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Placing Manufacturing in Context
(With Reference to Frank Sinatra, Joseph Schumpeter, Ernie Preeg,
George Mitchell, Tom Stemberg, a Feckless Congress and … Secretariat)
Remarks before the U.S. Manufacturing Summit

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Orlando, Florida
August 22, 2013

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

Placing Manufacturing in Context
(With Reference to Frank Sinatra, Joseph Schumpeter, Ernie Preeg,
George Mitchell, Tom Stemberg, a Feckless Congress and … Secretariat)

Richard W. Fisher
Every morning there is a quote of the day on the ubiquitous Bloomberg screens. Monday’s was
especially apt for today’s conference. It was from Frank Sinatra: “The best revenge is massive
success.”
Bill Simon asked me to provide context for your discussion of a manufacturing revival in the
U.S.A. I am delighted to do so. It is well-nigh time for us to once again become a “massive
success” in manufacturing. But there are obstacles to doing so. If our manufacturing sector is to
experience a lasting renaissance, significant changes in fiscal policy and regulation that emanate
from Washington are sorely needed.
First, some historical context. Look at this chart:

Manufacturing Production Through the Century
Index, 100 = 2008:Q1
110
100
90
80
70
60
50
40
30
20
10
0
'20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
NOTE: Shaded areas indicate recessions.
SOURCE: Federal Reserve Board.

U.S. manufacturing production was ramped up to fight the Second World War and, as you can
see, declined precipitously after the war’s end. Then starting in 1947 or thereabouts,
manufacturing output in America picked up slowly at first, adjusting to a post-WWII world,
before accelerating to an expansion rate of 4.6 percent per annum from the time of the election of
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President Kennedy until Paul Volcker’s Fed broke the back of inflation and engineered a
recession at the end of the 1970s. During the high-tech revolution of the 1990s, manufacturing
production took off at a torrid pace, then bounced back from the tech wreck of the early 2000s
until hitting the brick wall of the financial panic of 2007 and the severe recession that ensued.
The downturn in U.S. manufacturing output during the 2007–09 recession was on the order of 20
percent, the worst setback but for the defense-related decline following WWII and the 54 percent
decline experienced during the Great Depression. Manufacturing output today is still about 5
percent below its December 2007 business-cycle peak. 1
As for employment, manufacturing payrolls fell 16.6 percent between December 2007 and
January 2010. They are still 12.9 percent below where they stood 5 ½ years ago.
This raises the issue of productivity enhancement. Look at this chart:

Manufacturing Share of Nonfarm Payrolls
Percent
35

30

25

20

15

10

5
'47

'52

'57

'62

'67

'72

'77

'82

'87

'92

'97

'02

'07

'12

NOTE: Shaded areas indicate recessions.
SOURCE: Bureau of Labor Statistics.

Since the end of the post-WWII recession, manufacturers’ share of the nation’s payrolls has been
in continual decline. Whereas at war’s end they represented 33 percent of nonfarm payrolls,
today they account for less than 10 percent. To be sure, this reflects a rise in our nation’s
prosperity: As nations grow richer, they produce and consume more services. Today,
manufacturing accounts for only about 12 percent of gross domestic product. The divergence
between trends in job and output shares is largely accounted for by a relentless drive by
manufacturers to increase productivity. Workers today are dramatically more productive than the

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workers of our parents’ and grandparents’ generations because technology has enabled them to
produce more with fewer hours worked and at less cost.
This is not going to change. The iconic economist, Joseph Schumpeter, coined the phrase
“creative destruction.” In plain English, this means “out with the old, in with the new.”
Americans are masters of replacing outdated methods with new ones. And it is by mastering new
technology, new methodologies, and new techniques that we have the hope of revitalizing and
bringing back to our shores a greater amount of the world’s manufacturing, regaining what was
lost since the recession and—perhaps—bending upward the long-term manufacturing
employment curve.
Now here is more recent history:

Monthly PMIs Around the World and in the U.S.
Index, 50+ = Expansion
65
60
55

Expanding

50
Contracting

45
Advanced

40

Emerging
35

United States

30
'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

NOTE: Shaded areas indicate recessions. Chart displays various purchasing manager diffusion indexes.
SOURCES: Markit; JPMorgan; Institute for Supply Management.

