Thanksgiving always puts me in a good mood, so I found myself looking for some un-ballyhooed and actually plausible reasons to be optimistic about American domestic manufacturing. (As readers know, there’s no shortage of ballyhooed, implausible reasons.) And I came up with a small one: defense spending, where a modest comeback appears to be heralded in today’s government data on durable goods orders.
Two solid reasons can be cited for this plausibility. First, defense spending helped prop up domestic industry during the recession, but this effect has faded notably during the recovery. Second, due largely to burgeoning international crises, pressures for more defense spending are likely to rise going forward, and bolster manufacturing output.
At the same time, the effects are likely to be pretty modest, since as of 2011, according to the Federal Reserve, defense goods production represented only a little over three percent of total inflation-adjusted manufacturing output.
But don’t forget – defense manufacturing could well be concentrated in advanced manufacturing, so the innovation effects, especially over time, could be considerable. Here’s what the numbers say so far:
After inflation, defense output (along with production in the space sector) fell during the recession. But it fell much less adjusting for inflation than manufacturing overall: 6.90 percent versus 20.48 percent. During the recovery, these trends have reversed sharply. Since its technical beginning, in mid-2009, real defense output has increased by 15.80 percent, but real overall manufacturing output is up by 27.55 percent.
Yet the recession was so punishing for American manufacturing in general, that overall real manufacturing is only up 1.42 percent since its technical onset (in December, 2007). Real defense production is 7.81 percent higher.
Defense’s relative slowdown is especially evident from the latest year-on-year inflation-adjusted production figures. For manufacturing overall, such real output has accelerated from 1.64 percent in January to 3.74 percent in October. For defense, this production has increased only from 0.28 percent in January to 0.79 percent in October. And even though year-on-year overall manufacturing production growth has slowed in real terms since July (when the automotive sector went bananas), so has output growth for defense.
But another, more forward-looking set of indicators may be painting a brighter picture for defense manufacturing. Its new orders and those of manufacturing overall have tracked each other quite closely since the recession began. Lately, however, defense new orders have been showing a bit more vigor.
On a year-on-year basis, between 2012 and 2013 total manufacturing orders (with defense) grew faster on a year-on-year basis than non-defense orders in only two of the nine months between January and September. (These figures are not adjusted for inflation.) Total orders grew faster only in September, and in August, they grew at the same rate.
Between 2013 and 2014, total manufacturing orders out-grew defense orders year-on-year for three of the nine months between January and September. Moreover, if we measure 2014 to date, overall manufacturing orders are up faster cumulatively (2.09 percent) than non-defense orders (1.63 percent). October data is only out in a preliminary form (and only for durable manufactures), but they reveal that, month-to-month, total orders rose by 0.4 percent, but non-defense orders fell by 0.6 percent. In fact, non-defense order change has trailed overall manufacturing order change for the past three months.
Please don’t get me wrong: I’m not necessarily advocating higher defense spending. But it does seem increasingly clear that, especially if the manufacturing slowdown that began in August continues, the defense sector is poised to provide a lift.