The recent decline of stock prices on Wall Street did not take me by surprise. I knew the overall economy was headed into rough water when I saw that the ISM index for manufacturing in December was 48.2, down four ticks from the 48.6 in November. Anything below 50 means manufacturing is contracting. Prior to November, manufacturing had expanded for 34 consecutive months. As manufacturing goes, so goes the nation.
Most of the economists and pundits are focused on more conspicuous economic factors such as the long overdue slump in China, the collapse of oil prices, the hike in interest rates and the soaring dollar. They tend to dismiss manufacturing because after all it only accounts for 12 percent of GDP. Plus we have been repeatedly told in recent years that manufacturing is yesterday's news as we are supposedly passing into a post-industrial, services economy.
But we cannot sustain a healthy economy by taking in each other's laundry. It is the fine art of making useful things that fosters real economic growth. To be sure, manufacturing is no longer the jobs machine of yesteryear, but it still an outsized force in the economy. More than any other sector, manufacturing is where real wealth is created - where raw materials are transformed into the finished products that enhance the quality of life. Manufacturing is far and away our most dynamic sector and consequently represents about 60 percent of profits among S&P 500 companies.
To be sure, all is not doom and gloom. The U.S. remains the world's dominant economic power and the U.S. dollar is the world's reserve currency. But that makes the dollar unusually strong and the strong dollar makes exports more expensive. We are not as dependent on exports as many other nations, such as China, Japan and Germany, but U.S. firms have been earning 27 percent of their profits overseas in this decade. Ergo, the decline of U.S. exports still hurts, and it hurts most in our main growth engine -- manufacturing.
Short term challenges are one thing, but my main concern is the long term. Since forever, manufacturing has been the seedbed of innovation where new products and processes are tested and proved, accounting for the lion's share of new patents every year. But a growing number of manufacturing companies are cutting back on research and development which does not augur well for our future. The proposed merger of Dow and DuPont is a case in point being driven by hedge fund managers who demand severe cutbacks in the company's R&D budgets. They see R&D as an impediment to near term profits.
But our future depends on investing in the long term. Most Fortune 500 companies do not disclose their R&D spending and for those that do the category is too broad to be meaningful. A more telling statistic is that by 2007 only 6 percent of publicly traded companies were publishing research in scientific journals, down from nearly two-thirds in 1980. That's scary.
Now the great global slowdown is washing up on our shores even as we abandon our strongest asset - our commitment to innovation. None of the major political candidates are talking about this. Like Nero, we are fiddling while Rome burns.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.