The Latest PMI Data: Can We Finally Get Serious About U.S. Manufacturing

By SBE Council at 2 October, 2024, 11:53 am

by Raymond J. Keating -

While certain manufacturing industries in the U.S. thrive, the overall manufacturing sector has been in stagnation for more than a decade-and-a-half, and that means it's been in relative decline.

The latest manufacturing PMI from the Institute for Supply Management served up more troubling news on manufacturing. Specifically, "Economic activity in the manufacturing sector contracted in September for the sixth consecutive month and the 22nd time in the last 23 months…"

As for particular sectors, it was reported that 13 of 18 major manufacturing industries experienced contraction in September. The growth areas were:

Petroleum & Coal Products

Food, Beverage & Tobacco Products

Textile Mills; Furniture & Related Products

Miscellaneous Manufacturing

Meanwhile, the contracting areas were:

Printing & Related Support Activities

Plastics & Rubber Products

Wood Products

Apparel, Leather & Allied Products

Primary Metals

Transportation Equipmen

Nonmetallic Mineral Products

Electrical Equipment, Appliances & Components

Paper Products

Machinery

Chemical Products

Fabricated Metal Products

Computer & Electronic Products

Of course, part of this story is attributable to the current situation, including economic and election uncertainties.

However, as already noted, manufacturing has been in trouble going back to the end of 2007. The following chart captures manufacturing production - that is, the actual physical output of the manufacturing free from price changes - over the long run. The break occurring in late 2007 into early 2008 is nothing less than striking. In fact, manufacturing output in the U.S. has never recovered to its late 2007 high.

And as striking as this extended period of stagnation/decline has been, just as stunning has been the inability of elected officials to aggressively respond with a pro-entrepreneur, pro-investment, pro-growth agenda that makes economic sense.

Tax Policy. The reduction in the corporate income tax rate in the 2017 tax measure certainly was a clear positive, along with a complex effective reduction in tax rates for most non-C-corp businesses and various expensing measures. But those are being threatened, as heard in the current presidential and congressional campaigns, along with other tax increase proposals.

Trade Policy. For good measure, both major political parties are pushing protectionist trade agendas - which means increased costs for consumers and domestic businesses, as nearly all imports are inputs to U.S. enterprises, and reduced opportunities globally for American entrepreneurs, businesses, investors and workers.

Industrial Policy. Similarly, each party has become rather infatuated with assorted industrial policies, whereby politicians dole out various kinds of subsidies to politically-favored firms, industries and/or regions. That turns out to be an economic negative as resources are drained from the private sector in order to be allocated according to political preferences. Basic economics and history make clear that resources taken from private sector entrepreneurs, businesses, investors and workers competing in the marketplace to ultimately serve consumers, and handed to politicians and their appointees to serve political preferences, diminish entrepreneurship, innovation, productivity and economic growth. Along these same lines, politicians choosing carveouts or other special treatment for certain types of businesses fall prey to the same ills.

Regulatory Policy. Finally, an ever-expanding regulatory state serves as the silent killer of U.S. entrepreneurship, investment, business expansion and economic growth - particularly on the manufacturing front. (See a recent SBE Council analyses on regulatory costs here and here.)

Small Business and Manufacturing. For good measure, it must be kept in mind that most manufacturers in the U.S. are small firms, with 60.3 percent of employer firms in manufacturing having fewer than 10 employees, 75.2 percent fewer than 20 employees, and 93.4 percent fewer than 100 workers, based on the latest Census Bureau data (2021). These small firms turn out to be the sources of assorted innovations, from new products to new methods of production. Elected officials distributing subsidies either allocate taxpayer dollars to large firms, or act as ignorant venture capitalists wasting tax dollars, lacking the incentives and knowledge to make such decisions according to sound economics and business ideas.

Higher taxes, mounting regulation, protectionism, subsidies and industrial policies amount to wrongheaded politics trumping sound economics, and actually work to undermine manufacturing ventures in the United States. These political undertakings raise costs and diminish incentives for starting up, investing in, and operating businesses.

If policymakers are serious about creating the best environment in which all kinds of businesses, including manufacturing, might flourish, then the agenda is clear:

First, broadly and permanently reduce tax rates to help spur entrepreneurship, investment and business growth. Rather than proposing to raise personal income, capital gains and corporate income taxes, each party should be making the case for reducing such tax rates.

Second, expensing of capital expenditures by businesses should cover all investments and be made a permanent option for enterprises. Being able to fully write off capital investments in the year made serves as a strong incentive for investments that lead to innovation and productivity gains.

Third, protectionism must be jettisoned in favor of free trade. After World War II and through the administration of President George W. Bush, the U.S. led the world in the direction of lowering government-imposed costs on and barriers to trade. This led to increased economic growth in the U.S. and around the world, and a diminishment of poverty. In contrast, protectionism increases costs and reduces opportunities. Both political parties in the U.S. need to get back to advancing free trade, turning their backs on the pandering politics of protectionism.

Fourth, industrial policy never works and needs to be ended. Government can provide the right foundation for economic growth - such as low taxes, a light regulatory touch, sound money, and the rule of law - but government is not the source of growth. Quite the contrary, governmental escapades on the industrial policy front - such as subsidies and carveouts - simply turn out to be grossly inefficient. Programs whereby politicians take resources from the private sector in order to subsidize the politically preferred need to be ended.

Fifth, establish independent congressional regulatory analysis. Congress needs an independent means to analyze new and existing rules and regulations, such as subjecting them to rigorous cost-benefit analysis.

Sixth, Congress should approve all rules and regulations generated by federal agencies before such measures take effect. Congress has clear incentives to pass regulatory measures as well as to leave the actual details of creating and imposing rules, mandates and regulations to agency bureaucrats. Therefore, it's critical to establish full responsibility for regulating with Congress by requiring that all rules and regulations be subject to votes in Congress before being imposed.

Seventh, all rules and regulations should sunset. All new and existing rules and regulations should have a limited lifespan, so that Congress is required to re-evaluate regulations after a certain period of time to see if they still make sense.

Eighth, and finally, supermajority votes by Congress should be required regarding bills that impose major regulations on businesses, entrepreneurs and investors. Given the tremendous costs of regulation on businesses and entrepreneurs - and therefore on workers, investors and consumers - requiring a supermajority vote (such as 60 percent in each chamber of Congress) to pass bills imposing major regulations would be a reasonable check on the bias to regulate.

Rather than government coming to the rescue of manufacturing in misguided ways, what's really needed is for government to stop imposing and start rolling back policies that inflict harm on the industrial sector, along with the rest of the U.S. economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II:52 More Quick Reads to Help You Think Like an Economistand The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

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