U.S. Manufacturing’s Comeback

Mar 6, 2012

Photographer: George Frey/Bloomberg

For years, booming emerging markets such as China have been growing their manufacturing industries by tapping their considerable competitive advantages, including cheap labor, low taxes, and a pro-business approach to regulation. These markets have been inviting to U.S.-based manufacturers, but now many of these companies are finding that smart strategic decisions to boost production and sales means making more products in America.

One indication of a resurgence in U.S. manufacturing is the rise in American exports. The U.S. Bureau of Economic Analysis (BEA) reports that exports of U.S. manufactured goods reached a record $1.26 trillion in 2011, up 15% from 2010. Moreover, Federal Reserve data for the last three months of 2011 reveal an industrial production annualized rate of 3.1 percent – that’s ten straight quarters of growth.

“Reports of American manufacturing’s demise ring hollow given the data on exports and production,” says U.S. Chamber of Commerce Vice President of International Affairs John Murphy. “A vibrant manufacturing sector is essential to our complete economic recovery and our standing in the global economy.”

The growth in manufactured exports is due in part to improving conditions that make America’s business environment and workforce more competitive. In some cases, U.S. multinational manufacturers are relocating overseas production to plants in America.

Competitive Advantages at Home

So what are the causes of this recent resurgence in U.S. manufacturing? They include the following.

Rising labor costs abroad, flat wage growth in the United States: Wages abroad are growing. In China, for example, wages are growing 15% to 20% a year. Meanwhile, U.S. wages have remained flat. While other emerging markets also offer cost advantages, local infrastructure is sometimes limited, which raises costs and undermines a market’s attractiveness as a destination for investment.

In addition, improved automation in manufacturing as well as American workers’ higher productivity are undercutting the attractiveness of foreign labor. American workers are 3.4 times more productive than those in China. This means the gap between domestic and foreign labor costs is shrinking, decreasing the advantages of operating abroad.

“It is the productivity of our workforce that provides the true advantage,” writes Conexus Indiana President and CEO Steve Dwyer. “The best equipment and most novel business strategies are useless without workers who can adapt and succeed in a complex, fast-paced environment. Human capital makes the difference.”

Ample natural gas supplies at low costs:  With the discovery of large quantities of natural gas in shale formations, a stable and abundant energy source is now available for manufacturing uses, which can be energy intensive. Current government estimates indicate that the United States has over 90 years supply of natural gas at current rates of consumption. Increased production in parts of the country is lowering the cost of energy, improving the bottom line for manufacturing plants. This growing output and decreasing costs gives manufacturers access to some of the cheapest energy around, which spells advantages for moving production and operations back to America.

Weakening dollar: Currencies in some foreign markets are growing stronger, while the U.S. dollar has weakened over the past several years. This means not only can businesses get more bang for their buck in the United States (in terms of employment, operations, and other costs), it also means foreign products are more expensive (and therefore less competitive with U.S. products). Manufacturing in the United States gives businesses a cost advantage.

Low corporate borrowing rates: Corporate borrowing rates in the United States are lower than elsewhere in the world. The Federal Reserve has said it will keep interest rates near zero through 2014. Meanwhile, companies operating in Asia are seeing increases in the cost of capital.

Supply chain costs: Making products closer to the end customer can help keep logistics costs low; U.S. freight rail costs, for instance, are among the lowest in the world. Rising shipping costs abroad, land prices and the time needed to transport products are encouraging American companies to manufacture in the United States, where they can capitalize on more favorable conditions.

Threats to intellectual property: In taking manufacturing abroad, companies expose their products to potential intellectual property theft, the costs from which are enormous. Foreign partners can steal the secrets to valuable technologies and other products, in turn competing with the American companies that developed the innovation. Manufacturing within the United States offers greater intellectual property protection.

“When all costs are taken into account, certain U.S. states, such as South Carolina, Alabama and Tennessee, will turn out to be among the least expensive production sites in the industrialized world,” says a recent report on insourcing and a return of manufacturing to the United States, Made in America, Again. “The reallocation of production is still in its early stages, but we believe it will accelerate in the years ahead.”

Offshoring Claims Ring Hollow

However, the renewed optimism in U.S. manufacturing has coincided with populist rhetoric disparaging U.S. multinationals that operate facilities and employ workers overseas. In his 2012 State of the Union address and in public comments since, President Obama has called for U.S. companies to stop “offshoring” American jobs to foreign job markets.

But the facts don’t support the administration’s claims.  Between 2007 and 2009, as the wider U.S. economy shed 8 million jobs, U.S.-headquartered multinational corporations actually added 675,000 new American jobs, according to the Bureau of Labor Statistics. Moreover, “offshoring” is a trivial contributor to job loss: The Bureau of Labor Statistics reports that of the 184,493 workers who lost their jobs in Q3 2011, only 110 were the result of U.S. firms moving production overseas. These data shoot holes in the argument that there is a one-to-one relationship between downsizing in the United States and increased employees abroad.

The lesson to be learned is that manufacturing in the United States can thrive with a competitive economy and through the ingenuity and innovation of its companies.


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