Renaissance in American Manufacturing? Not So Fast
Optimistic statistics on American manufacturing distract from the less optimistic truth.
- Optimistic statistics on American manufacturing distract from the less optimistic truth.
- For the last few years, it has become a cottage industry to proclaim the revival of the US manufacturing sector.
- In the 2000s, the US, Canada and the UK lost over a third of their manufacturing jobs.
- Too many in the US remain unaware that manufacturing establishments in America losing a global race for innovation.
Over the last few years, there have been many proclamations of the “revival” of the U.S. manufacturing sector. Stories about jobs streaming back into the United States from abroad are accompanied by self-congratulatory news reports on four straight years of job growth in manufacturing.
Even the manufacturers themselves believe this narrative. According to a survey, 57% of U.S. manufacturing executives believe that the country is experiencing a renaissance in the sector.
Unfortunately, all this happy news, at least to date, does not stand up to hard analysis of the facts. At the end of 2013, there were still 2 million fewer manufacturing jobs and 15,000 fewer manufacturing establishments than in 2007, the year before the Great Recession. And inflation-adjusted manufacturing output (measured on a value-added basis) was still 3.2% below 2007 levels.
True, the U.S. manufacturing sector has grown since 2010, resulting in 520,000 new jobs and 2.4% real value added growth. However, almost all of this growth has been cyclical in nature, driven by just a few industries that contracted sharply during the recession.
In particular, the transportation equipment sector (e.g., autos and aerospace) has accounted for 35% of jobs gained and 122% of real value added growth between 2010 and 2013. In contrast, overall U.S. manufacturing actually contracted in output from 2010 to 2013.
Even the chemical and petroleum refining industries, widely assumed to be booming because of the shale gas revolution, saw declines in real value added by around 10% from 2010 to 2013.
Moreover, while we reshore about 30,000 jobs annually, we offshore just as many, if not more. And over that same period (2010 to 2013), the U.S. trade deficit in manufactured goods increased by 11%.
Disconnected from reality
So why is there such a disconnect between the narrative and reality? A large part of the answer is due to the fact that many people were desperate for good news and latched on to any strand of evidence to provide it.
In the 2000s, the United States, Canada and the United Kingdom lost over a third of their manufacturing jobs, a faster rate than all other developed nations. Following this decline, both the UK and Canada acknowledged that a national strategy for rebuilding manufacturing strength was necessary. In the United States, such a strategy is still missing.
Ignorance is bliss
As if to cover up for that lack of strategic resolve, some consultants and academics have developed a go-to list of macro trends that explain the reversal of fortunes in U.S. manufacturing. They point to rising Chinese wages, U.S. productivity growth, high global shipping costs, a devalued dollar and the shale gas boom.
However, none of these trends have the power to significantly alter outcomes, and several are not even true.
Take global shipping costs. They were indeed abnormally high up until 2008, but are now back to normal. That factor does not “reshore” jobs and production.
How about energy costs? For most manufacturers, they represent less than 5% of costs, so cheap fossil fuels help only at the margin. The dollar is currently just as devalued as it was in the mid-2000s, when the jobs left in the first place, and has increased by more than 10% in the last year.
Most interesting is the view of U.S. competition with China. To be sure, Chinese labor costs are rising, but manufacturing wages there are still just 12% of the wages of the average American manufacturing worker.
Regarding productivity, it is worth noting that, while the United States assumes that its superior productivity sets it apart in advanced industries, China’s labor productivity growth is much faster than growth in the United States.
Furthermore, China’s push to open its interior to production is serving as a brake on rising wages, while its expansion into more advanced industries allow it to compete with the United States in an increasingly broad range of industries.
What all of this points to is that too many Americans remain blissfully unaware that manufacturing establishments in the United States, all the positive rhetoric notwithstanding, of the real factors that determine who wins and who loses (and why?) in the global race for innovation.
The manufacturing “renaissance’ narrative holds that all we Americans have to do is let natural market forces work their magic. That obscures the need for making the hard policy choices required to really ensure that manufacturing in America does thrive.
A lower effective tax rate, including a robust R&D tax credit, significantly increased funding for public-private R&D partnerships and serious efforts to counter foreign mercantilist policies that hurt U.S. manufacturers would lay the ground for a real, rather than a faux, renaissance.
Until that occurs, we are left with hope and hype and not much else.