MADE IN THE U.S.A. The U.S. Manufacturing Sector is Poised for Growth For at least the last century, manufacturing has been one of the most important sectors of the U.S. economy. Even as we move increasingly towards a knowledge-based economy, advanced high-tech manufacturing in industries like computers, oil exploration, aerospace, medical equipment and electrical machinery has been at the forefront of much of our research, innovation, investment and economic growth. Given its historical importance, it would be hard to imagine a vibrant, thriving U.S. economy experiencing robust economic growth without a strong manufacturing sector. Yet, that is exactly what is causing some national angst a concern that the American manufacturing sector will no longer continue its historically significant role in driving economic growth. Concerns about the role of U.S. manufacturing in the economy have been fueled by countless media reports over the last several decades promoting a narrative that modern American 26
manufacturing is in a perpetual state of decline. We often hear claims that nothing is made in America anymore because most of our manufacturing production and jobs have allegedly vanished to China, Mexico and South Korea. If that narrative was true, it could have serious, negative implications for economic growth. Fortunately, it s a story that has been largely exaggerated. There s actually a new chapter developing that predicts the U.S. manufacturing sector of the future will play an increasingly important role in economic growth. The manufacturing sector of the U.S. economy has been making a remarkable comeback since early 2010, to the point that it has been at the forefront of the economic expansion over the last year. This condition has been referred to by some as the shining star of the U.S. economy recovery. Most importantly, employment in the manufacturing sector actually increased last year for the first time in 13 years 109,000 new jobs were added in 2010 marking the first annual gain in manufacturing jobs since 1997. In 2011, another 180,000 manufacturing jobs were added in the first seven months, the largest January-July increase in manufacturing jobs since 1994. Furthermore, the manufacturing sector alone was responsible for more than 19 percent of the almost one million new payroll jobs added to the U.S. economy in the first seven months of 2011, even though manufacturing jobs represent fewer than 9 percent of the total payroll jobs in the economy. Even with recent gains, it s true that U.S. manufacturing jobs are still about 7.8 million jobs below our peak employment level in 1978. Yet, for the U.S. manufacturing sector to create 289,000 jobs since 2010 and lead the U.S. economy out of the Great Recession is something that nobody could have ever predicted several years ago. This impressive rebound suggests that the U.S. manufacturing sector is alive and vibrant, and far from dead or even in decline. In fact, there are some very encouraging signs that the manufacturing sector is now poised for additional robust growth in the coming years. In terms of the post-war record of manufacturing output in the U.S., there has never been any factual basis to the claims that nothing is made in America anymore or that the industrial sector of America is in decline. The inflation-adjusted, absolute amount of output produced in the U.S. manufacturing sector has expanded consistently for more than a century, and has never declined except in the short-run during recessions. For some perspective, consider that the 1.87 trillion peak value of U.S. manufacturing output in 2007 (before the 2008-2009 recession) was the highest level ever 27
produced during a single year, and was double the size of manufacturing output just twenty years earlier in 1987 (in real dollars). Even though manufacturing output in the U.S. has not yet fully recovered from the Great Recession, the strong manufacturing employment gains, along with some other very favorable trends, are currently working together to revitalize the U.S. manufacturing sector. Actually, the future growth prospects for America s manufacturing sector have not looked brighter in several generations. For example, the Boston Consulting Group concluded in a May 2011 study on U.S. manufacturing titled Made in the USA, Again: Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world. We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you re going to see a lot more products Made in the USA in the next five years. While the shrinking wage gap is one of the key factors for the pending manufacturing renaissance being predicted in the U.S., there are a variety of other important factors that will also play key roles in the revitalization and growth of American manufacturing. These include: 1. The U.S. has cheap land and industrial property Industrial property values in the U.S. peaked in the spring of 2007, and then dropped sharply by 35 percent over the following two years. Despite a subsequent appreciation of about14 percent through the first quarter of this year, industrial property values in the U.S. are about the same today as in early 2005, six years ago. In contrast, recent reports suggest that commercial property in China is appreciating at about 12 percent per year, which means that property values will double there over the next six years at the current rate. Some analysts have recently warned about a serious real estate bubble in China. Certainly, the increasing costs of industrial property in China compared to flat or falling bargain prices for commercial property in the U.S. will provide cost advantages for expanding manufacturing production in the U.S. in the coming years. 2. Energy costs favor U.S. production Until a recent downward adjustment in the late summer, crude oil prices in 2011 have averaged between 85 and 113 per barrel. Adjusted for inflation, oil prices this spring were higher than at any time in history, except for the spike in prices during the summer of 2008. Looking ahead, the Energy Information Administration in July was projecting oil prices above 100 per barrel through the end of 2012. Meanwhile, thanks to the boom in domestic shale gas, the inflation-adjusted cost of commercial natural gas in the U.S. fell to a 10-year low this year and is about 50 percent of the price in 2006. For manufacturing production that uses natural gas, like steel production, the cheap natural prices will provide some cost-saving incentives to shift 28