I have been saying for the past few years that the United States is the “best-looking horse in the
glue factory.” This is certainly true in manufacturing. We have actually been outperforming the
rest of the world on the manufacturing front as the recovery from the Great Recession has gained
traction.
For the past three years, we have outperformed the “emerging” countries:

3

Monthly PMIs of Emerging Markets and the U.S.
Index, 50+ = Expansion
65
60
55

Expanding

50
45

Contracting

40

Emerging
United States

35
30
'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

NOTE: Shaded areas indicate recessions. Chart displays various purchasing manager diffusion indexes.
SOURCES: Markit; JPMorgan; Institute for Supply Management.

And we have outperformed the “advanced” countries:

Monthly PMIs of Advanced Economies and in the U.S.
Index, 50+ = Expansion
65
60
55

Expanding

50
45

Contracting

40

Advanced
United States

35
30
'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

NOTE: Shaded areas indicate recessions. Chart displays various purchasing manager diffusion indexes.
SOURCES: Markit; JPMorgan; Institute for Supply Management.

But in the last two years gains have been choppy. Notice how manufacturing growth slowed not
only when Europe’s woes began to crimp confidence, but also when fiscal infighting dominated
behavior in Washington.
4

Headwinds to Steady Manufacturing Growth
Index, 50+ = Expansion
65
Europe
slows

60
55
50

Fiscal
cliff

45

Sequester
spending
cuts

U.S. ISM
Manufacturing Index

40
35
30
'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

NOTE: Shaded areas indicate recessions. Chart displays U.S. purchasing manager diffusion index.
SOURCE: Institute for Supply Management.

So, two questions: How do we continue to outperform other nations? How do we reignite and
sustain the manufacturing renaissance?
Monday’s front-page article of the Wall Street Journal pointed to some of the sources of strength
in U.S. manufacturing, citing my old friend Ernie Preeg (who used to supervise me in writing
economic policy decision memoranda for President Carter—which means Ernie must be 110
years old by now, a miracle of science!) and the work done by Hal Sirkin and his colleagues at
the Boston Consulting Group.
The article cited a critical factor influencing our destiny: the revolution occurring in oil and gas
production. Thanks to a Houstonian named George Mitchell and other Schumpeterian
practitioners who defied conventional wisdom and threw out the old and embraced the new, we
have developed an abundance of natural gas and liquids production that are the stuff of
production and the enablers of consumption. This is captured graphically here:

5

U.S. Oil and Gas Production
Million barrels per day

Billion cubic feet per day

12

June ‘13
estimate

70

Crude oil

10

80

Natural gas surges
from fracking boom

60

8
50
6

40
Natural gas

Oil production aided
by deep water + other
technologies

4

30
20

2
10
0
1920

0
1930

1940

1950

1960

1970

1980

1990

2000

2010

SOURCE: Energy Information Administration.

The Journal article also cited better relationships with unions and with workers in crafting
flexible and innovative labor contracts, the rising cost of labor relative to productivity in China
and the “world is our oyster” capacity for sales of exported U.S. manufactured goods, noting as
examples the overseas sales of Hypertherm and Graco.
What the Journal article failed to cite is a historically profound enabler: Cheap and abundant
money made possible by the Federal Reserve. I promised Bill Simon I would not venture into
monetary policy today, and I won’t. But I will say this: While there are many risks in the policy
that the Fed has been pursuing (and God and anyone who has suffered through my speeches the
past few years knows I fret about those risks), every manufacturer of goods in America has been
given a great gift by your central bank—the lowest cost of money in 237 years, an extension of
the roaring bond market rally that has now run 32 years, and a broad stock market rally that
began in March of 2009 and has gone on to bust through all previous record highs. 2
Look at this chart of the three-decade-old bond market rally:

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Nominal Bond Yields
Percent
Sep. '81:
16.9%
15.8%
15.5%

18
16
14
12
10
8

Aug. '13:
5.4%
4.6%
2.7%

6
4
2
0
'81

'83

'85

'87

'89

'91

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

SOURCE: Federal Reserve Board.

