U.S. Manufacturing: The Key to Reviving the Economy

Though passing the $787 billion stimulus package looked like heavy lifting, the real work actually begins now -– deploying the $311 billion in federal, state and local spending in a way that jump-starts the economy and creates jobs.

The United Steelworkers and the Carlyle Group don’t agree on everything, but on this we are in lockstep: the key to success of the stimulus is maximizing the economic activity generated by each tax dollar spent. The more money spent in the manufacturing sector, the greater the economic benefit. Manufacturing multiplies the spending because it has a ripple effect through the economy. That’s why it’s so important to concentrate the expenditures on products with significant domestic value added, which will more quickly generate more jobs and economic benefits.

Manufacturing is the bedrock of our nation’s gross domestic product, producing approximately $1.40 of additional economic activity for every $1 of direct spending in the sector -– more than all other U.S. industries. Here’s how this “multiplier effect” works: Every dollar spent on a manufactured product pays wages and benefits to company employees, buys raw materials and purchases supporting products and services such as forklifts and shipping. The suppliers of the raw materials and supporting products, in turn, pay wages to their employees and purchase raw materials, supplies and services -– and so on. And all along the way employees use some of their wages to buy products and services for themselves. Of the incremental spending generated by the multiplier, roughly 60 percent is spent in other sectors, meaning everyone from retailers to teachers to healthcare workers benefits from manufacturing activities.

Manufacturing has also been the engine of U.S. economic productivity. Since 1990, output per hours worked in the manufacturing sector has increased 94 percent, versus 49 percent for the economy as a whole. Greater productivity translates directly into higher pay. In 2006, wages and benefits for the average manufacturing position were 41 percent higher than the rest of the workforce.

But this critical part of our economy is now suffering terribly. While a serious recession is gripping most of the world, for U.S. manufacturing it’s the 1930s all over again. In 2008 alone, manufacturing jobs were cut by more than 540,000, an amount nearly equal to the population of our nation’s capital.

In the steel industry, for example, nearly 55 percent of capacity is currently idled, a level last seen in the Great Depression. Cumulative steel production for the first seven weeks of 2009 was down 52 percent compared to the same period last year.

The manufacturing collapse hurts our economy in two ways. First, layoffs create a vicious cycle of lower consumer spending, which leads to reduced manufacturing activity, which leads to still more lay-offs. Second, the multiplier effect cuts both ways. Just as a growing manufacturing sector lifts all boats, problems in the sector disproportionately ripple across the rest of the economy.

So, by ensuring spending flows to the manufacturing sector, the stimulus package can have a deep and lasting impact. And what’s more, results will come quickly. Job creation by supporting industries up and down the supply chain will begin as soon as infrastructure projects are awarded – even if the projects are not started immediately – due to lead time needed to support the new demand. For example, steel manufactures will begin relighting beam and bar capacity long before shovels are put to ground.

But stimulus spending can’t exist in a vacuum; as the President has said, it needs to be accompanied by action to loosen up credit markets and stem the tide of home foreclosures. Without access to credit, many manufacturers won’t be able to fund the inventory needed to address demand created by the stimulus program. This, in turn, will dampen and slow the program’s impact.

Secretary Geithner’s recent announcements include a number of important ideas and initiatives, but additional details need to be fleshed out. For example, a public-private partnership to purchase toxic assets is a positive step that sends a clear signal that we must find a way to attract private capital back to the markets. Before the private sector engages, however, the administration must identify who can sell assets, what type of assets can be sold and how the financing will work. In addition, the expansion of the TALF will provide additional liquidity to constricted markets, but policymakers should consider further broadening the class of asset-backed securities that are eligible for TALF support.

While jumpstarting credit markets is critical, it is equally important to take aggressive action to stabilize housing prices. The President’s recent announcement, which emphasized interest rate reductions through mortgage modifications, is a significant step in the right direction. However, we fear that homeowners will continue to lack incentives to stay in their homes unless the program places a greater emphasis on principal reduction. Interest rate reductions will help some homeowners, but those with significant negative equity may still have strong incentives to walk away from their homes. Stabilizing the housing markets is the most important action the government can take to revive consumer spending.

A well-implemented stimulus plan that focuses spending on manufacturing and industry, incentives for investment of new private capital and additional steps to prevent foreclosures will help to break the credit and investment logjam.