The manufacturing sector has long played a major role in the economic health of the United States, but many of the conditions that made it a successful industry in the past are being offset by a new series of challenges, according to a new report.

Increasing expenses from corporate taxes, health care and pension costs, government regulations and energy pricing are all significant concerns for today's manufacturers, according to The Facts About Modern Manufacturing, a report released this month by The Manufacturing Institute, the Manufacturers Alliance/MAPI and the U.S. Department of Commerce.

The U.S. manufacturing sector remains the largest in the world, having generated $1.64 trillion in goods in 2008, the report says. Over the last 10 years ending in 2008, manufacturing value added has increased 22 percent. When adjusted for price changes, manufacturing gross domestic product (GDP) has kept pace with the overall U.S. economy for the last 61 years, the report asserts. In current dollars, manufacturing GDP accounted for 11.5 percent of total U.S. GDP last year.

According to the Modern Manufacturing report, 57 percent of all U.S. exports are in the form of manufactured goods, and since 2000, capital goods firms have increased their international sales by 65 percent.

"The facts clearly illustrate that manufacturing is central to America's economic future," Emily Stover DeRocco, president of The Manufacturing Institute, the research and education arm of the National Association of Manufacturers, said in an analysis of the study.

"America's global market share of manufacturing has held steady at around 22 percent for 30 years. Productivity growth is higher in manufacturing than in other sectors, holding down inflation and contributing to a higher standard of living. And one in six U.S. jobs is in or directly tied to manufacturing, which still pays premium wages and benefits," DeRocco added.

Although the manufacturing sector constitutes a sizable portion of domestic output and employment, as well as global market share and trade, it is facing numerous challenges to its competitiveness and operational efficiency. For example, U.S. global market share for exports fell from 19 percent in 2000 to 14 percent in 2007, while China's share rose from 7 percent to 17 percent over the same period.

"Rising costs...are hampering our manufacturers' competitiveness in a global, interconnected marketplace. Non-production costs add almost 18 percent to U.S. manufacturers' costs relative to our major trading partners," DeRocco said.

In its analysis of the report, the Manufacturers Alliance/MAPI outlines the following four hurdles for manufacturing competitiveness, investment and job creation:

• Corporate Tax Rates — The U.S. currently has one of the highest corporate tax rates among its major trading partners, second only to Japan's. At a 40 percent statutory rate, corporate taxes have not kept pace with falling levels in other developed countries, the report claims.
• Health Care Costs — Manufacturers struggle under U.S. health care costs, which are some of the most expensive in the world relative to the size of the country's economy. According to the report, at the current rate, one in five dollars would be spent on health care by 2015 unless a more cost-effective solution is found for businesses.
• Regulatory Compliance Costs — Manufacturing companies spend an estimated $162 billion each year to meet economic, environmental and workplace safety regulations, which is the equivalent of a 12 percent added tax. Many businesses advocate for a less expensive compliance solution.
• Energy Prices and Availability — Manufacturers consume roughly one-third of America's power supplies. Because most of this energy comes from fossil fuels, particularly natural gas, rising fuel prices have elevated production costs as well. Improving the availability of secure, reliable and affordable energy is one of the top priorities for manufacturing.

Although U.S. manufacturing is still the largest and most profitable manufacturing sector in the world, the risks posed by rising expenses may hinder its continued growth, necessitating a shift in industry focus. Developing strategies to cope with these challenges is likely to become a top concern.

"All of these challenges underscore how manufacturing in the U.S. is at a crossroads, and the policy choices made today will shape the future of manufacturing in our country," DeRocco notes. "Addressing the underlying pressures that make it difficult to manufacture in the U.S. and making our economy more competitive should be a top priority for policymakers as the nation struggles to recover from the recession and create good jobs."

Resources

The Facts About Modern Manufacturing
The Manufacturing Institute, Manufacturers Alliance/MAPI and the U.S. Department of Commerce, Oct. 6, 2009

...U.S. is World's Largest Manufacturing Economy but Faces Many Risk Factors
Manufacturers Alliance/MAPI, Oct. 6, 2009