From Institutional Investor:
Prophets of doom who believe U.S. manufacturing is on a path of irreversible relative decline were given further ammunition on Thursday after a well-watched survey suggested that output in the sector grew this month at its slowest pace in three years.
The preliminary “flash” survey of purchasing managers from Markit Economics also showed that backlogs of work started to fall in September — an ominous sign which could, if it persists, lead to lay-offs in workers and a further shrinking in U.S. manufacturing capacity.
Chris Williamson, Chief Economist at Markit, said growth had slowed to the point where “the manufacturing sector may have even acted as a slight drag on the economy in the third quarter.”
This suggests that manufacturing’s share of the U.S. economy has begun sliding again.
The greatest weakness is in exports, according to the survey, which recorded the sharpest decline in new export orders since October 2011.
U.S. manufacturers have fretted over the damage to exports caused by the euro zone crisis. The head of Illinois-based Caterpillar, the world’s biggest maker of earthmoving equipment, said recently that Europe’s economy may not show appreciable growth for another five years.
Closer to home, economists say manufacturing has been hit by tepid domestic demand, cooled by the prospect that the “fiscal cliff” will topple the U.S. into a double-dip recession by the end of the year. The fiscal cliff is the process by which spending is automatically cut and taxes are increased if there is no agreement between politicians over fiscal plans — exerting a massive drag on demand.
Optimists say the euro zone crisis and fiscal cliff are short-term problems, rather than factors that will depress U.S. manufacturing over the long term. Pessimists counter that structural political problems on both sides of the Atlantic and the daunting mathematics involved in running down huge existing government debts even if there is a sudden political solution, have the potential to keep the U.S. and euro zone fiscal crises, if indeed both qualify as such, alive for many years. They could, therefore, wreak havoc on business and consumer sentiment — and hence on U.S. manufacturing — for much of the next decade.
Long-term pessimists about the U.S.’ manufacturing base can point to the progressive slide in manufacturing’s share of total U.S. gross domestic product (GDP) over the decades. The share has fallen fairly steadily from 22 percent in 1980 to 18 percent in 1990 and 13 percent in 2010, based on United Nations figures that look at GDP on a value-added basis. This is part of a general decline across most of the rich world: The descent has been even faster in the U.K. and Italy, and of a similar order to the U.S. even in Germany and Japan. However, the latter two countries’ manufacturing sectors remain proportionately larger because the decline started from higher levels....MORE