The state of American manufacturing is a big deal. For a country blessed with abundant natural resources, it was America’s ability to churn out finished goods that fostered a prosperous middle class and made it the wealthiest country in the world.
And now that average American income is stagnant, record numbers get government assistance, and roughly 10 million people have simply dropped out of the workforce, we look to manufacturing as the obvious fix.
Some will tell you that U.S. manufacturing is not the disaster it’s often made out to be. They will show you charts like this from Bloomberg:
Manufacturing output is back to pre-crisis levels. We are to assume that as the economy strengthens and grows, so will the amount of goods we produce.
Of course, charts like this don’t resonate with the American worker who’s seen his or her job shipped overseas or been replaced by a robot. To them, this statistic — that the number of manufacturing jobs has fallen from 17.2 million in 2000 to 12.3 million in 2015 — is the only one that matters.
Who cares if manufacturing output is doing well if it’s not leading to a better life for millions of Americans?
There’s an unassailable logic at work here. That’s why Hillary’s “America’s Already Great” rally cry was really a slap in the face to so many. “It’s not great for us,” they said with their votes for Donald Trump’s promise to “Make America Great Again.”
Of course, a good slogan is one thing. Turning a few catchy words into real paying jobs is quite another…
What’s the Plan?
Trump has said that bad trade deals and bad tax policy are the main culprits for manufacturing job losses. I can’t say he’s wrong on this. As the highest of all the G20 countries, U.S. corporate tax rates are too high. Perhaps if taxes were lower, the need to find cheaper labor overseas to grow profits wouldn’t be as demanding (though the notion that U.S. corporations would simply ignore a way to boost profits is pretty naive).
And I well remember H. Ross Perot’s 1993 warning that NAFTA would create a “giant sucking sound” of jobs crossing the border, leaving the U.S. for Mexico. The U.S. has lost jobs to Mexico. Our trade deficit with that country shows it. But in the big picture, trade with Mexico is not as lopsided as it’s made out to be…
Clearly, the biggest trade problem is China (funny I don’t hear much about our trade deficit problem with Germany). And the U.S. already does slap tariffs on Chinese goods like steel and solar panels when they are being dumped on the market.
Tariffs in the form of a border adjustment tax are one solution that’s being kicked around the White House right now. But if they are enacted, pretty much every retailer in America immediately turns unprofitable. There’s got to be a better way…
So let’s ask the question: what do you do when a business is struggling? Do you cut advertising budgets and stop upgrading equipment to save money? Or do you invest more in the business to make it better?
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A Solid Investment
What if you could invest a dollar in a business and get a return of $17.90 in sales growth? You’d probably do that all day, right?
Well, there’s a government-sponsored group that does just that. Created by Ronald Reagan in 1988, the Manufacturing Extension Partnership (MEP) was created to help American businesses compete against the Japanese. The MEP helps companies use new technology, etc. to become more efficient.
Last year, the MEP said it worked with over 25,000 businesses, helped generate $9 billion in new sales and $1.4 billion in cost savings, and helped create and save over 86,000 jobs.
The Washington Post ran this success story the other day:
Denny Dotson, the chairman of Dotson Iron Castings in Mankato, Minn., said his company probably would have died without the program’s help.
“They helped us and so many manufacturers stay competitive in today’s international climate,” he said. “We grew.”
About 12 years ago, as American trade with the rest of the world intensified, Dotson knew his firm needed to adapt to avoid layoffs. The family-owned business took about eight weeks to finish a casting order.
MEP stepped in, Dotson said, and showed the business how to reduce waste in the manufacturing process. Five years later, it was wrapping up orders in eight days.
As productivity improved, so did business — and Dotson hired about 25 more machinery workers, paid an average of $21 an hour. For a business of 140 workers, that represented significant growth.
“Without that,” he said, “we would not have been able to succeed as an iron foundry in the United States, I’m convinced.”
Now, the MEP is a public-private partnership. It gets one-third of its funding from the government. Last year, that amounted to $143 million. The rest of the budget is covered by state and local governments and client fees.
It’s reported that the MEP budget would be cut under the Trump administration’s budget. While it’s clear that government spending is out of control, the MEP sure seems like one area where you’d want to spend more, not less.
Until next time,
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.
