Manufacturing Connections

Written by Danny Bachman, Ph.D.

Published on May 05, 2016

If industries were in high school, manufacturing would be the boy who was the class hero, at least to the policymakers and local officials who extoll the virtues of the industry.¹ Probably the football team's quarterback, and definitely showing up as "most popular" in the school yearbook. But, just as football quarterbacks don't win games without the rest of the team, manufacturing's high quality jobs can't exist without other industries. But which other industries? And what industries depend on manufacturing? The input/output charts in DataUSA provide a look at how manufacturing interacts with other parts of the economy.

The Sankey diagram of "use tables" shows the flows from different industries into manufacturing, and flows out of manufacturing.

Like many popular high schoolers, manufacturing is very much into itself. The largest supplier to manufacturers is other manufacturers, and the largest user of the industry's products is the industry itself. This may be reflection of the complex supply chains in manufacturing compared to other industries.

Despite the industry's reputation for high-quality employment,² labor costs are only the fourth largest input by cost (on the left-hand side). Gross operating surplus, which is the return to capital and owners, is larger than labor costs in this industry. The reason is not low pay—this is the 6th highest paying industry (out of 14) in the economy. But high productivity (output per worker) means that the industry doesn't need to employ many people in order to maintain high levels of production. And manufacturing workers use more capital than workers in most other industries, which translates to a large capital base and the need to pay for it—hence large profits (capital returns) in this industry.

Mining is among the larger sources of inputs. The raw materials produced by mining mostly have to be worked on (in manufacturing) before they become usable. For example, there isn't much use for taconite pellets (raw iron ore) until they are taken to a steel mill and converted into steel products.

Services in this part of the economy (or cafeteria table in the high school, if we want to keep the metaphor going) are a smaller share of inputs than mining and manufacturing together. While services provide the majority of value added and output in the U.S. economy, they are smaller contributors to manufacturing—accounting for about one-third of manufacturing inputs, and a similar share of manufacturing's users.

Uses of manufacturing are concentrated in final demand categories. Almost half of manufacturing output is sold directly to households (personal consumption expenditures), for business investment, to foreigners (exports) or to governments (local, state, or federal). The amount used as inputs by all service industries is slightly less than final demand uses.

The tree map for uses focuses on industries that buy manufacturing products. And, as noted, manufacturing is the largest user of its own products. Construction and transportation are the second largest users of manufacturing inputs.³ The rest of the services industries and mining split the remainder (25%) of manufacturing output used as intermediate production. Service industries generally aren't as large a market for manufactured goods as final demand or manufacturing itself.

Use of Output by Other Industries

The Manufacturing Industry purchases the greatest share of products and services from the Manufacturing Industry Sector in order to produce other goods and services. Purchases of the Manufacturing Industry Sector for final consumption by consumers, businesses, or government are not included here.

Manufacturing, like some popular kids, has a somewhat narrow social circle. It's a key contributor to certain parts of the economy. If you are on the "football team" (mining and construction) you will think that manufacturing is critical. Other industries are less closely tied to manufacturing. If you are putting on the school play (Arts, Entertainment, and Recreation) or in the Future Doctors of America club (Heath services), you might not even be going to the football game.

For a comprehensive discussion of the popularity of manufacturing among U.S. policymakers, see James Ledbetter, "What's so great about manufacturing," The New Yorker, August 6 2015.
See The Benefits of Manufacturing Jobs, US Department of Commerce, Economics and Statistics Administration accessed at http://www.esa.doc.gov/sites/default/files/1thebenefitsofmanufacturingjobsfinal5912.pdf.
The category "intermediate" inputs does not include investment goods. When a business purchases a truck, the truck is private fixed investment (light blue in the Sankey chart), not an intermediate input.

Danny Bachman, Ph.D.

Danny Bachman is in charge of U.S. economic forecasting for Deloitte's Eminence and Strategy functions. He is an experienced U.S. and international macroeconomic forecaster and modeler. Dr. Bachman came to Deloitte from IHS economics, where he was in charge of IHS's Center for Forecasting and Modeling. Prior to that, he worked as a forecaster and economic analyst at the US Commerce Department, was responsible for U.S. economic forecasting and modeling at WEFA (previously Wharton Econometric Forecasting Associates) and taught international economics at Temple University. His first professional job was at Israel's Ministry of Finance.

Dr. Bachman is a native of Philadelphia. He has a B.A. from Johns Hopkins and Ph.D. from Brown University. Dr. Bachman lives in Rockville, Maryland with his wife, but without his two millennial children, who—evidently defying the odds—have not returned home after college. Yet.