U.S. manufacturers have experienced record growth over the past couple years, but certainty on a wide portfolio of issues, from infrastructure to trade, will be critical to keep that growth sustained throughout 2019. For policymakers in Washington, the May jobs reported should make that clear.
According to the latest Bureau of Labor Statistics jobs data, the U.S. economy created just 75,000 new jobs in May, with a sluggish 3,000 manufacturing jobs created for the month.
“Manufacturing employment has been more sluggish than desired for four straight months, coinciding with weaker demand and production activity and lagging behind the robust pace we experienced last year,” NAM Chief Economist Chad Moutray said. “Indeed, manufacturers created 264,000 net new jobs in 2018, the best pace of employment growth in the sector since 1997. Yet, the sector has added only 13,000 employees since February. For those numbers to pick back up, our leaders in Washington must recommit to tackling the issues currently creating uncertainty for businesses and focus on policies aimed at sustaining the vigorous growth the industry saw last year.”
Employment has not been the only indicator that’s lagged behind. Earlier this week, the Institute for Supply Management® said manufacturing activity in May expanded at its slowest pace since October 2016; whereas the competing survey from IHS Markit reflected growth that was the weakest pace in nearly a decade. In addition, manufacturing production has fallen in three of the past four months.
“Manufacturers need certainty,” Moutray said. “Things like ratifying the USMCA, securing a bilateral trade agreement with China, passing a long-term reauthorization of the Ex-Im Bank and enacting a bipartisan agreement to update our nation’s infrastructure are immediate steps policymakers can take that would greatly benefit the industry long into the future.”
Another factor holding back manufacturing growth is the looming workforce crisis—a challenge which continues to be the top concern for business leaders, especially in a tight labor market. The number of job openings in the sector has remained highly elevated, averaging about a half million per month over the past 12 months.
“At the end of the day, despite lower levels of industry growth, manufacturers are still creating far more open jobs than workers ready to fill them,” Moutray said. “That’s putting a damper on job creation as well.” Overall, the labor market remains tight, with the unemployment rate remaining 3.6 percent, the lowest since December 1969.
The Manufacturing Institute, the NAM’s education and workforce partner, is the leading industry authority on workforce development and recognizes the need to grow the qualified manufacturing workforce and close the skills gap. It has a range of programs and initiatives designed to do just that.
“The future of this industry and our economy at large are both tied to the future of the manufacturing workforce,” said Carolyn Lee, Manufacturing Institute executive director. “It’s just one more reason why we at the Institute work so hard every day to support the manufacturing workforce of today and grow the manufacturing workforce of tomorrow.”
While some politicians in Washington and presidential candidates across the country are openly discussing rolling back key parts of the historic tax reform bill signed into law back in 2017, the National Association of Manufacturers’ latest survey data paints an alarming picture of the impact such a move would have on the U.S. economy and the manufacturing industry in particular.
According to the NAM’s Manufacturers’ Outlook Survey from first quarter of 2019, two thirds (66 percent) of manufacturers would be forced to consider cutting back investments in the United States if Congress rolled back portions of the tax reform bill, while 62 percent would scale back projected growth in wages and bonuses. Meanwhile, more than half (54 percent) would cut back on hiring.
“These are scary numbers,” Chris Netram, NAM’s Vice President of Tax and Domestic Economic Policy, said.
The Tax Cuts and Jobs Act took the U.S. tax code from one of the least competitive among advanced economies to “just about average,” Netram said. “Backsliding to uncompetitive rates and policies tells companies that operate in a global supply chain that the U.S. is not open for business. It will force them to look elsewhere.”
“Long term, the global economy will still continue to grow,” Netram said. “But the United States won’t capture as much of it.”
Because taxes are a fixed cost in any investment, raising taxes drives the required rate of return on any investment even higher, raising the threshold for what would make an investment profitable and changing the calculus for businesses planning future investments in equipment and employees.
Small manufacturers have benefited from tax reform’s provision allowing for a 20 percent deduction of “pass-through” small business income. While much of the discussion in Washington has focused on the corporate tax rate, far more manufacturers file as pass-through businesses, meaning smaller firms would bear the brunt of a full tax reform repeal.
“The number of pass-throughs dwarfs the number of corporate filers,” Netram said. “If you were looking to harm small manufacturers, reducing or repealing the pass through deduction is how you’d do it. That’s one thing that’s so alarming about what some leaders are talking about in Washington.”
The NAM has conducted its quarterly Outlook Survey since 1997. Last year’s aggregated results found the most optimistic reading among U.S. manufacturers in the survey’s history, with respondents crediting the tax reform bill as a major factor. A similar survey from 2018 found huge majorities were planning to increase investments, hiring and wages due to the tax law. Meanwhile, job growth in the industry in 2018 was the fastest in more than twenty years.
“Adopting a more competitive tax system has boosted the industry,” Netram said. “Rolling back the benefits of tax reform would make it more difficult to further grow our thriving American manufacturing sector.”