The Death of Manufacturing

Briton Ryle

Posted December 7, 2015

Every month, the Institute of Supply Management (ISM) releases a manufacturing survey that’s supposed to show the health of the U.S. manufacturing sector.

This is considered important because manufacturing is supposed to be a reliable gauge of the U.S. economy as a whole. If we’re making more stuff, it means we’re buying more stuff. And if we’re buying more stuff, it means more people have jobs and are making money.

The ISM survey from November was bad. It showed the first outright contraction in manufacturing in 36 months. Contraction doesn’t mean slowing growth — it means actually contracting, as in getting smaller. The November ISM survey found that new orders were down 4%. Production was down 3.7%, and inventories were down 3.5%.

So you might think the economy is in bad shape — that people aren’t buying stuff and that the overall strength of consumer spending is weakening.

This has been a theme for some time. The U.S. manufacturing sector has been in decline for a couple decades now. All those greedy corporations sending good American jobs to China, it’s gutting the middle class and seriously weakening one of the pillars of the U.S. economy.

For whatever reason, we like to look back on the era when great American manufacturers like General Electric and Ford really did pay enough to support a middle-class American family. Even as late as 1978, the per-capita income in Detroit was about the same as it was in New York City. Today, Detroit is bankrupt, and New York thrives…

We like to say that this is what’s wrong with America, as if it’s some kind of choice to simply undercut the American manufacturing worker.

Was it a choice? Or was it the inevitable outcome of a developing world? Maybe the 1950s and 1960s were an anomaly. After all, Europe and Japan were devastated after World War II. China was in even worse shape due to Mao and his Cultural Revolution policies.

The U.S. economy was light-years ahead of pretty much any other economy in the world. The U.S. manufacturing sector had been put on steroids during WWII. It’s no surprise we enjoyed a powerful and self-sustaining manufacturing-working-spending cycle for a couple decades.

The U.S. had cheap natural resources and energy to push manufacturing. And the American worker was a true “value add” to these cars and washing machines. There was no competition from South Korea or Japan to Whirlpool. Ford didn’t have well-made Hondas to compete with.

The More Things Change…

Today, manufacturing is a low-margin, low-wage endeavor everywhere in the world. China may have helped build its own quasi-middle class with manufacturing, but even it is trying to move away from manufacturing as an economic staple.

The simple fact is that manufacturing cannot sustain a middle class. Manufacturing is a deflationary business. Workers get more productive and make more stuff per hour, and unit costs go down. Competition squeezes profit margins, and companies respond by squeezing compensation and benefits for the workers.

On December 1, the Washington Post published a look at new manufacturing jobs in the South. It’s a really disturbing picture. While you might think new jobs would be a good thing, they’re not. Not at all. Let me give some details from this article about a Chinese copper tube manufacturer setting up shop in Alabama…

The company is Golden Dragon Copper. And it wanted to start making stuff in the U.S. to avoid import tariffs. Five states and 62 towns submitted proposals to lure Golden Dragon Copper. 

In the end, Golden Dragon chose Wilcox County in Alabama. Why? Because Wilcox County offered it around $200 million in subsidies. The company got free land, tax breaks, free roads, and $2 million for worker training. Wilcox County even gave Golden Dragon $20 million to compensate it for the import tariffs it had already paid!

One machinist saw his pay “jump” from $11 to $11.25 an hour when he was promoted to manager. Golden Dragon says the average pay is $13 an hour. No matter how you slice it, that ain’t middle-class pay.

And this isn’t isolated. Nissan got $1 billion in subsidies from Canton, Mississippi and pays workers that get sent from the local temp agency $12 an hour…

The question is: Why? Why has the manufacturing sector gotten so bad?

Rolling Over for the Corporations

I will admit that I used to think the death of manufacturing — or at least the death of its ability to support a middle class — was an inevitable outcome of globalization. Now, I’m not sure.

Did you know that in 1936 and 1937, Congress passed the Robinson-Patman Act and the Miller-Tydings Act, both of which were designed as anti-chain store laws, to keep giant stores from using discounting and market power to get extract discounts from suppliers?

Today, Wal-Mart is the king of forcing its suppliers to cut prices.

As late as 1966, the Supreme Court blocked a merger of two grocery store chains in Los Angeles because the merger would have given them more than 7.5% market share (7% had been a standard). Today, Wal-Mart has 50% market share in around 40 metro areas…

Turns out antitrust laws were all the rage in the early part of the 20th century. As one senator said in 1950, as he introduced the Celler-Kefauver Act:

…the swallowing up of… small-business entities transfers control from small communities to a few cities where large companies control local destinies. Local people lose their power to control their own local economic affairs. Local matters are within remote control.

In 1952, Senator Hubert Humphrey said:

Do we want an America where the economic marketplace is filled with a few Frankensteins and giants? Or do we want an America where there are thousands upon thousands of small entrepreneurs, independent businessmen, and landholders who can stand on their own feet and talk back to their government or to anyone else?

You may remember the Glass-Steagall Act of 1933, made into law to prevent “too big to fail” banks. That antitrust law was repealed in 1999. It only took nine years for banks to get so big they collapsed.

In 1976, Congress repealed the Miller-Tydings Act. Now we have dominant chains like Wal-Mart and Amazon. The owners of these behemoths are billionaires, while workers make $11 an hour. 

It sure seems like Congress used to look out for the small American businessman. Now, they’re just in the pockets of huge corporations.

If you want to know why American manufacturing has hit the skids, maybe it’s time to like at antitrust laws instead of globalization.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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