Defense Implications of Misleading Manufacturing Capacity Data

I’m following up my industrial production post. As calculated by the Federal Reserve, U.S manufacturing capacity today is 82% higher than it was in 1990.

The same pattern shows up in Fed data on individual industries. According to the Fed,  domestic manufacturing capacity in the motor vehicles industry is 66% higher than it was in 1990.  Similarly, the Fed figures suggest that domestic production capacity has risen over the past 20 years in the aerospace, machinery, chemical, electrical equipment, and especially computer industries.

What’s going on here? Both production and capacity are defined in terms of the value of shipments from a plant. That is, from the perspective of the Fed, a factory that makes all the components of a machine in-house is absolutely indistinguishable from a factory that imports all the components and simply assembles them into the final product.

Or, to put it a different way, an aircraft factory that builds all the components of a plane–wings, avionics, seats–is indistinguishable from  a factory that imports the components and ships the assembled plane.

Why does this matter for defense?  The source data  for most of the Fed’s capacity numbers comes from the Census Survey on Capacity Utilization (now quarterly). Here’s the form, and here’s the instructions. Companies are asked to estimate the value of their shipments each quarter, and their full production capability, defined in terms of shipments.

But then manufacturers are also asked for their National Emergency Production. This question was put on the form “at the request of the Department of Defense.”  The manufacturers are told to

Estimate the market value of production for this plant as if it had been operating under national emergency conditions for the quarter .

But here’s the kicker. In estimating national emergency production, the manufacturers are told to assume that

funding, labor, materials, components, utilities, etc. are fully available to you and your suppliers.

As worded, this question makes no distinction between foreign and domestic suppliers. And while Washington may have the ability to impose a national emergency on American plants, the U.S. has no such power over suppliers in China, Mexico, Japan, or any other country. We can’t order Chinese plants onto emergency footing.

As a result, the answer to this question will give a misleading rosy picture of the emergency capabilities of the U.S. manufacturing sector in the case of a natural disaster or major war.

Sometimes bad data is worse than no data…this is one of those times.

About Michael Mandel 127 Articles

Michael Mandel was BusinessWeek's chief economist from 1989-2009, where he helped direct the magazine's coverage of the domestic and global economies.

Since joining BusinessWeek in 1989, he has received multiple awards for his work, including being honored as one of the 100 top U.S. business journalists of the 20th century for his coverage of the New Economy. In 2006 Mandel was named "Best Economic Journalist" by the World Leadership Forum.

Mandel is the author of several books, including Rational Exuberance, The Coming Internet Depression, and The High Risk Society.

Mandel holds a Ph.D. in economics from Harvard University.

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