Is US Manufacturing in Decline?

America has a serious trade deficit with the rest of the world and is said to be falling behind in manufacturing.

The link between these two ideas is that as America imports more cheap goods, fewer goods are made at home. This decreases output and employment, which in turn reduces tax revenues and forms a vicious cycle.

Let's test this idea in two ways. Let's look at US manufacturing output and US total unemployment.

1) If the trade deficit is due to imported goods displacing domestic goods, then the data should show that manufacturing output is falling.

2) If imports are killing jobs, then the data should show unemployment to be rising.


1) This graph shows US output in two main industrial sectors, manufacturing and agriculture (you can see from the labels that they are combined with 2 other sub-sectors, which is standard practice in the UN system of national accounts)


It shows that US manufacturing output has been rising almost continuously since 1970, more than doubling in that period. The periods of slight decline are clear: the OPEC oil crises of 1973 and 1979; the early 90s recession; 9-11 2001.

The overall trend over the last several decades does not show a decline in manufacturing. Instead the average annual growth rate for the sector was 2.7%. This growth rate was just under the GDP growth rate of 3%, which confirms that manufacturing makes up a slightly declining share of GDP.

2) What about manufacturing employment?
Aren't imports, especially from China, killing US jobs?

This graph shows the US trade balance with China, which is also a good indicator of the total US trade balance. The shift is strong and clear: imports and exports were in balance until the early 1980s, and then the US fell into a large deficit. US exports to China grew rapidly, but imports from China grew even more.



This shift happened very soon after China was granted normalized trade relations with the US in 1980 (Most Favored Nation status).

But notice the US unemployment data in the graph. It generally fluctuates between 4% and 8%, but it also has a clear trend (dashed line). Between 1950 and 1980 trade with China was either non-existent or in balance, but the unemployment trend was rising.

Then the surprise: the trade deficit with China accelerates but unemployment falls!
It seems very unclear that importing cheap Chinese goods could cause unemployment. And in fact, the data suggest the opposite case. At the very least, it shows that cheap imports did not cause unemployment.

None of this implies that the trade deficit or cheap imports have had no effect. It is true that they displace firms and entire industries, which in turn causes localized economic decline and job loss. But over the entire US economy, output and employment in manufacturing are underestimated in the public perception.