Martin Neil Baily is a senior fellow in Brookings’s Economic Studies Program and holds the Bernard L. Schwartz chair in economic policy development. Bruce Katz is founding director of the Metropolitan Policy Program at the Brookings Institution.
Amid continuing mixed signals about the economy, one notable bright spot is the revival of U.S. manufacturing. The surprising strength of this once-battered sector holds promise for reenergizing the U.S. economy overall, and despite troubles in Europe, its new vigor may provide a boost to the global economy. In the latest “How We’re Doing” Index, a team of scholars at the Brookings Institution looked at the past five quarters of economic data to explore how growth in manufacturing is helping to support the nation’s fragile economic recovery — with a particular emphasis on key metropolitan areas in a 21st century dominated by high-tech industries.
The latest broad economic reports have been somewhat disappointing. The economy grew at a 3 percent rate in the fourth quarter of 2011, but the advance estimate for the first quarter of 2012, 2.2 percent, was lower than expected. Monthly jobs growth averaged more than 250,000 positions from December through February, but the increase slowed to 154,000 jobs in March and the economy added only 115,000 positions in April. The unemployment rate is still inching downward, but it remains above 8 percent. Stronger payroll growth will be needed for continued improvement.
Because households contribute about two-thirds of U.S. economic demand, the fairly strong pace of consumer spending — it rose 2.9 percent in the first quarter — is encouraging. Unfortunately, disposable income is growing more slowly than consumption, a trend that must change if consumers are to keep spending. If U.S. employment gains expand, incomes are likely to rise and the fragile recovery will strengthen. But faltering employment growth could still trigger a self-reinforcing cycle of weakness. The chances are good that the U.S. economy is on a self-sustaining path of recovery, but it could be derailed, notably by a worsening crisis in Europe or conflict in the Middle East that pushes up oil prices.
Amid all this uncertainty, U.S. manufacturing is returning. The industry was knocked to its knees by the recession, but it should not be counted out. Some 16,000 manufacturing jobs were added in April — a weaker number than those of the previous two months but still an increase. Manufacturing employment, output and exports are headed in the right direction: In April, the number of U.S. manufacturing jobs was up 489,000 from the January 2010 low of 11.5 million. The Institute of Supply Management’s manufacturing index has shown 33 consecutive months of expansion.
Overall, the U.S. economy remains strongest in advanced manufacturing sectors with high technological and skills requirements, such as aerospace, industrial and energy equipment, automobiles and medical devices. These types of manufacturing are prominent in several metropolitan areas that were hit hard by the recession but are recovering, thanks to the sector’s sharp rebound. Detroit benefited greatly from the revival of the auto industry after the federal rescue of General Motors and Chrysler in 2009, and it has added jobs rapidly over the past year. Firms in the Cleveland and Charlotte areas have ramped up production to take advantage of the shale-gas boom sweeping much of the country. By contrast, manufacturing employment has grown more weakly or continued to slide in services- or government-oriented economies such as Las Vegas and the Washington region. A new Brookings report on trends in the industry shows how manufacturing employment has retrenched toward more specialized areas of the Midwest and Northeast after three decades of steadily southward movement.
Manufacturing accounts for 12 percent of U.S. gross domestic product and less than 10 percent of national employment; alone, it cannot power the economic recovery. Yet manufacturing accounts for 70 percent of private-sector research and development in the United States. High levels of investment in R&D, the potential to reduce the trade deficit and the ability to produce good jobs for middle-skilled workers merit the increased attention the sector is receiving after decades of policy drift. The administration, for example, has included a manufacturing initiative of roughly $1 billion in its fiscal 2013 budget, and notable plans have been proposed in Massachusetts and in Chicago.
Supporting basic science and technology development, providing advanced infrastructure and financing to help more manufacturers export to growing foreign markets such as East Asia and Latin America, and building a manufacturing workforce equipped with quality science, technology, engineering and math skills are essential for long-term economic recovery.