Tags

, , , , , , , , , , ,

RealityChek has looked at U.S. domestic manufacturing’s health through the lenses of employment, wages, output, trade balances, and productivity. All have revealed a pretty dismal picture these days. But since manufacturing renaissance claims still persist, here are two other indicators that strongly suggest that the sector is hardly in a golden age – the numbers of manufacturing establishments and firms in America.

Among those who closely follow the sector, it’s widely recognized that there’s been major shrinkage in the number of manufacturing establishments in America since the early 1990s. But that number has always been a little fuzzy, because “establishment” can mean “individual facility.” Since manufacturing’s efficiency has kept growing for most of this period, fewer establishments could partly, or mainly, mean that companies are simply closing factories or other assets that are no longer needed to maintain or even increase output levels.

Luckily, surfing around U.S. government data sites today, I’ve found two statistical series that allow more definitive conclusions to be drawn. The first comes from the Labor Department, and consists of figures on establishment births and deaths by industry that are part of the Business Employment Dynamics data I used recently to shed new light on manufacturing employment. As suggested by the name, establishment “deaths” don’t come back to life whereas “closing” decisions can be temporary for a variety of reasons – including seasonal fluctuations in demand and work flow. Deaths can still stem from greater efficiency, too, but logically more of them reflect declining fortunes in the sector.

The first full year for these figures is 1994, and the most recent numbers are from the first half of last year. What they show is that 67,000 more manufacturing establishments died than were born during this period. The Great Recession of course took a major toll. Between 2007 and 2009 alone, 18,000 of these deaths took place. But domestic manufacturing has also been in the red in this regard ever since. And although establishment deaths actually have been at historically low levels in the last few years (bottoming at 21,000 in 2012 and 2013), so have establishment births. Moreover, they sunk to 20,000 in 2009 and have remained there ever since.

Just as important, establishment deaths have exceeded births throughout the current recovery. To be sure, the situation was even worse during the last recovery. But that expansion of course turned out to be a humongous economic bubble, and no one was claiming that American industry was in the best of health then.

A Census Bureau series with birth and death figures at the firm level within manufacturing tells an even grimmer story. The death of companies is much less likely to be a sign of greater efficiency than even the death of establishments, since dead companies aren’t going to be reopening their facilities. These Census statistics date from 1977 and run through 2013. They show that in that first data year, 259,982 manufacturing companies were in operation in the United States. These ranks peaked at 302,306 in 1996, but as of two years ago, stood at only 230,708. And as with the establishment births and deaths numbers, the number of companies kept on shrinking once the last recession ended (in 2009) – from 250,707.  And shortly afterward the manufacturing renaissance was first forecast.

There is one possible mitigating factor here. A fascinating article in IndustryWeek last June called attention to the growing trend of consolidation in manufacturing. Manufacturing firms merging with or acquiring each other, or combining with non-manufacturing firms, would obviously reduce the number of industrial companies without indicating any loss of dynamism or competitiveness.

According to numbers presented by author Michael Collins, from the late 1940s till the onset of the last recession in 2007, ownership concentration in manufacturing has increased more than seven-fold. And these concentration levels really began taking off in the mid-1980s, once changes in financial regulation fostered a wave of corporate takeovers by greatly encouraging the use of debt and leverage. Collins doesn’t present any such data for this recovery, but it’s likely this trend has continued given how the Federal Reserve’s easy money stimulus policies have kept interest rates at historic peacetime lows.

So the shrinkage in manufacturing firm numbers due to business failure needs to be teased out from the number due to consolidation, and as a result, these decreases could still be consistent even with claims of an historically healthy U.S. manufacturing sector. But that’s a case that the manufacturing renaissance crowd still needs to make.

Advertisements