Is manufacturing losing steam?

After averaging 7-8 percent annual growth over the last eight years, the manufacturing sector posted a lackluster growth rate of 4 percent in the third quarter (Q3). First quarter annualized growth was still high at 7.6 percent, but slowed to 5.5 percent in Q2, and now this.

This disappoints me, as I’ve attributed much of the good news in the economy in recent years, especially the more job-creating and poverty-reducing nature of our GDP growth, to the surging manufacturing sector. Over the last five years and until earlier this year, the industry sector had grown faster than agriculture and services did. Services had consistently been the fastest-growing sector and the economy’s pace-setter in the past. This changed when import tariffs across Asean went down to zero in 2010, helping induce a surge in various manufactured exports to our neighbors as regional value chains expanded and flourished. We’ve moved beyond to global value chains as well, including in the aerospace industries, with companies producing vital parts for major aircraft.

The manufacturing surge has improved both the quantity and quality of jobs generated in our economy. Before, our jobs data would show industry generating, at most, tens of thousands of new jobs annually; in recent years, hundreds of thousands of new industry sector jobs have come about, as the overall unemployment rate dropped to historical lows. Furthermore, there has been a rising proportion, especially in the last eight years, of wage and salary workers and entrepreneurial employers in our workforce—as against individually self-employed (usually informal sector) and unpaid family workers.

In 1998, less than half (49 percent) of our total workers were in the wage and salary worker category. In 2005, it became 50 percent, and, in 2010, 54 percent. Now it’s nearly two-thirds (65.3 percent), an 11-percentage point rise in just eight years, more than doubling the 5-percentage point rise in the 12 years from 1998 to 2010.

The effect of more and better quality manufacturing jobs on poverty reduction has been evident. Between 2012 and 2015, data from the triennial Family Income and Expenditures Survey showed poverty incidence dropping nearly 4-percentage points, from 25.2 to 21.6 percent; previous three-year periods saw poverty dropping by barely 1 percentage point, or even rising.

It is for these reasons that the seeming slowdown in manufacturing sector growth disturbs me. With the impressive numbers over the last eight years, we were seeing a nascent industrialization finally happen, after we missed the boat in the ’90s as China pulled the proverbial rug from under us and became the “factory of the world.” Most economists see industrialization to be key in achieving the kind of broad-based, inclusive growth that our more successful neighbors experienced over the past two to three decades.

Where did the manufacturing slowdown occur? Closer examination of the Q3 data shows that key manufacturing industries ranging from wood products to petroleum refining and electronics sustained brisk, even accelerating growth. Food manufactures, which account for a third of all manufacturing output, was the biggest drag on the sector, growing only 2.6 percent in Q3, and 4.2 percent over the first three quarters. This is evidently a direct offshoot of agriculture’s negative performance.

Further pulling manufacturing down with negative growth were tobacco products, chemicals, textiles, garments and transport equipment. The last appears to be the result not of weaker demand due to the recent tax hike on cars, but because manufacturers miscalculated the effect of the tax hike, deliberately cutting back production more than was warranted. At least one car dealer has told of mounting back orders as his manufacturer supplier unduly reduced production and deliveries, in anticipation of much lower sales.

So is manufacturing losing steam? All told, two quarters don’t necessarily spell a trend, and the latest slowdown in manufacturing looks transitory and surmountable. Still, this is the sector—along with agriculture—that’s well worth guarding closely, and boosting much further, every way we can.

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