Curious Capitalist

Is the U.S. Manufacturing Renaissance Real?

U.S. manufacturing is back. That's been the conventional economic wisdom for months now. But at least one economic seer is throwing a bit of cold water on the idea.

  • Share
  • Read Later
George Frey / Bloomberg / Getty Images

A worker welding the outside of a safe at the Champion Safe Co. manufacturing facility in Provo, Utah, on Wednesday, Feb. 22, 2012.

U.S. manufacturing is back. That’s been the conventional economic wisdom now for several months, and there’s plenty of proof to back it up – rising factory output, strong manufacturing production gains, and lower labor costs that make American workers more attractive. Couple that with the natural gas boom underway in the U.S., which many experts believe will lower energy costs for U.S. manufacturers, and you’ve got a resurgence of a sector that has been shrinking as a percentage of the economy for several decades. “We are probably the most competitive, on a global basis, than we’ve been in the past 30 years,” says GE CEO Jeff Immelt. “Will U.S. manufacturing go from 9% to 30% of all jobs? That’s unlikely. But could you see a steady increase in jobs, over the next quarters and years. I think that will happen.”

But at least one economic seer, Goldman Sachs’ chief economist Jan Hatzius, is throwing a bit of cold water on the idea. He recently released a report, which is getting a lot of attention on the web, arguing that the U.S. “manufacturing renaissance” is cyclical, not structural – meaning, the sector is doing as well as would have been predicted under any circumstances at this point in an economic recovery, and that the gains don’t point to a real seismic shift in U.S. manufacturing competitiveness. “Measured productivity growth has been strong,” admits Hatzius in the report, entitled “U.S. Manufacturing Renaissance: Fact or Fiction?” “But U.S. export performance – arguably a more reliable indicator of competitiveness—remains middling at best.”

It’s a very interesting point, and it matters a lot to the broader economy. Nations that do better in manufacturing gain an edge in the global economy: For every $1 of manufacturing output in a community, there’s another $1.48 of wealth created. That’s why economic advisors to the President, like National Economic Council head Gene Sperling, have been pushing pro-manufacturing policies. But the Goldman report would seem to indicate that the strength in U.S. manufacturing output reflects more the relative weakness of Europe (which is mired in a debt crisis) and Japan, rather than a long-term positive shift in the U.S. itself. “Over the next few years, the manufacturing sector should continue to grow a bit faster than the overall economy,” notes the report. “But the main reason is likely to be a broad improvement in aggregate demand rather than a structural U.S. manufacturing renaissance.”

(MORE: The $600 Billion the IRS Can’t Collect)

Hatzius was on holiday this week and unavailable for comment (we’ll be following up with him next week), but one immediate question is whether exports really do provide a more accurate picture, as the report suggests. It may be that more goods manufactured in the U.S. are staying in the U.S. As we’ve traveled around the country reporting on this topic over the last couple of years, a number of big industrial firms have pointed to growing demand for their products here at home – Caterpillar, which makes an increasing amount of its large earth-moving equipment for domestic mining, agriculture, and energy operations, is a great case in point.

Then there’s the question of how to look at the productivity numbers. While U.S. productivity is up over the last several years relative to, say, China, which has been flat (and also suffers from rising wages), the big question is how much more it can go up. We feel there’s reason to be bullish on the growth potential there, given how materials science and the evolution of the “industrial internet” are fundamentally reshaping manufacturing in the U.S.’s favor. The once separate steps of designing a product, making or buying the parts, and then putting everything together are beginning to blend — a consequence of technologies such as additive manufacturing and 3-D printing. It means that manufacturing wants to be closer to engineering and design — a dynamic that would likely benefit the U.S., which still rules those high-end job categories. Add the ability to include sensors in every part and process, and you’ve got a whole new manufacturing ecosystem that allows companies to accelerate product development cycles and deliver more variety and value more quickly to ever more fickle consumers.

Of course, the jobs that are being created aren’t your father’s (or grandfather’s) factory jobs of knocking in four bolts a minute for eight hours a day. The new economics of Made in the USA are built in large part around acquiring cutting-edge technologies ahead of global competitors and then using those new techniques to produce more efficiently on super-automated factory floors. And while all the technology will translate into higher end jobs, it will also mean — barring dramatic growth — fewer jobs overall, especially in the middle. Positions will either be high end, or lower paid, since workers still have to compete with cheaper overseas labor (even with wage inflation in China, it will be years before the Chinese are on par with U.S. wages). It’s no accident that many of the new manufacturing clusters in the U.S. are in the South, where unions hold less power. “Yes, manufacturing is coming back, but it’s evolving into a very different type of animal than the one most people recognize today,” says James Manyika, says James Manyika, director of McKinsey Global Institute, which recently did an exhaustive study on this shift entitled “Manufacturing the Future.” “We’re going to see new jobs, but no where near the number some people expect, especially in the short term.”

