Study: High costs squeeze manufacturing profits

Manufacturing profits in five key sectors were 67 percent lower than they would have been from 2000 to 2003 because of adverse structural costs - and still have not returned to their historic norm - according to a joint study released Tuesday afternoon by the Manufacturing Institute and the Manufacturers Alliance/MAPI.

"Profit rates for durable goods and chemical manufacturing continue to be dramatically lower than their historic norm, primarily because of escalating domestic costs and intense international competition," said Jerry Jasinowski, president of the Manufacturing Institute. "These structural costs are having a far greater negative impact on manufacturing profits than the recent recession.

"The historically lower level of profits has a negative impact on our ability to make investments, innovate, create new jobs and compete in the global economy. We have placed extreme cost burdens on manufacturers and their workers relative to their primary competitors."

Author and economist Jeremy Leonard added, "The main drivers of the profit squeeze are soaring health and pension costs, high energy and material costs and misaligned exchange rates that affect global competition. These factors have contributed to a secular decline in manufacturing profits, adversely affecting investment in equipment and R&D, job growth and training. As the study points out, concern about manufacturing profitability should thus stretch from the boardroom to the factory floor." 

The report focuses on five major industries - fabricated metal products, machinery, electrical equipment and appliances, motor vehicles and chemicals - which together represent more than half of all manufacturing production. 

"This study provides a sobering look at the ability of U.S. manufacturers to finance growth, innovation and job creation in today’s highly competitive economy," said Thomas J. Duesterberg, president and chief executive officer of MAPI. "Without the robust profit margins characteristic of the 1980s and 1990s, U.S-based firms must work overtime to find the resources for investment in human and physical capital needed to stay one step ahead of the competitors."

Jasinowski added, "Our country has become complacent about the extraordinary extra cost burdens we place on competing profitably. We must also continue to work to bring down foreign trade barriers and end exchange rate manipulation. Most alarming is that one quarter of the profit deterioration is due exclusively to higher health care and pension costs."

Leonard noted that other structural costs identified in an earlier NAM/MAPI study www.nam.org/costs - especially rising tort, regulatory and tax costs - also continue to contribute to the profits downturn.

"It’s time policymakers realized that escalating cost pressures have eroded manufacturing profits and threaten our nation’s economic growth and competitiveness," Jasinowski said.

The new study is available at www.nam.org/costsqueeze.