Manufacturing output has increased the last few years; yes, it has. But the improvement has been relatively modest, and significantly less than in previous decades. Overall, the value of manufacturing output has increased only 8% since 2009, or under two percent per year over the following four years.Moreover, this growth rate is significantly lower than that maintained in the decade ending in 2007. During those ten years, 1997 to 2007, manufacturing output grew at an average of 4% annually; this is a growth rate faster than the 3.4% average GDP growth in that period. Does that growth rate suggest a declining industry?
But the image that we get from manufacturing employment is the reverse, as can be seen in the chart to the right. Employment has been declining for quite some time. We see, in the chart "Manufacturing Employment," that from an average of over 17 million workers in the early 90s, we are currently posting barely 12 million people employed in manufacturing. Aside from the reshoring and presumed increase in employment, the industry has been moving to using more and more capital to replace labor.
Manufacturing Output is not the same as Manufacturing Shipments
An alternative view of manufacturing output is total shipments from manufacturers. The manufacturing output data displayed above, similar to other GDP statistics, only counts "final" output, that is it excludes output from one factory that is an input to another one. For example, the output of a factory that makes batteries and ships them to an auto maker will be excluded from the "output" statistics; the figures only include the value output of the auto maker, which already includes the value of the batteries purchased from the first manufacturer.
If we look at manufacturing shipments, the picture that emerges is similar, yet more positive. The total value of manufacturing shipments reached six trillion dollars last year, this is almost 10% above the previous peak of $5.4 trillion in 2008.In the chart labeled "Manufacturing Industry" we show for comparison the construction of manufacturing facilities in the U.S. We can see that it has been recovering nicely from the 2008 economic recession. So, two aspects of the manufacturing sector indeed indicate a rebound, and validate the reshoring argument.
It's important to point out, however, that the manufacturing sector's output (not shipments, sorry if this is confusing) is still $68 billion below the 2007 level, and only four of the 19 industries that compose this sector actually show positive gains. Also, as the chart to the right shows, the more robust industry in this sector is Computers & Electronics, it accounts for two thirds of the positive gains.
So, what's next for U.S. manufacturing?
This is similar to the decline in agricultural employment that occurred in the 19th and early 20th century. The substitution of capital equipment for labor that took place in agriculture resulted in increasing levels of farm output, as is evidenced by the relative abundance of agricultural products and lower prices of agricultural goods, but employing only a very small proportion of the U.S. work force- currently under two percent of the working population.
We see the same pattern developing in the manufacturing sector. A pattern of a greater volume of production and output, with more manufactured goods available at lower prices, accompanied with fewer and fewer people employed. Although we don't expect manufacturing employment to drop sharply in the next few years to the levels of agricultural employment, the general outlook for it is, at best, general stagnation.
Data from the Reshoring Initiative shows that offshoring of U.S. manufacturing is now in balance with reshoring.
ReplyDeleteSince 2003, new offshoring is DOWN by 70%-80% and new reshoring is UP by 1500%.
The most important accomplishment has been the net-loss of 100,000+ manufacturing jobs each year has ended. The economic bleeding has stopped.
New reshoring is now balancing new offshoring at about 40,000 manufacturing jobs/year, resulting in the first neutral year of job loss/gain in the last 20.
According to the Reshoring Initiative reshoring and FDI yielded between 2010 and 2014:
- About 170,000 manufacturing jobs
- 25% of manufacturing job growth
- 400,000 total jobs including the manufacturing multiplier effect
According to Harry Moser, “Essentially, reshoring should be seen as not a measure of the renaissance but the most efficient tool to start achieving it.”
The challenge is to pick the most effective and implementable actions to overcome the loss of manufacturing and the trade deficit.
The Reshoring Initiative sees two choices:
1. In the short to medium term: reshoring – getting companies to understand all of the benefits of local production and adopt a more comprehensive total cost analysis. This could cut the trade deficit by 25% and bring back 1 million manufacturing jobs. Mainly this requires education of companies and is entirely under the control of our society. Detailed, objective reporting is necessary to motivate companies to reevaluate offshoring.
2. In the longer term, to get the other 75%, requires improved competitiveness: taxes, currency/tariffs, skilled workforce, basic education, etc. All are political, most are cultural and endemic, currency/tariffs is subject to WTO rules, other countries’ actions and our need to raise interest rates. There has been almost no progress on these fronts in decades of trying.
Ideally, it is best to do both sets of actions. We should be enthusiastic about reshoring but not optimistic about the renaissance until we begin to take the steps to allow us in the future to become optimistic about renaissance.
The Reshoring Initiative Can Help.
The not-for-profit Reshoring Initiative’s free Total Cost of Ownership software helps corporations calculate the real P&L impact of reshoring or offshoring. In many cases, companies find that, although the production cost is lower offshore, the total cost is higher, making it a good economic decision to reshore manufacturing back to the U.S. http://www.reshorenow.org/TCO_Estimator.cfm