manufacturing production to the U.S. Assuming that oil prices remain elevated over the next few years, the historically high levels of international shipping costs would create some new cost advantages for production in the U.S., especially for manufacturing that currently takes places 8,000 miles away from the U.S. market in countries like China and Japan. 3. The weak U.S. dollar helps American manufacturers From a peak in early 2009, the U.S. dollar has fallen by almost 16 percent against a broad index of currencies, and by almost 10 percent since last summer. In a recent Wall Street Journal editorial, A Falling Dollar Will Mean a Faster U.S. Recovery, Harvard economist Martin Feldstein predicted that the downward trend in the value of the U.S. dollar would continue for at least the next few years. The weakening dollar will help American manufacturers in several ways: a) It makes U.S. goods more competitive in overseas markets and stimulates our exports of manufactured products, and b) It makes the outsourcing of manufacturing to other countries like China and India much more expensive for American firms. Both factors will likely contribute to increased domestic manufacturing activity in coming years. 4. Moderate increases in U.S. wages and inflation Average hourly manufacturing earnings in the U.S. have been increasing at a rate of only about 2 percent over the last several years. At the same time, CPI inflation in the U.S. has risen at an annual rate above 3 percent over the last few months. In other words, real manufacturing wages have been falling in the U.S. That trend will likely continue for at least the next several years due to the jobless recovery and high unemployment rate, which will contain wage increases in the U.S. In contrast, manufacturing wages in China have been increasing 17 percent per year and core inflation reached a 3-year high of 6.5 percent there in July. Both of those trends are expected to continue. Consequently, the gains from labor arbitrage and input arbitrage for U.S. 29
companies shifting production offshore to take advantage of cheap labor and inputs in places like China are starting to shrink. As a result, some American companies are shifting production back to the U.S. from overseas. 5. U.S. manufacturing productivity continues to increase Measured by output per worker, manufacturing productivity has consistently risen in the U.S. and has even accelerated in recent years. In just the 13-year period between 1997 and 2011, annual manufacturing output per worker doubled from 75,000 to 153,000, the highest level in history. Coupled with flat or falling real wages, the huge increases in U.S. manufacturing productivity are making domestic manufacturing labor costs more competitive on an international basis than at any time in recent history. 6. Manufacturing profits are at record highs Measured by both after-tax profits and profit margins, U.S. manufacturing corporations as a group were more profitable in the first quarter of 2011 than at any time in U.S. history. With record-high profits, U.S. manufacturing firms now have the strongest balance sheets ever, which will likely translate into increased future spending on: a) Capital equipment b) Research and development c) Expanded output capacity d) Increased hiring REAL MANUFACTURING OUTPUT 1947-2011 PER WORKER 160,0000 140,0000 2011 153,000 120,0000 100,0000 1997 75,000 80,0000 60,0000 40,0000 20,0000 1950 19,600 26 YEARS 1976 38,500 21 YEARS 13 YEARS Sources: BEA, BLS 1950 1960 1970 1980 1990 2000 2010 30
A lot of that spending could take place in the U.S. along with much of the hiring, as the record profits provide the resources to fuel an expansion of the manufacturing sector. Further, with healthy balance sheets, the pressures for manufacturers to exploit every possible cost-saving opportunity will ease, including finding the lowest-cost labor. This could mean increased manufacturing production and employment in the U.S. Also, for many higher-end manufactured products, labor costs are becoming a decreasing share of the total cost, which could also work to favor domestic production over offshoring production overseas. 7. U.S. innovation continues to remain high Of the top ten manufacturing nations in the world by annual output, the U.S. has the highest ranking on the 2011 Global Innovation Index. Ranked #7 in the world overall for innovation, the U.S. is ahead of the other top manufacturing nations like China, Germany, France, Italy and the U.K. Moreover, the number of patent applications and patents granted in the U.S. has remained at record levels in recent years, which is more evidence that America continues to be a world leader in innovation. As manufacturing increasingly moves in the direction of advanced, high-tech production processes, America s long-standing position as one of world s most innovative, inventive and entrepreneurial economies will support America s industrial sector with the technology needed to remain the world s leading manufacturer. Taken together, these seven favorable factors will make the U.S. manufacturing sector increasingly cost-competitive. This will especially apply to domestic manufacturing output that is sold in the U.S. market. Realistically, we can expect future sustained growth in American manufacturing output; and stability, if not continued future growth, in domestic manufacturing employment. It would have been unthinkable even just a few years ago, but this recent convergence of positive trends makes a strong case for a U.S. manufacturing sector that is poised for robust growth in the coming years. To paraphrase Warren Buffett, American manufacturing s best days lie ahead. We look forward to a future that includes a lot more products that are labeled Made in the U.S.A. 31