(MORE: Expert: Paying Kids Allowance Is ‘Cruelty’)

It’s a sentiment that stands in sobering contrast to President Obama’s second term goal of creating a million new manufacturing jobs in four years. Some of the difference may lie in semantics. As Manyika points out, labor statistics underestimate the reality of manufacturing, since they count mainly jobs inside factories. Related positions in, say, Ford’s marketing department, or small businesses doing industrial design or creating new software for big exporters don’t get tallied. Yet these jobs wouldn’t exist but for the big factories. The official 9% of U.S. employment represented by manufacturing belies the importance of the sector to our overall economy. Manufacturing represents a whopping 67% of all private sector R & D spending, as well as 30% of the country’s productivity growth.

In short, manufacturing’s value can be measured in many different ways. “The ability to make things is fundamental to the ability to innovate things over the long term,” says Willy Shih of Harvard Business School and co-author of Producing Prosperity: Why America Needs a Manufacturing Renaissance. “When you give up making products you lose a lot of the added value.” That’s as good a reason as any to care about the future of manufacturing.

37 comments
AndyCaldwell99
AndyCaldwell99

@LeslieMarshall Eliminate the real waste, I.E. Consultants, excess managers, unnecessary paperwork, games. And focus on the end product.

NielsvdStappen
NielsvdStappen

Creating jobs based on insustainably low prices for energy indeed is a good economical achievement according to 19th century standards!

AnthonyMcMillan
AnthonyMcMillan

As long as u.s. students are forced to pay a world premium for education, this country will continue to decline across all sectors. The true decline began in the 90's as u.s. business were given huge incentives to create manufacturng jobs in other countries. NAFTA and CAFTA have been a godsend to big business who simply moved companies to Mexico to take advantage of low wages and almost no coporate oversight and moved their products back to the u.s. to sell, minus those pesky tariffs that actually help u.s. manufacturing. And then President Bush really sped up our downfall with a massive tax cut, during a time of war, which has never been done before in U.S. history, doubling our national deficit and losing hundreds of thousands of jobs a month by end of his presidency. The u.s. continues its ignorance by inacting free trade policies with countries around the world but here is the kicker. Free trade works, that is if you actually have products that the other country wants to buy. The u.s. has a huge manufacturing capacity but we just don't make alot of things in this country anymore. We have free trade with Mexico but the only thing we really sell Mexico is corn, a vegetable subsidized in the u.s. which has caused thousands of corn farmers to lose everything in Mexico, so as usual big business benefits while the rest of us.....well we really dont enter into the equation.  

MatthewW.Hall
MatthewW.Hall

Goldman Sachs has a lot of clients with big investments in Asia, right? I wonder if there is a conflict of interests here? Maybe they want to support the stock price of those who are not as heavily invested in the U.S. by suggesting that they have less promising business plans? Hmmm....... 

manapp99
manapp99

Manufacturing is returning somewhat but manufacturing jobs that command high pay are not. The new manufacturer is using robots and CNC machinery that do not require a high degree of skill from the factory personnel. With the coming surge of robots that can perform most rudimentary tasks like waiting tables even the low skill jobs will soon be vanishing. Labor unions are not likely to have the influence they once did which is another reason that factories are relocating here. 

jwarrencollins
jwarrencollins

I've started small business before. Why, the bureaucrats come out of the woodwork for taxes, licensing, zoning, environment, unemployment comp, SS matching, sales tax registration, state fees, local fees, endlessly bleeding away of capital before the first of the product is ever sold. They get theirs first and always, and they make you feel almost criminal for even trying. As long as America is under this endeavor-killing situation, we'll mostly be selling each other insurance, religion and lotto tickets. Change it or live with it.

JohnKriegsmann
JohnKriegsmann

To really grow as a manufacturing power the US needs to build a vocational education structure from the ground up. It is almost impossible to find qualified machinists, welders, car mechanics and skilled technicians in the US today. Our fixation on college for everyone has been a big problem.  In the last century liberal arts graduates wire hired by business's in need of middle managers, paper pushers and number crunchers. That was yesterday, today's liberal arts grads are piling up thousands and debt only to go from the graduation ceremony to the unemployment line or at best a part time retail job. In less you want to teach, be a doctor, nurse, lawyer, engineer, accountant  or scientist forget college and learn a trade.

wenchypoo
wenchypoo

Any jobs that are coming out of China are going to Mexico.

