp reduction in employment is the relentless progression of automation and innovation that have reduced the direct labor content of goods produced here. It is also a natural consequence of national wealth; as a nation becomes richer, it devotes more resources to services and tends to “farm out” resource-intensive activities like manufacturing to less wealthy, less developed countries. Worldwide, manufacturing employment makes up 23% of the global workforce according to the World Bank.