Alan Reynolds

An earlier column questioned recent allegations that U.S. manufacturing has suffered a long-term secular decline rather than a routine but painful cyclical recession. I received a number of critical comments, some from online bulletin boards. Many misunderstood the distinction just mentioned, between secular and cyclical trends, and nearly all the critics misunderstood the statistics.

I am certainly not claiming that all manufacturing industries are now flourishing in every state. On the contrary, industrial production in August was barely 1 percent above the cyclical trough in December of 2001. But suffering for a few years during and after a recession is a typical cyclical malady -- not a sign that manufacturing has long been fleeing the United States. Manufacturing generally grows faster than the economy during booms but also falls faster during slumps. Manufacturing often declines before recessions begin and remains distressed for quite a while after recessions end.

A couple of complaints about my earlier column were well illustrated by a thoughtful letter in The Washington Times from Michael Kirschner of San Francisco. Like several others, he sincerely believed (incorrectly) that the statistics I mentioned about GDP and industrial production confused U.S. companies with U.S. production: "Very little that HP, Dell or many other high-tech manufacturers make," wrote Kirschner, "is built in the United States."

Actually, Dell has huge award-winning manufacturing plants in Austin, Texas, and Nashville, and Hewlett Packard has manufacturing plants in 29 U.S. cities. Foreign plants of companies such as HP and Dell are mainly needed to fill foreign orders as quickly as they are filled here. Dell's factory in Ireland markets to Europe, not the United States.

Perhaps Kirschner meant to say that many parts that go into making computers are made in places like Singapore. But imported parts have nothing to do with statistics on manufacturing output within the United States. Gross Domestic Product from manufacturing is -- as the name says -- domestic product only. If a $1,000 computer contained $700 worth of imported parts, then only the $300 of value added would be counted as domestic product.

Recent controversy about manufacturing's allegedly falling share of GDP resulted from statistical mistakes. One obvious error has been to compare the figure at a cyclical peak such as 1988 with the recent recession bottom in 2001. Another error has been to rely on the nominal value of manufacturing rather than its real value or quantity.


Alan Reynolds

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