Bert_Rochau
Bert_Rochau

An, albeit limited, US manufacturing revival is inevitable. One of the natural results of the globalization process is the (very slow) equalization of costs of production across the board - this is why Western wages remain relatively stagnant and the wages of workers in developing nations are rising. Once costs-of-production between the West and the developing nations, like China, become closer, job creation (and manufacturing growth) will drift back from the likes of the BRICS and back to Europe and the US. We're already seeing this to a certain extent.

US exports are in all likelihood flat due to increased competition from foreign companies and the simple fact that the fabled "skilled and well paid" US manufacturing worker isn't making products that the bulk of the world's new purchasing power - the average BRICS worker - are going to be buying. I mean, the guy working over at Foxconn just isn't that interested in buying a Ford.

drudown
drudown

Conspicuously, the only realistic means for America's industrial/manufacturing base to truly come back is via the State, e.g., tax subsidies, tax increment financing and public/private partnerships. What, surely the GOP cannot credibly contend that the "market" is going to "create jobs" that the GOP "outsourced" abroad? 

Like the tremendous out-of-pocket cost to the Arab occupations/wars, so too will America's "renaissance" require capital. Enough of this non sequitur gibberish about "no more revenue" (I mean taxes). Taken to its illogical conclusion, the GOP's "fiscal plan" imprudently and inexplicably excludes raising revenue upon which a thriving economy depends. 

Contrary to GOP talking points, every blue collar American worker and business owner should embrace higher taxes on the wealthiest Americans and Corporations, i.e., we live in a systemic, symbiotic society and "entitlements" are a condition precedent to (1) an educated and competent work force and (2) a flourishing society. 

"We pass for what we are." - Emerson

andrewfader
andrewfader

@TIME @TIMEBusiness Let's skip to the real question: Can you still basically enslave laborers in factory towns in Asia? The US?

EdWould
EdWould

The U.S. never exported anything.  We were wealthier than everybody else.  Nobody could afford to buy U.S. made stuff.  So the multinationals and their Senators and Presidents got together and figured out a way to increase exports.  By moving their operations offshore to the banana republics, they added value to foreign countries across the globe while sucking the life out of their own.  As the standard of living in the U.S. went down while the standard of living of other countries went up, the purchasing power gap closed, allowing U.S. products to become more desirable.  In other words, they created a plan to increase exports by gutting their own country.

Sadly, the financial hucksters cite the fact that U.S. exports have gone up in the global economy but fail to note that the reason they have is because 80% of the population's living standard is now barely indistinguishable from that of many countries we used to pity.

Go ahead Senators, approve as many CEO-drafted trade agreements as you can before the middle class is so thoroughly destroyed that the government bookkeeper who processes your paycheck can't afford the gas to get to work, you scathing criminal idiots.


EdWould
EdWould

Manufacturing in the U.S. will continue to randomly flatline as long as multinationals continue to be allowed to write treaties that allow them to move their operations into cheaper labor countries, make the products at fractions of what it would cost here, and then sell them in the U.S. market with little or no tariff disincentives.  Washington's Republicans and Democrats representing everyone with enough money except their own constituency are the architects of our collapse.  Until selling in the U.S. market is recognized as the very valuable privilege that it is and is required by laws to be offset by a valuable contribution in the form of domestic job, plant, and equipment investment, development, and creation, the GE's of this country working with the trash that is our Senate will continue to suck the greatest value out of any international trade agreements while leaving the rest of the population with their global trade benefit, that being cheap Chinese and other foreign-made junk that often doesn't even work out of the box, assuming it doesn't poison you first before you can get it open.

Buying something four times as often as you once did, even at half the price, is not a benefit.

Manufacturing something at one-fourth the price that you once did, then selling it in the same market without a material increase in tariffs, is an incredible benefit.

Who enabled these benefits?  Your Senator.


alec
alec

I'm sorry, but China " suffers from rising wages."? I'm sure that hundreds of millions of Chinese workers feel just terrible about it.

Leftcoastrocky
Leftcoastrocky

-- “When you give up making products you lose a lot of the added value.” That’s as good a reason as any to care about the future of manufacturing. --


Good point.  I agree



Leftcoastrocky
Leftcoastrocky

Let's identify the manufacturing jobs which will be generated and develop and finance training programs to make sure that we have the U.S. workers to fill them.

roknsteve
roknsteve

China is drowning in pollution and manufacturing is coming back to the U.S.A.  China will be out of business by 2020.  

traderjim7
traderjim7

And jobs are still coming out of the US and going to China and Mexico.  The man they interviewed just sent several hundred over to China from Wisconsin.

MarkShowacre
MarkShowacre

@drudown 

You are so politically delusional about the market forces of macro economics, it funny as hell!!!!