Over the years, Congress has enacted a wide variety of tax preferences, direct subsidies, import restraints, and other federal programs intended to bolster the manufacturing sector, often with the goal of retaining or recapturing highly paid manufacturing jobs. Only a small proportion of U.S. workers is now employed in factories, as manufacturers have shifted low-value, labor-intensive production, such as apparel and shoe manufacturing, to other countries. Meanwhile, U.S. factories have stepped up production of goods that require high technological sophistication but relatively little direct labor. Recent data, however, challenge the belief that the manufacturing sector, taken as a whole, will continue to flourish. In particular, statistics showing that domestic value added represents a diminishing share of the value of U.S. factory output have been interpreted by many analysts as indicating that manufacturing is "hollowing out" as U.S. manufacturers undertake more high-value work abroad. Economic data have been slow to take note of this development, which raises the question of whether the United States will continue to generate highly skilled, high-wage jobs related to advanced manufacturing. While some data thus indicate that U.S. manufacturing is resilient and recovering well from the 2007-2009 recession, two facts in particular support the argument that the manufacturing sector is more challenged than the government's output and productivity measures imply: 
Unlike previous expansions, the two most recent cyclical upturns in the U.S. economy have not brought more jobs in manufacturing. Value added represents one measure of the health of manufacturing. In essence, value added is meant to capture the share of the value of final products that is being added "in house." A number of conceptual issues and statistical deficiencies complicate interpretation. Accounting for research and development. This trend is strongly in evidence in the United States. The data discussed in this report shed light on a concern frequently raised in the context of national security, that U.S. manufacturers of vital products are critically dependent upon inputs from abroad. Evidence suggests that while the output of U.S. factories contains substantial foreign value added, many other countries are even more dependent upon foreign value added than is the United States, at least with respect to goods traded in international markets. The declining importance of physical production is in evidence in many countries, and is not a phenomenon limited to the United States. Nonetheless, available data still tend to treat manufacturing and services as unrelated economic activities, and it is not clear that existing data series on domestic economic activity, trade, and freight transportation completely capture changes in the nature of manufacturing, the sources of employment, and the creation of value.
The health of the U.S. manufacturing sector has been a long-standing concern of Congress. Although Congress has established a wide variety of tax preferences, direct subsidies, import restraints, and other federal programs with the goal of retaining or recapturing manufacturing jobs, only a small proportion of U.S. workers is now employed in factories. Meanwhile, U.S. factories have stepped up production of goods that require high technological sophistication but relatively little direct labor. Labor productivity in manufacturing, as measured by government data, has grown rapidly, suggesting that the manufacturing sector as a whole remains healthy.
Recent data, however, challenge the belief that the manufacturing sector, taken as a whole, will continue to flourish. Unlike previous expansions, the two most recent cyclical upturns in the U.S. economy have generated few jobs in manufacturing. Moreover, statistics suggest that domestic value represents a diminishing share of the value of U.S. factory output. One interpretation of these data is that manufacturing is "hollowing out" as companies undertake a larger proportion of their high-value work abroad. These developments raise the question of whether the United States will continue to generate highly skilled, high-wage jobs related to advanced manufacturing.
The evidence concerning "hollowing out" is ambiguous, as conceptual issues and statistical deficiencies make it difficult to determine whether the recent decline in manufacturing value added, relative to shipments, is a short-term phenomenon or a long-term trend. Despite improvements in recent years, U.S. statistical agencies still tend to treat manufacturing and services as unrelated economic activities, and it is not clear that existing data series on domestic economic activity, trade, and freight transportation adequately capture changes in the nature of manufacturing, the sources of employment, and the creation of value.
Nonetheless, evidence suggests strongly that physical production activities account for a diminishing share of the final value of manufactured products, with service-related inputs such as research, product development, and marketing becoming more important. Further, the production of many goods is dispersed across multiple locations along global supply chains, making it difficult to determine where value is added. Such shifts pose a challenge to efforts to capture economic value by promoting goods production in the United States.
In the context of national security, the fact that U.S. manufacturers of vital products are critically dependent upon inputs from abroad is frequently a subject of concern. International comparisons indicate that the United States is in no way unique in its dependence on foreign inputs to manufacturing. Although the output of U.S. factories contains a large proportion of foreign value added, many other countries appear to be even more dependent upon foreign value added than is the United States, at least with respect to goods traded in international markets.