Have we been letting a good story get in the way of the facts?
The “manufacturing renaissance” has been the central point in the return of America’s industrial power. It even has its own national council.
Yet here are the facts: the United States may have added only about one new manufacturing job in the last few years for every five that were lost during the financial crisis and the recession that followed.
That’s according to a new report from the Information Technology & Innovation Foundation, a non-partisan and nonprofit think tank based in Washington DC. The report was released early this morning.
“We have stretched six cool examples [of the rebirth of manufacturing] into a whole news trend,” says Adams Nager, economic research industry at the foundation and, together with its president, Robert Atkinson, the co-author of the report.
“A lot of people are desperate for positive economic news, so articles suggesting that there’s a revival of manufacturing get a lot of traction.”
Dow Chemical does plan to invest $4bn to expand its chemicals production on the Gulf coast; Flextronics is, indeed, investing $32m to build a product innovation center in Silicon Valley. Airbus is setting up a massive facility in Alabama, its first in North America, for a price of $600m, to build airliners. In the past two years, the aluminum industry has announced $2.3bn of new manufacturing investments in the US. Corporate profits at many manufacturing companies have climbed, too.
At least some of these are on the list of the seven industries that the Boston Consulting Group identified as being most likely to participate in some kind of big manufacturing revival: transportation goods (check), computers and electronics (yup), fabricated metal products (yes), machinery, plastics and rubber, appliances and furniture.
The whole manufacturing renaissance saga even hit the bestseller lists in recent months, with Factory Man (which, as the subtitle promises, tells the story of How One Furniture Maker Battled Offshoring, Stayed Local – and Help Save an American Town) winning a coveted spot on the New York Times’ list of the year’s most notable books and reviewer Janet Maslin’s personal top 10 list.
The problem? It’s all “Pollyannaish optimism” and “consultant-driven marketing hype”. But even manufacturing executives are succumbing to it. One study by LEK Associates found that 57% of respondents are convinced that the country is in the midst of a manufacturing renaissance, and a whopping 68% of them believe that their industry will experience accelerated growth in the coming years as a result.
But the ITIF survey – which is based on raw numbers rather than on the feelings of manufacturing executives or anecdotes – reveals another story. And it’s one that you may want to ponder if you were planning on putting a large chunk of your investment savings to work in this as an investment theme, or betting that there will be a great, stable new source of jobs emerging sometime soon.
“It’s true that we’ve had four straight years of growth, and that we’ve added 520,000 jobs in manufacturing in the last three years,” says Nager. But that compares to 2.5m jobs lost between 2007 and 2009. Moreover, he adds, the dramatic turnaround of the auto industry has distorted those figures.
In 2014, 16.5m vehicles were sold nationwide, making it the industry’s best year since the Great Recession, when sales plunged to hit a low of 10.4m vehicles in 2010. “There is almost an elevated level of demand,” says Nager, who notes that of all the manufacturing jobs created since 2010, 72% of them have been in the automotive sector.
But as investors in the shale oil and gas industry are discovering, there’s a danger in pinning all one’s hopes for and conviction in a broad-based manufacturing renaissance on what happens in a single industry.
Then there are the myths to which the true believers in the manufacturing renaissance subscribe: for instance, that China’s rising labor costs suddenly will make it more economic to stay put in the US, or even to repatriate manufacturing operations – a phenomenon, still scarce, known as “reshoring”.
The problem? Wages are rising in coastal areas like Shenzhen, but in order for a company to stay put, they’d have to feel confident that they would continue to climb (unclear) and that there were no other alternatives. The latter, at least, is clearly not the case. Some companies have already shifted facilities further inland in China, or even left China for Vietnam, Cambodia or (in the case of textiles) Bangladesh.
The good news, says Nager, is that there is enough onshoring happening today to offset the effect of offshoring: companies are repatriating about 30,000. “But there are still millions that have left, and they won’t come back unless it makes economic sense to do so,” he adds. Again, this seems to be a trend that is lauded by politicians, but driven by anecdotes rather than supported by hard data.
And if you’re waiting for global shipping costs or the shale gas revolution to ignite the manufacturing revival, you may wait a long time. Both energy costs and shipping costs are volatile, and the latter, at least, has only a tiny impact on most manufacturers.
It isn’t that there is nothing of interesting underway in manufacturing, however. It’s not very likely that manufacturing will once again be a major force in the US economy, accounting for a large and growing chunk of the country’s gross domestic product and offering stable, well-paid jobs to a substantial part of the country’s population. In other words, the alleged “manufacturing renaissance” isn’t going to pull our economic chestnuts from the fire.
But that doesn’t mean that manufacturing can’t become a new and interesting force in the economy. It won’t ever again employ the same numbers of people – and Nager hypothesizes that for every blue-collar worker who gets a manufacturing job, these industrial companies will employ at least one engineer. “But if we can establish a lead in manufacturing the next big thing – whatever is being imagined in the labs at Harvard or MIT or Stanford today – that’s where the potential lies,” he argues. “The value of being the first mover is tremendous; to take an idea, create the prototype, to bring it to market and to create an international bestseller – that is where the money is.”
To pull that off, however, we need to confront reality, not indulge in dreams that a new assembly line or chemicals plant is a sign of something as grandiose and so far as elusive as a manufacturing renaissance. We also, suggests Nager, need to be sure that we’re read, by investing in technology-focused education and by developing more assertive trade policies, to ensure that whatever new manufacturing ventures we develop we can keep, without them being undermined by non-tariff barriers that contributed to the loss of jobs in sectors like steel and textiles. “This isn’t protectionism, but ensuring we have a level playing field.”