When the governments of the world undervalue manufacturing’s impact on Gross Domestic Product (GDP), the result can be detrimental to the economy. The results can include taxes and laws being put in place by governments without understanding the true impact on manufacturing. A recent study by Manufacturing Alliance for Productivity and Innovation (MAPI) suggests the US has been significantly undervaluing manufacturing’s contribution to GDP. If you are reading this post outside the US then I hope the topic at least has some relevance to you in your own country.
Manufacturing is a major driver of the economy.
The results of the MAPI study showed manufacturing in the US drives 32% of GDP, as compared to the Department of Commerce number of 11%. Nearly 3x higher than the Department of Commerce calculates.
Stephen Gold, President and CEO of MAPI says:
“Official national statistics state that manufacturing’s proportion of GDP—its annual value-added divided by the value of all goods and services produced in the country—stands at about 11%. The U.S. Department of Commerce finds the total requirement manufacturing multiplier is around 1.4.”
11% versus 32% of GDP is a very large discrepancy. Why did the new MAPI study deliver a much higher GDP number compared to the Department of Commerce traditional approach? Mr. Gold says, “…official manufacturing statistics are based narrowly on information collected at the “establishment”—or plant—level, as opposed to the “firm” level. That means numerous manufacturing-related activities, such as corporate management, R&D, and logistics operations, are not included within the NAICS codes for manufacturing (31-33) when they are located separate from plants.”
“Yet another reason the government measure is misrepresentative: it captures only the creation of upstream value, including the processing of raw materials and intermediate inputs, and the production process. The manufacturing value stream is actually much broader, encompassing the associated activities in both the upstream supply chain and the downstream sales chain of manufacturing goods sold to final demand.”
The MAPI study suggests manufacturing drives nearly 1/3 of the US GDP as opposed to the previous calculations of approximately 1/10. Talk about under-appreciated. I have always struggled with what seemed to be low Department of Commerce estimates. Manufacturing, by virtue of taking raw materials and creating sell-able and exportable product, has a lot more impact than a restaurant or a law firm – 11% just seems intuitively too low. Farmers and manufacturers create wealth.
I am very glad to see MAPI digging in to show the total impact of all the hard work of US manufacturers. Hopefully the new data is right. And hopefully it will be accepted as fact within the US Government. An increase in perceived value of manufacturing will help the US Government to stimulate, rather than restrict, manufacturing growth with an overall positive impact on the US economy.