The Mysterious Disappearance of Productivity Growth in US Manufacturing: Was It the China Shock?
Abstract
Faster productivity growth in manufacturing than in the private business sector was once a reliable feature of the U.S. economy. During 1972-2009 manufacturing productivity growth was one percent faster than in the private sector (3.1 vs. 2.0 percent). But during 2009-24 its growth was a full 1.5 percent slower than in the private sector (-0.1 vs. 1.4 percent). This paper is among the first to explain this remarkable turnaround.Labor productivity growth is divided between growth in capital deepening and total factor productivity (TFP), which in turn often is interpreted as measuring the pace of innovation. A ranking across 19 industries of the post-2009 TFP growth slowdown highlights electronic products as the top culprit. The paper develops case studies of the pace of innovation in this and other manufacturing industries.
But TFP explains only 40 percent of the slowdown. The other 60 percent is accounted for by the even greater slowdown in capital deepening. Manufacturing output rose at 3.1 percent annually from 1972 to 2001 but then its growth nearly vanished to a mere 0.4 percent annually from 2001 to 2024. Without output growth there was no incentive to invest, the capital stock became older and more obsolete, plants closed, and the benefits of modern technology embedded in new machinery were largely lost.
Why did output growth vanish after 2001? The timing coincides almost exactly with the 2001 entry of China into the WTO. The paper develops a 19-industry data base to study the relationship over selected intervals between the expansion of imports from China and other nations and declining growth in manufacturing output, capital, investment, and productivity. Far from stripping the U.S. only of its least productive industries, the “China shock” appears to have undermined the foundations.