Daily Archives: December 31, 2012

Is American manufacturing on track for a resurgence in 2013? There are several reasons to think so, and that’s good news because a strong manufacturing sector matters for the health of the US economy.

Manufactured goods account for 60 per cent of US exports of goods and services. It funds 68 per cent of all business research and development and R&D is the major source of innovation. Manufacturing enjoys strong productivity growth, which drives growth in wages and living standards, and demand for other economic activities. Every dollar in final sales of manufactured products supports $1.34 in output in other sectors—the largest multiplier of any sector. And manufacturing provides goods jobs. Even after controlling for demographic, geographic and job characteristics, manufacturing jobs enjoy higher wages and benefits compared to jobs in the rest of the economy. (The source for these statistics is here.)

After a dramatic cyclical slowdown in 2008-2009, industrial production in manufacturing has grown by more than 10 per cent since January 2010, and manufacturing employment has increased by about 500,000 — the strongest cyclical rebound since the recessions of the early 1980s. Nonetheless, there are still 1.8m fewer manufacturing jobs now than in December 2007 when the recession hit and more than 5m fewer than in 2000.

There are grounds for optimism that the recovery of manufacturing will gain strength in 2013. The US has maintained its lead in manufacturing productivity by an increasing margin. Between 2007 and 2011, manufacturing productivity grew more rapidly in the US than in any other developed country. During the same period, unit labour costs in US manufacturing declined while they increased in other large manufacturing countries including Germany, Japan, and China. Wages in China, measured in dollars, are now five times higher than they were in 2000 and are rising at double-digit rates. The natural gas boom in the US has also boosted the competitiveness of US manufacturing by lowering the cost of energy: natural gas in Asia now costs about four times as much as in the US.

These new competitive conditions are reducing the allure of offshoring. Higher transportation costs, rising skill requirements for manufacturing workers as a result of the addition of high-tech components to everyday manufactured goods, and unanticipated costs, quality control problems,and intellectual property risks of doing business in emerging market countries are also undercutting the business case for offshoring.

Tim Cook, Apple chief executive, recently announced that the company would invest $100m to bring some of its manufacturing jobs back to the US, noting that Apple has “the responsibility to create jobs” in the US. Apple’s announcement is the latest in a series of announcements by US multinational companies that they plan to “reshore” some jobs. Indeed, some companies such as GE have already acted on their re-shoring plans and are investing in new US facilities to manufacture products they used to manufacture abroad. By redesigning its assembly line, GE has been able to lower its labor costs, energy costs and material costs compared to those it was paying to produce the same product in China.

Some business leaders predict that reshoring might bring about 1m jobs back to the US over the next few years. So far, however, reshoring has not created many additional US manufacturing jobs, and the incentive for offshoring low-skill, labour-intensive parts of the manufacturing supply chain remains powerful. As a result of labour-saving and skill-biased changes in manufacturing technology, a growing share of all manufacturing production in the US is highly automated, requiring highly skilled workers but not many of them.

Overall, barring a self-inflicted recession caused by political gridlock and a harsh dose of fiscal austerity, look for stronger growth in US manufacturing and more reshoring by US companies in 2013. But look for only a modest increase in manufacturing employment.

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