Manufacturing Leads U.S. Economic Expansion

When Don Leavens, vice president and chief economist at the National Electrical Manufacturers Association (NEMA, www.nema.org), set the title for this year's economic discussion at ABB Automation and Power World in Orlando, the U.S. economy was in recovery mode. But although the presentation title should be changed from "It's Not Your Grandfather's Recovery" to "It's Not Your Grandfather's Expansion," the message is still the same: There is a new economic reality with a whole new set of growth factors than those that have been typical since World War II.

Since the end of 2010, the U.S. economy has officially moved beyond the recovery phase and into the expansion phase, the terms dictated by growth in GDP. Although some 5 million people are still unemployed, there is a higher level of output today than there has ever been in the history of U.S. production, Leavens said. "The implications for productivity are real," he added. "There's been an incredible surge of GDP over this period without adding these people back to the payroll."

Housing has typically led the U.S. out of recessions since World War II, but housing today remains in the dumps. Instead, manufacturing has led the current expansion. "This is very surprising to many economists," Leavens said, noting that we're in "uncharted territory."

The expansion has been driven primarily by rebuilding inventories. After a recession, the period of restocking the shelves as people begin to spend again usually lasts for the first six months of recovery, but this time the restocking has been sustained well into the expansion, and will likely continue for another four to six months. Part of the reason for this, Leavens said, is that the recovery was not as strong as it typically is. Consumers were slower to begin spending again. But now that they're finding out the economy actually has legs, manufacturers are having a harder time keeping some things on the shelves.

Another key aspect that makes the latest recovery different from past recoveries is that the U.S. is no longer the only economic engine driving it. "For years, we were the world's consumers, and everyone else was the supplier and consumer of capital. That's changed," Leavens said. "We've been asking for a long time for other countries to become drivers. Now we have other centers of economic activity that are helping to support our export markets."

"The idea that we're manufacturing less is absolutely false." Don Leavens, NEMA chief economist, on the continued contributions of manufacturing to the U.S. economy.The advanced economies are experiencing relatively small growth rates, while the larger growth percentages are coming from emerging nations such as China, India, Brazil and Mexico, as well as sub-Saharan Africa.

And what the U.S. is selling overseas is a lot of high-value technology, which contributes to economic advantage. "Our manufacturing sector is actually alive and well," Leavens said. "A lot of the demise you've heard about is in employment. But we will produce more than we've ever produced before. The idea that we're manufacturing less is absolutely false."

The stock market has helped people recapture their savings. "We lost about $17 trillion in household wealth, and we've recovered just over half of that," Leavens said. "Where it came from was the stock market."

Only just now the United States is beginning to see a turnaround in the employment situation. But the current increase of 200,000 jobs a month is not nearly enough to keep up with the kids graduating and looking for jobs, let alone the millions of people who had lost their jobs, Leavens contends. "We need at least 400,000 to 450,000 jobs a month to make a dent, and then it would still take years."

A major factor for continued job loss is another difference between the latest recovery and previous recoveries: GDP has not returned to its original trend line, as it usually does. Instead we have what Leavens expects is a permanent loss in GDP. Although 1981-83 saw our severest recession since the Great Depression, GDP bounced back to the original growth trend line. "Many of the layoffs we've seen now will be permanent layoffs," Leavens said. If people get reemployed at all, they will likely be in very low-wage positions. "We have many, many more months of this to go."

Leavens expects construction to be hurting for quite some time as well. "Industry is doing well, but the construction side is just languishing," he said. "We're not going anywhere on the housing sector." There are 6 million to 8 million homes tied up in foreclosure that haven't even hit the market yet. "It's tied to jobs. People don't buy a home if they're not employed, or if they think they're going to lose their job."