Our manufacturers, like all businesses public and private—large, medium and small—have also
been given more than abundant natural gas and other sources of energy for their operations: They
have been given abundant, super-cheap monetary fuel needed to stoke up their production
engines and expand their businesses.
So what is holding us back from bending the curve of historical manufacturing production that I
first showed you and extending our recent superior performance on the manufacturing front?
The Journal article I just mentioned noted inhibiting factors such as a shortage of skilled workers
and the draw of growing markets like China, India and Brazil for plant location. And of course
there’s the slowdown in Europe and in some emerging markets. But the article skirted the most
vexing and self-inflicted inhibitor of all: fiscal and regulatory policy of the gang that can’t shoot
straight in Washington.
I have spoken of this for years.
The Constitution unambiguously gives the Congress of the United States control of the fiscal
purse strings. Yet all they have done under both Republican and Democrat presidents and the
leadership of both parties in the upper and lower houses is spend and regulate with abandon.

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Let’s cut to the chase: The remaining obstacle to being the absolute best economy for
manufacturers and other businesses, bar none, has been fiscal and regulatory policy that seems
incapable of providing job-creating manufacturers and other businesses with tax, spending and
regulatory incentives to take advantage of the cheap and abundant fuel the Fed has provided.
After recovering most of the losses from the Great Recession, manufacturing growth has, on net,
decelerated in the last two years. Ask any manufacturer what holds him or her back and they will
tell you that they can’t operate in a fog of total uncertainty concerning how they will be taxed or
how government spending will impact them or their customers directly. And as to asking their
opinion of the impact of regulation on their businesses—from the Affordable Care Act to the
thousands of other regulations enumerated in the Federal Register—don’t even go there, unless
you delight in hearing profanities. I thought my college classmate Tom Stemberg, the founder of
Staples, was remarkably constrained in his Wall Street Journal op-ed piece today as he pointed
out that the 50,000 jobs he created from scratch might never have occurred under what he called
today’s “blizzard of bureaucratic red tape.” 3
We needn’t be condemned to the glue factory. American companies publicly held and private—
large, medium and small—have taken advantage of the cheap and abundant money made
available by the Fed’s very-accommodative monetary policy to create lean and muscular balance
sheets. In response to the deep recession and the challenges of fiscal and regulatory uncertainty,
they have rationalized their cost structures and ramped up productivity, leveraging IT, just-intime inventory management and new production structures to the max. Their workers are more
productive than ever.
I believe American manufacturers today have the potential, far and away, to be the most efficient
operators in the world. We have countless manufacturers in every sector of goods production and
assembly that are the equivalent of the Secretariats, Man o’ Wars, Citations, Seabiscuits or any
great thoroughbred that has ever graced the track. They just need to be let out of the starting gate.
That gate is controlled by Congress, working with the president. If they would just let ’em rip,
we would have an economy that would take off. Instead of settling for being the “best-looking
horse in the glue factory,” we can become the wonder-horse that outpaces the rest of the world,
putting the American people back to work and renewing the unparalleled magnificence of
American prosperity.
Here is an image I want engraved in your minds. It is of Secretariat winning the Belmont Stakes
by 31 lengths in 1973, leaving his competitors in the dust.

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Secretariat Winning 1973 Belmont Stakes by 31 Lengths

© Bob Coglianese

I want our manufacturers to be Secretariats, beating out the rest of the world by a stunning
margin. We can do it. We must do it. We must insist that Congress practice a little
Schumpeterianism of its own: throwing out old, counterproductive fiscal and regulatory policies
and ushering in new ones that unleash job creators from the starting gates. Then we will
experience a “massive success.” And as Old Blue Eyes said, that massive success will be “the
best revenge”—sweet revenge, indeed, on those who say that a true renaissance of American
manufacturing is beyond our reach.
Thank you.

1

An alternate measure of output, called the value-added production series, shows that manufacturing output has
nearly recovered its prerecession level.
2
See remarks before the Ninth Annual Redefining Investment Strategy Education Forum, Dayton, Ohio, March 26,
2009, www.dallasfed.org/news/speeches/fisher/2009/fs090326.cfm.
3
“A New Law to Liberate American Business,” by Thomas G. Stemberg, Wall Street Journal, Aug. 22, 2013, p.
A15.

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